Russell...
March 8, 2004 -- US consumers continue to buy "like there's no tomorrow." According to last Friday's Fed report, consumer credit outstanding rose by a larger than expected $14.2 billion in January to a seasonally adjusted $2.016 trillion. Wall Street expected a $5.9 billion gain. At the same time, "investors" in January bought just over $40 billion in mutual funds, one of the biggest buying months in recent history.
Mark Faber notes that according to a Yale School of Management poll, 95% of individuals and close to 92% of financial institutions believe US stocks will be higher 12 months from now. People are bullish about the stock market.
The percentage of cash held by mutual funds has dropped to an historic low of 4.3%. Funds are extremely bullish regarding the stock market, at least with other people's money.
Advisors have remained bullish for 44 consecutive weeks. Bullishness is now rampant with Investor's Business Daily's poll of investment advisors showing the bullish percentage now at 59.6% while the bearish percentage is at 18.8%. The bullish percentage of advisors has prevailed for months on end.
In the face of all this bullishness, stocks continue to be drastically overvalued. And despite 45-year lows in short interest rates and the greatest spate of liquidity ever seen, none of the major stock averages, the Dow, the S&P, the Nasdaq or the Wilshire, has been able to rise to new highs. Eighteen months have passed since the bear market lows of September 2002, which is a long time for a bear market rally to remain in force.
Meanwhile, the "conventional wisdom" holds that if there's to be any trouble ahead, that trouble will be held off until "after the elections." Why? How? "Easy, the Fed won't let it happen."
But now we see important divergence in the stock averages. On January 22, the D-J Transportation recorded a closing high of 3080.32. Two trading days later on January 26, the Dow rose to a high of 10702.51. Following that high, both Averages turned down. On the rally that followed, the Industrial Average advanced to a new high of 10737.70 on February 11. The Transports failed by a wide margin to confirm.
In fact, in the face of continuing strength in the Industrials, the Transports have now formed a series of declining peaks.
January 22 -- Transports closed at 3080.32.
February 11 -- Transports closed at 2951.92.
March 1 -- Transports closed at 2916.61.
This is continuing divergence, and a very negative sign for the market. So while investors appear highly bullish and the retail public continues to buy heavily into the market -- the Averages are waving a "warning flag,"
In the face of all the above, I've advised a move to cash and gold with close stops under all common stocks that subscribers still hold.
I'm not alone in this. The cheer-leading Wall Street Journal buried it in its B-section (for shame), but it made headlines on the front page of the Financial Times. The world's greatest investor, Warren Buffett of Berkshire-Hathaway fame, states that he can find few if any stocks to buy which fit his valuation criteria. So Buffett's been building a record cash hoard of $36 billion. Writes Buffett in his annual report just released, "Our capital is under-utilized now . . . It's a painful condition to be in -- but not as painful as doing something stupid."
On top of that, Buffett has invested $13 billion in foreign currencies in a huge play against the dollar.
Writes the Financial Times today, "The last time Warren Buffett chose to sit on the sidelines with anywhere near this much cash, it was a precursor to the largest stock market bubble in history."
How about the VIX? This morning the VIX (implied volatility index) was just over 14, which is close to an historic low. The extremely low VIX tells us that there is very little desire to buy puts. Puts are insurance on the downside. Of course, the VIX could be correct -- the low VIX could be telling us that the market is not ready go down, and therefore, there's no need for puts. But the other side of the coin is this -- if this market does head lower, the VIX at a low 14 tells us that there's very little downside protection in this market. Take your choice.
The Lowry's statistics are interesting. Buying Power has been sluggish, telling us that up to now there's been a lack of desire to accumulate stocks. But at the same time, Selling Pressure is at its lowest level since late-1997. Just as there's little urge to buy, there's also little urge to sell. On this basis, we might expect the market to mill around in a trading range.
This morning the June 30 year bond was up 22 ticks to a new high of 113.20. And I wonder, is the extraordinary strength in bonds simply a case of foreign buying of Treasuries? Or is the bond market making a bet on future deflation? I don't have the answer to this critically important question, but it sure has me wondering.
Interest rates? What does the bond market think, aside from the surging bonds? The yield on the 10-year T-note is now 3.78%. The yield on the inflation-adjusted 10-year T-note (TIPS) is 1.41%. The yield differential between the two is 2.37%. The bond market is saying that inflation over the coming 10 years will average around 2.37%.
Investment Position -- May I suggest that subscribers read or re-read my piece on the Home Page, the piece entitled "Rich Man, Poor Man." This is the time, I believe, to at least act like a rich man (Warren Buffett, for example). Yeah, I know that to be invested in T-bills or in a money market fund or a CD means that you get paid next to nothing. But to be invested in other than cash today means to be invested in something that's overvalued.
What's overvalued today? Stocks, bonds, real estate, condos -- frankly, almost everything.
Question -- Russell, why are you so worried about the stock market at this time? What's really bothering you?
Answer -- I'm worried because, as I've said, I believe the top for this market is now in. I'm worried because if the bear takes hold again here, it will be deflationary. Yes, declining stocks are deflationary. If stocks turn down here, they will be pressing against the greatest mountain of debt in world history.
What about gold? Gold is the only money with intrinsic value and which has no debt against it. As such, gold is "bankrupt-proof." This is the great value of gold. In an all-out inflationary environment, gold will tend to keep up with inflation. On the other hand, in a disastrous deflationary credit collapse, gold stands as intrinsic money that will defy bankruptcy. Should there be a panic out of all paper currency in a world deflationary collapse, there could be a panic to own the only money that is pure intrinsic value, gold.
Gold stocks are not gold. Gold stocks are the companies that produce gold. From a safety standpoint, gold stocks obviously cannot be compared with physical gold that you own. However, gold stocks do have the leverage. For instance, if the price of gold were to rise 50% from here, say to 600, many gold stocks would probably double and even triple in price. For this reason, I would suggest a 50/50 gold position, half gold and half gold stocks. An even more conservative position would be two-thirds metal to one-third stocks.
Let's check the action of the bellwether gold stock, Newmont (NEM). The chart below tells an interesting story. RSI is above 50, which is a plus. At the bottom of the chart we see MACD still below zero but "trying" to move above the thin black line, which is a 9-day exponential moving average of the heavy black MACD line.
The blue histograms at the bottom of the chart are very slightly above zero, meaning that MACD is very slightly above its 9-day moving average. Short-term buy and sell signals are given when MACD moves above or below its 9-day MA.
NEM is just below its 50-day moving average, shown by the blue line on the chart. The 50-day MA stands at 44.47 today. Thus, a move to 45 or above would be a bullish signal for NEM. In the meantime, NEM has been correcting, marking time as its 200-day MA (red line) slowly climbs up to meet the price action.
I'll remind subscribers that when an item advances "too far" (often more then 10%) above its 200-day MA, it's ready to correct. By the same token, when an item drops too far below its 200-day MA, it's ready to correct to the upside.
CONCLUSION -- I continue to believe that the top is in for this market. If I'm correct, it means that the bear will be tightening his grip. If that happens, it could not happen at a worse time. Why is that? Everybody is bullish, nobody has cash, debts are sky high, and nobody is prepared for trouble "this side of the election."
Transports closed today 212 points below their January 22 closing high of 3080.32. Transports would need to better 3080.32 to confirm the Dow. I don't think that's going to happen. Has anyone been watching the Transports at all? Does anyone follow the Dow Theory?
And so ends our Monday.
Richard Russell
Editor-in-chief - DOW THEORY LETTERS
www.dowtheoryletters.com/dtlol.nsf
March 8, 2004
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