Gary, you may be interested to see this commentary by Richard Russell , editor of the Dow Theory Letter, La Jolla, California.
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December 12, 2002 -- In all my dealings with the markets over half a century the most fascinating aspect has been the study of the primary trend. My mentor in this area was the great Dow Theorist, E. George Schaefer. Schaefer, in my opinion, possessed the best understanding of the primary
trend of any analyst in history.
On June 13, 1949, the Dow sunk to a low of 161.60. That was the extreme low of the past World War II bear market. A week later, on June 18, 1949, George Schaefer wrote a masterpiece report in which he stated that the long bear
market had ended, and a great bull market lay ahead. Schaefer based a large part of his seminal report on the fact that stocks were selling "at great values." Schaefer advised investors to load up on dividend-paying blue-chip
stocks and ride the bull. The rest is stock market history.
At the time, of course, literally nobody believed Schaefer. The general sentiment was that "The war is over, and we now face a resumption of the Great Depression." In mid-1949 there was little or no interest in stocks or the stock market. Volume on the NYSE was running under 2 million shares a day. At the 1949 lows stocks were selling at give-away prices, high dividends, low price-earning ratios. Blue chip stocks were selling at great values. And Richard Russell was working for thirty-five bucks a week.
Fresh out of the Army Air Force, fresh out of college, those times were a work-shop and a revelation for me. I remember those days as if they were only yesterday.
One of the things I learned in my studies of the primary trend told me that the primary trend always seems to carry further than anyone thinks possible.
I guess I've written this a few hundred times, but for all my new subscribers I'm going to say it again. The primary trend always runs to conclusion. The primary trend can be temporarily manipulated, it can be held back, it can be talked back, but ultimately, as night follows day, the
primary trend will fully express itself.
The latest example of the power of the primary trend was seen in the bull market that began in 1974 and ended in 1999. Actually, even though technically the bull market ended in 1999, the speculation was so intense that many stock groups carried over their frantic bullish actions into the year 2000.
Yet I remember well the situation in late-1974 as the bull market was starting. People were so bearish that when I called a bull market under Dow Theory I got angry letters from subscribers claiming that "I had lost my mind." Leading Wall Street analysts were predicting that the Dow would fall to 250. Newspapers and magazine were openly stating that capitalism as we know it was finished. Wall Street was despised, and the public was totally disgusted with the stock market.
What followed was a fabulous 24-year bull market. It lasted for two generations.
By 1999-2000, as the great bull market was dying, sentiment had totally changed. Prosperity forever was the generally accepted thesis. New books were coming out forecasting "Dow 36,000" and "a new era in stocks have arrived." Wall Street had banned the word "sell" from its vocabulary.
I have used two sets of moving averages as aid in identifying trends. I use the 50-day and 200-day MAs for short to medium trend identification. For a more definitive identification of the primary trend I use a 20-month and a
40-month moving average. It take a long time, and a persistent trend-direction before the 20-month MA can cross above of below the 40-month moving average.
The 20-month MA of the Dow turned down in December 2000. In January 2002 the 20-month MA broke below the 40-month MA. I took this bearish crossing as confirmation that the primary trend of the market had turned bearish. In May of 2002 the 40-month MA of the Dow finally turned down. The stage was set for a great bear market.
That leaves us in the current situation where the declining 40-month MA of the Dow stands at 10094, and the declining 20-month MA stands at 9504. The Dow is well below both MAs at 8537.
Since the bearish crossing of these two long-term moving averages occurred only 11 months ago, I'm thinking that this bear market has a long way to go on the downside before I receive a new bull signal based on the two long-term moving averages.
The last bullish crossing in which the 20-month MA broke above the 40-month MA of the Dow occurred in April of 1980. That was 22 years ago. Assuming that the recent bearish crossing could last for a third of the bullish 22 year span, I would guess that this bearish crossing could last at least 7 years before I receive a bullish signal. That could take us close to the end of this decade.
Now let's turn to gold. In January of 1997 the 20-month MA of gold crossed bearishly below the 40-month MA.
The declining 20-month MA of gold hit its low on November 2001. The 20-month MA then turned up. In May of 2002 the 20-month MA crossed bullishly above the 40-month MA. This was the confirmation I was looking for -- the confirmation that told me that the primary trend of gold has finally turned
decisively bullish.
As I write today the rising 40-month MA of gold stands at 287 and the faster moving rising 20-month MA of gold stands at 296. Gold, in the meantime, has climbed to the 332 area.
The question -- where is gold going from here?
Obviously, there's no definitive answer to this question, only guesses. But it's a free country and I'm allowed to guess.
My un-specific guess is that gold is going higher than anyone at this time thinks possible. Gold rose to 850 back in 1980. Since then the Fed has created many trillions of intrinsically worthless fiat dollars.
My guess is that before the current bull market in gold is over, gold will be priced substantially above the 1980 peak price of 850. How much higher I don't know. At the recent New Orleans seminar I stated that as a guess I believed we'd see the price of the Dow and the price of gold cross. At what level? My guess was around 3,000.
To sum up, it's my belief that the bear market in stocks is still in its early stages. I believe that the bull market in gold is also in its early stages.
This, of course, it not a happy forecast. It's a forecast, based to a large extent, on my experience, knowledge and intuition regarding primary trends and how they work.
I might also add that in my experience the longer the primary trend is manipulated, held back, prevented from expressing itself, the greater the move when this "wound-up spring" is finally released.
Stocks have been touted to the heavens as the way to riches. "hold for the long-term," we are still told, "and you'll die rich."
Conversely, gold has been talked down, denigrated, despised, mocked, for over two decades. "Gold is an antiquated relic," we are told. "It's days are over."
I believe we'll see a drastic and total reversal of these two concepts over coming years. Stocks will be seen as the destroyer of wealth, and gold will be seen as the answer to economic freedom.
If I'm wrong, I apologize. |
