Richard Russell:
www.dowtheoryletters.com
>>The latest figures we have on NYSE margin debt is the June total of $146 billion. That's against $278 billion at the high. Which means that margin debt since January 2000 has declined by 47%. Well, that's not the 90% decline that I expect to see by the time this bear market is over, but it's a good start.
And it does give us an idea of roughly where we are in this bear market. I'd say we're around the halfway point. By the time this bear market breathes its last, I expect margin debt on the NYSE to be around, as a guess, $15 to maybe $20 billion.<<
August 19, 2002
Annual income twenty pounds; annual expenditures nineteen pounds -- result, happiness. Annual income twenty pounds, annual expenditures twenty-one pounds --result, misery. Charles Dickens
Well, a new week begins, so let's turn to an old study that I haven't updated in a long time. It's the US government's debt situation. Here is the latest national debt figure. The national debt is now $6.162 trillion. One year ago its was $5.721 trillion. In case you're interested, that means we've added $421 billion to the national debt over the last 12 months or $1.15 billion every day of the year.
Is anyone worried? Evidently not. Of course, the Dollar index has taken a big plunge from 120 on January 28 to 107 this morning. But as I said, is anybody worried? Maybe our foreign creditors, but what the hell, let the poor devils worry.
There's another statistic I want to update. It's the margin debt on the New York Stocks Exchange. Traders use margin debt when they want to leverage their positions. In a bull market when stocks are going up, traders tend to become enthusiastic, at which time they buy stocks in a big way, and they pile on the margin debt.
At the peak in March 2000 traders were very bullish, and they drove margin debt up to a peak of $278 billion. I said at the time that the speculator's "best friend" was his margin account.
Then came the bear market -- and bear markets over time tend to beat hell out of traders. In fact, my old friend, Dr. Sloan Wilson, wrote a book about margin debt, and his observation was that before a bear market is over, margin debt tends to decline to the point where it is 10% of the level that existed at the bull market peak.
The latest figures we have on NYSE margin debt is the June total of $146 billion. That's against $278 billion at the high. Which means that margin debt since January 2000 has declined by 47%. Well, that's not the 90% decline that I expect to see by the time this bear market is over, but it's a good start.
And it does give us an idea of roughly where we are in this bear market. I'd say we're around the halfway point. By the time this bear market breathes its last, I expect margin debt on the NYSE to be around, as a guess, $15 to maybe $20 billion.
OK, I'm looking at my screen on the D-J Basic Materials Index (US, weekly). This Index was at 148 in May, three months ago. It's at 123 today. That's down about 17% in three months. I'd call that deflationary, wouldn't you?
We know that Japan and China and much of Asia in the grip of deflation. And I have to wonder whether they are not exporting deflation to the US, or at least beginning to? This is a serious situation, and it's one that I believe the Fed is fighting.
The Fed's "ace in the hole" is the continuing inflationary surge in the price of US housing. If housing goes, it's Katie bar the door. Greenspan is counting on home prices either holding up or rising -- that to offset the $7 trillion losses in the stock market. If housing tops out and head down, then the nation is in super-trouble, and "ol' man deflation" will be in the driver's seat. That's Greenspan's worst nightmare. He'll do anything to avoid that situation.
The trick is to keep mortgage money available and mortgage rates low. And to keep Fannie Mae and Freddie Mac buying up those mortgages. So it's housing, housing, housing. The Green man knows that he must keep the housing market growing or at worst holding.
Will that happen? September lumber was 319 on March 22. This morning it was 247, down 22% from its high. Then I turn to the six home-building stocks that I have on my computer screen. Pulte Homes is typical. PHM hit a high of 59.75 on June 25. Then, for some reason, it plunged to a low of 40.55 on July 22. From there PHM has rallied to today's price of just over 50. Have PHM and the rest of the home building stocks topped out? Too early to say.
For instance, today PHM broke about above its 50-day MA (50.20), and the 50-day is above the 200-day MA (47.75).
So I'd say that the housing situation is a bit "iffy" but still intact. Housing, the last bastion (but a powerful one) against the forces of deflation.
Gold is acting as if its discounting deflation. True, December gold is well above its rising 200-day MA, which stands at 301 today. Last week gold rallied to touch its declining 50-day MA. Dec. gold formed a little triangle. Today gold broke out of the triangle to the downside. Dec. gold should have strong support at 301 and above. But let's not kid ourselves, gold is acting as if the forces of deflation are a bit stronger than the forces of inflation. That's the way I see it.
Let me put it this way -- if the forces of deflation take over in the US, there'll be a lot more to worry about than the price of gold.
With the Dow plowing higher, I keep waiting for the Transports to confirm. If you remember, a Transport confirmation would require the carriers to better their July 30 closing of 2389.51. So far, it hasn't happened. Let's keep out eye on that number -- it's 2389.51.
In last week's sites I listed the three levels of resistance on the upside for the Dow. To review --
The first level was the level of the Dow's 50-day moving average. That level as of today is 8849. The Dow, as I write, is at 8907 -- 58 points above the MA.
The second level is 9168. This is the halfway or 50% level between the March 2002 high of 10635 and the July low of 7702.
If we better 9168 the third level of resistance is the 200-day MA of the Dow which today stands at 9731.
As for the S&P, it is above its 50-day MA, which stands at 932.20. The halfway or 50% level for the S&P comes in at 986. The 200-day MA for the S&P stands today at 1072.
TODAY'S MARKET ACTION -- Good action -- but it's never perfect. Volume is still low and those Transports have still not confirmed.
However, my PTI was up a full 8 to 5248 and the moving average was 5263. PTI remains in its bear mode with PTI now only 15 points below its MA.
The Dow was up 212.87 to 8990.93. There were five movers today -- IBM up 3.14, JPM up 2.35, MMM up 2.72, MSFT up 2.00, UTX up 2.07.
Sept. crude was up .51 to 29.84.
Transports were up 24.62 to 2364.02.
Utilities were up 2.69 to 241.87.
There were 2202 advances and 1049 declines.
There were 40 new highs and 33 new lows. This is the first switch over since June 4, meaning the first time new highs were greater than new lows. My High/Low Index gained 7 to minus 3966.
Total NYSE volume was a low 1.28 billion shares Institution still don't seem to be buying this rally -- so what, stocks are going up without them. Of course, volume can always come in.
S&P up 21.96 to 950.74.
Nasdaq up 33.67 to 1394.68 on volume of 1.56 billion shares.
My Big Money Breadth Index was up 8 to 759.
Sept. Dollar Index up .83 to 107.72. Sept. euro down .70 to 97.55. Sept. yen down .68 to 84.49. Sept. Swissie down .56 to 66.59. Sept. pound down 1.04 to 152.38.
Sept. Nikkei up 30 to 9,770.
Bonds firm with the Sept. 30 year T-bond up 11 ticks to 108.29 to yield 5.05%. Sept. 10 year T-note up 6 ticks to 111.22 to yield 4.29%. Sept. muni futures up 1 tick to 106.31.
Dec. gold got smacked, down 7.70 to 307.70. Dec, gold rallied to its 50-day MA, hung there, then plunged today, but it's still above its 200-day MA.
Sept. silver down 8 to 4.40. Oct. platinum down 4.20 to 552.80. Sept. palladium up 2.90 to 322.00. Metals? I dunno. Deflation, anyone?
McClellan Osc. surged to 224 today, this is the highest reading in over a year -- Market is super-overbought, which is amazing considering the unconvincing volume. They never make it easy in this business!!
STOCKS -- My Most Active Stock Index was up a full 15 to 265,
The 15 most active stocks on the NYSE today were -- TYC up 1.20, AOL up .77, DYN up .54, HD up .89, GE up 1.32, Q up .30, C up 1.45, JPM up 2.35, DIS up .79, ILA up .59, PFE up .94, LOW up 4 .21, T up .31, IBM up 3.41, WMT up .90.
More -- MWD up 2.05, JPM up 2.35, GS up 1.07, FNM up 1.03, AIG up 2.91, MER up 1.77, GM up 1.26, DCX up 2.77, CSCO up .30, AMZN up .60, KO down .49, AA up 1.34, MERCK up 1..26, COST up .24, TGT up 1.22, MAY up .65, KBH up 1.40, CAT up 1.23, KSS up 2.35, BBY up .56.
CONCLUSION -- All major stock averages now above their 50-day moving average and heading (it seems) for the halfway correction of the March to July smash. It's really strange and unusual to see volume so reluctant to expand, but what the heck, in this business you take what you can get.
The question -- How far can the market rally without institutional participation. I guess we'll find out, won't we.
Those who bought Diamonds or Spyders near the lows have a nice little profit now. But remember -- it's far more important to avoid the big losses than it is to garner small gains (granted, small gains are good for the ego).
Well, so much for Monday -- let's see what Tuesday brings.
Best,
Russell
An interesting e-mail received on Sunday. But what does it mean?
Just an anecdote to pass along. Perhaps "a sign of the times?" Or a sign of
the times to come?
I was talking to our church treasurer and others after a meditation service
today, and the discussion turned to gold, the Federal Reserve, fiat money and
the like. We need not go into who would have instigated such a discussion...
At one point, I observed to the group that while gold may be asserted to be
"a relic" by some, with no importance as a monetary asset, people who held
their savings in banks in Argentina or Uruguay might think otherwise if they
had some physical gold instead.
I also pointed out - as you have noted ad nauseam - that the constitution
defines money as a measure of gold and silver specie, and that our government
has long abandoned the dictates of the constitution and abrogated its
responsibilities under it by giving the Federal Reserve the right to "print
money."
We got into a spirited discussion about fiat currencies, and talked about the
"new" currency the government is preparing to issue. I saw it as a way to
flush out any currency people are now holding, and to in effect "tax" those
who have had the foresight to stash away a cash cushion.
That lead to talk of banks runs, and I pointed out that it could happen here.
At that point, our treasurer stated that United Virginia Bank now has signs
posted in the bank limiting cash withdrawals to $3,000 per person per day.
This is the first time in my lifetime that I have heard of this happening at
a US bank. (This bank branch is in Northern Virginia, about twenty minutes
outside of Washington, DC.)
Our treasurer, who is neither a "gold bug" nor someone into "conspiracy
theories," wondered aloud as to whether people were starting to get nervous
about the financial system and were beginning to withdraw and hold cash.
I realize that this is an isolated incident, but it is disturbing to me. The
thought of any bank here limiting cash withdrawals is ominous. What good is
FDIC insurance if you can't get to your money?
Have any of your other subscribers experienced this anywhere in the country?
A sobering thought for a Sunday afternoon....
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