Richard Russell calls it a Bear in this weeks Barron's.
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June 12, 2000 from Barron's, "The Oracle Of Dow"
-Interpreter of a venerable theory sees markets at
a pivotal point
By Peter C. Du Bois
An Interview With Richard Russell ~ A long-time
student of stock-market history and an
accomplished technician, Dick is a particularly
strong believer in and proponent of the Dow
Theory, whose main function is to identify the
primary trend of the market. Just how important is
the primary trend? "Without understanding that
concept, you're lost," he says. "It would be like
trying to drive a car without an engine." Now 76
and a longtime resident of San Diego, Dick is no
stranger to Barron's. Beginning in 1958, his
comments on what the Dow Theory is saying have
frequently graced our pages. He has penned his
newsletter, Dow Theory Letters, since July 1958,
and last year began offering daily comments to
subscribers on his Website,
www.dowtheoryletters.com. For his
perspective and views on today's market, and why
he believes we're in the first phase of a bear
market, read on.
Barron's: When did you first become interested in
the stock market and start investing in equities?
Russell: I have a very strange family history. My
grandfather committed suicide in the Panic of
1907, and my uncle was undone in the 1929 Crash.
For all the talk about many people committing
suicide then, he was one of few who actually did.
I was born in 1924. In 1946, when I got out of the
Army Air Force, I read an article in Time magazine
about the great future of Kaiser Frasier cars. I
bought a few shares in the 20s, and they promptly
fell to 10. That's what got me really interested
in how markets work.
Q: When did you decide to focus on the Dow Theory?
A: In the mid-1940s, there wasn't an awful lot of
material available to help one understand the
stock market. I went to the New York Public
Library, which had a great section on economics. I
pored through every book I could find about stocks
and happened upon a collection of articles by
Robert Rhea. From 1932 until he died in 1939, he
wrote a newsletter called Dow Theory Comment that
came out irregularly every 10 days to two weeks.
It was successful from the start. Rhea had a big
following in Barron's, which at that time was
quite technically oriented.
Prior to starting his newsletter, on July 7, 1929,
Rhea had called the 1929-1932 bear market, based
on Dow Theory principles. He also called the exact
bottom on July 8, 1932, a feat which I consider
one of the most remarkable in the history of
stock-market analyses. He also called the turn to
the downside in the bear market of 1937. I was
totally fascinated by what he wrote. The material
really
made a lot of sense to me. It was the first time I
really got a feel for the market. I studied every
word and sentence Rhea ever wrote until I couldn't
see straight.
Q: Let's back up a minute. Can Dow Theory be
summed up in a sentence or two?
A: Unfortunately, no. It's more of an art form
than anything specific. It requires a lot of
interpretation, which is probably why its value
has lasted so long.
Q: Is it fair to say that Dow Theory tracks the
primary trend of the market by insisting that the
Dow Jones Industrial Average and the Dow Jones
Transportation Average must move in the same
direction and must confirm each other's new highs
or lows?
A: Yes, the theory helps to identify the primary
trend. Without understanding that concept, you're
lost. It's like driving a car without an engine.
However, value, dividend yield and other factors
also play important roles.
Q: What do you consider your best and worst market
calls?
A: I started my newsletter in July 1958, telling
people to be fully invested at a time when most
observers were very gloomy. We had a huge up-move
that lasted into 1960. However, I think the best
call I ever made was in December 1974, when I said
the 23-month bear
market that began in January 1973 had hit bottom.
Probably my worst call was not turning bullish in
October 1962. I caught the top in the spring of
1962, but stayed bearish too long. I missed the
entire bull market that ran until 1966. However, I
restated my bearish case in 1966, and the market
fell.
Q: Back in 1962, did you let your own opinion
override your data?
A: I think so. Around that time, I realized I
needed something else to keep me on the right
track. That's when I started thinking about what
became my proprietary Primary Trend Index. I began
publishing the PTI in 1971. It's a compilation of
eight components that measure only market action.
There's no subjective interpretation involved. I
prefer not to name the components. If everybody
followed the same ones in the same way, the PTI
would lose its usefulness. The key here is that no
matter what I think, the PTI keeps me on the
correct side of the market.
Q: What are your indicators telling you now?
A: As measured by Dow Theory and the PTI, we're in
the first phase of a bear market that could be
long, tedious, grinding and very painful. Before
it's over, I believe we'll see big pools of money
moving out of stocks and into cash. I also believe
we'll see absolute
slaughter in that dinosaur industry, mutual funds.
There now are an absolutely ridiculous number of
equity funds. In time they'll be
decimated, with literally hundreds of them closing
down as investors bid them good-bye.
Q: When did the bull market end?
A: On May 12, 1999, when the DJIA and the
Transports both hit peaks. The Industrials
subsequently hit several new highs, but Transports
didn't. That's called a non-confirmation, and it's
still in effect.
But that's not the only bad news here. In what I
call a Top-Out Parade, a total of 12 key
indicators are below their peaks. I doubt that any
of them will see new highs in this market cycle.
Sequentially, the Parade goes like this:
Daily new highs on the NYSE topped out at 631 on
October 3, 1997.
The advance-decline ratio topped out on April 3,
1998, at 13.00.
The DJ Transportation Average topped out on May
12, 1999, at 3783.50.
The NYSE Financial Average topped out May 13,
1999, at 584.21.
The DJ Utility Average topped out on June 16,
1999, at 333.45.
The Value Line (geometric basic) topped out on
July 6, 1999, at 472.95.
The NYSE Composite topped out on July 16, 1999, at
663.12.
The DJ Industrial Average topped out on January
14, 2000, at 11,722.98.
The Russell 2000 topped out on March 9, 2000, at
606.05.
The Nasdaq Composite topped out on March 10, 2000,
at 5048.62.
The Amex Index topped out on March 23, 2000, at
1036.40.
The S&P 500 topped out on March 24, 2000, at
1527.46.
Q: You said we're in the first phase of a bear
market. Typically, what happens here?
A: Market action is very deceptive. Individual
stocks and sectors decline, some froth and
excitement from the bull market top are erased,
the market fluctuates below its highs, sometimes
wildly, but the economy remains okay. In some
ways, the current first phase is different from
any other I've ever seen.
Q: Why?
A: Because it has lasted longer, because many more
individuals and institutions are involved, because
it's happening in an election year and because a
new phenomenon, the Internet, has emerged and
obviously is changing the world.
Then there's volatility. I've never seen anything
like what we have now. Among the reasons for it
are day-traders moving in and out of stocks, and
the divisor on the DJIA, which is a price-weighted
index. To adjust it for stock dividends and
splits, a divisor, which really
is a multiplier, is used. Following Intel's recent
split, every point up or down in a Dow stock moves
the index by 5.48 points. A
six-point pop in IBM would add 32.8 points to the
index. So it's not that hard to manipulate the
Industrials these days. But perhaps most
important, this first phase is occurring at a time
of the first generation of investors in U.S. stock
market history to never have gone through hard
times. This big difference allows them to
disregard risk.
Q: How else do you categorize this bear market?
A: So far, it is one of attrition, a deadening
process that goes on and on. Stock after stock
falls victim to the bear, but the action is
subtle, and nobody seems particularly worried. The
averages rally a bit, often on lower volume. They
decline, they wander about
aimlessly, but meanwhile, selected stocks get
hurt, and many get hurt badly. As this bear market
moves along, attrition will give way
to nasty selling, big breaks in stocks and rising
volume on the downside. We're not there yet.
Meanwhile, is the bear playing with us? Is he
trying to lull us into a false sense of security?
Is he trying to bore us to death? Damned if I
know, but I do know this: The bear has time on his
hands. He's in no hurry. The bull certainly was in
no hurry, and the bear is perhaps just getting
even.
Q: A whole generation on Wall Street never has
experienced a real bear market like the one that
began in January 1973 and ran 23 months until
December 1974. What are the most important things
to remember about one like that?
A: Here are some critical axioms. In a primary
bear market, values deteriorate over time.
Everyone loses, but the person who loses the least
is the winner. The one thing you should not take
in this business is a big hit. You can avoid
taking a big hit in a bear market by
being low on stocks or out of stocks entirely.
Q: Why do you suppose most investors either don't
see or won't admit that we're in a bear market?
A: In a recent issue of Dow Theory Letters, I
quoted something Charles Dow wrote around 1902. He
was the father of the theory, but he never called
it the Dow Theory. Even though his admirers begged
him to write a book explaining his theories, he
stubbornly refused.
However, his good friend, S.A. Nelson, published
15 of his editorials that had appeared in The Wall
Street Journal between 1899 and
1902. The little volume was entitled The ABC of
Stock Speculation. A footnote at the end of each
chapter refers to each editorial as "Dow's
Theory." Dow himself never once used the term.
To answer your question, here's one thing Dow had
to say about the sheer human and economic drama
the stock market represents, and why most people
are slow to recognize change:
"There is always a disposition in people's minds
to think that existing conditions will be
permanent. When the market is down and dull, it is
hard to make people believe this is the prelude to
a period of activity and advance. When prices are
up and the country is prosperous, it is always
said that while preceding booms have not lasted,
there are circumstances connected with this one
which [are]
unlike its predecessors and give assurance of
permanency. The one fact pertaining to all
conditions is that they will change."
Q: What are the other two stages of a bear market?
A: In the second stage, business conditions really
start to deteriorate. Stocks go down further as
they discount this climate. Corporate profits
decline, and the effects of the battering stocks
have taken so far is reflected in corporate
earnings. For this reason, the public
relates much more to what's happening in the
second phase, and optimism begins to turn to
questioning and even gloom. This usually
is the longest phase. It's when the public finally
really realizes that something is wrong. Stage
Three is the "give up" phase. Rhea said that's
when people who are saving for a rainy day find
that it's raining.
Q: So they want out at any price?
A: Correct. People dump stocks just to be out of
the market. Extreme fear is prevalent.
Q: Where do rising interest rates fit into your
bearish scenario? Is the stock market declining
because the Federal Reserve is tightening?
A: That isn't the way I see it. Early signs of
trouble were seen back in 1997-98, when new highs
and the advance/decline ratio topped out. By May
12, '99, when the Transports topped out, it
certainly was clear, at least to Dow Theorists,
that "something was wrong." That "something" was
unknown at the time and, frankly, I don't think it
is known today. To cite inflation is too easy.
Everybody knows the Fed is worried about
inflation. What everybody knows is fully
discounted by the market 99% of the time.
I'd say that something else is bothering the stock
market. If I had to guess, I'd say the dollar
could be topping out, or consumer spending, which
accounts for a big percentage of gross domestic
product, could continue to slow down. Obviously, I
agree that rising
interest rates are a negative for the stock market
and the economy. But more than that, I believe the
great primary trend of the market
has turned down. This implies that there are a lot
more troubles out there waiting to express
themselves.
Q: Will the Fed raise interest rates again on June
28?
A: The Fed is in a bind. At this point, it easily
can justify pushing rates up another 0.25% on June
28, in an effort to offset what the bond market
has been doing. Yields on long bonds have been
sinking, and I believe the stock market has been
reacting to this trend, not to slowing business
conditions. So, here's the way I see it: If the
stock market is looking strong in late June, the
Fed will raise rates
0.25%. If stocks are struggling and economic
growth is slowing, the Fed will stand pat.
Up to now, the Fed has been playing it cute.
They've been raising rates, but at the same time
they've allowed the money supply to expand. Thus,
the Fed has tried to put a ceiling on the market
with rising rates while at the same time putting a
floor under the market with copious cash. In the
end, we may get the worst of both worlds -- a
slowing economy and rising inflation.
The net result of all this is that the Fed's
manipulations are extending the stock market's
lengthy topping-out process, dragging it on and on
and on. The Fed objects to the "irrational
exuberance" of the stock market, but at the same
time is afraid to let the stock market
go into the tank.
Q: By Dow Theory precepts, what index levels now
are critical?
A: I need to discuss Charles Dow's "50%
Principle." He noted that what the averages do at
the halfway level of a major rise or decline is
important. The greater the move, the more
important the 50% Principle. For example, I
wouldn't apply it to a move of a week or
so covering maybe 100 points in the DJIA. However,
for larger moves, this analysis is often helpful.
The record high for the Industrials was 11,722.98
on January 14, 2000. From there it fell to 9796.03
on March 7, a decline of 1926.95 points. The
halfway point of the decline was 10,759.50. You
have to envision 10,759 as a fulcrum, the center
of a see-saw. According
to the 50% Principle, if the Dow, after all its
fluctuations, can settle and hold above the
halfway level, there's a good chance that this end
of the see-saw will rise, allowing the index to
test its prior high. But if the index, after all
its fluctuations, can't settle above 10,759, then
the odds are that this end of the see-saw will
sink, taking the Dow down to test or even break
below its March 7 low. In this
event, I believe the second and longest phase of
the bear market would be triggered.
Recently, the Dow has been both a little below and
a little above 10,759. Even if this battle is
resolved on the upside, and the Dow heads for its
prior peak, I recently had a terrifying thought.
The next 10 years could be much like 1966-1974,
with the market marching up and down in a wide
trading range, never giving clear signals. Then
the bear finally takes over and knocks the market
to its knees. That's about what happened during
1966 to '74. It was a very difficult and confusing
period, with mini-bull and -bear markets, and in
the end, nobody made a lot of money. In fact, if
they rode out the '73-74 collapse, they took the
beating of their lives.
Q: Does it bother you that many people consider
technical analysis to be voodoo that doesn't make
any sense?
A: Yes. These people haven't done their homework.
To me, that's one of the most incredible phenomena
about investing. Here's an industry involving
trillions of dollars, and guys haven't bothered to
study it carefully. They haven't read Dow Theory,
the basis of all
technical analysis. They haven't really studied
bull and bear cycles. They're amateurs. They
haven't learned the lessons of history.
Q: Okay, what's the downside from 9796?
A: It's unknown. One of the basics of Dow Theory
is that neither the duration nor extent of a move
can be predicted in advance. The inference I draw
is that in all history, periods of extreme
enthusiasm eventually end in a period of abject
pessimism. I consider the latest bull market as
having started in December 1974. Some people say
August 1982. Either way, it's been the longest
bull market in
history. To me this suggests that it probably will
be followed by one of the worst-ever bear markets.
Another thing, the speculation that we've seen in
this bull market dwarfs what we saw in the early
1970s. This adds to my belief that we'll see a
huge bear market, one beyond anything we now are
thinking about.
Q: Are there any checkpoints on the way down?
A: Not since 1982 has the Dow closed on any day
below its low of the prior year.
The 1999 low was 9120.67 in January. If that's
broken this year, it would be another milestone on
the downside, and you'd see more chaos than we've
seen so far.
Fortunately, I'm not in the business of selling
stocks, so I can say what I want. I say your best
position now is on the sidelines. Remember, the
current tax setup, with a maximum 20% federal levy
on long-term capital gains, means that if you make
money, the government is only a minority partner.
But if you lose money, Uncle Sam doesn't know you.
In this business, you never stop learning. Let me
put it another way. If you stop learning, you're
on your way to going out of business. Wall Street
is a tough teacher but also a good teacher. If you
have any weakness -- arrogance, laziness,
stinginess, cowardice,
procrastination -- the market will zero in on that
weakness and make you pay dearly. In this
business, you listen, you think, you ponder, you
struggle, you wrestle with the gods of the market,
and if you're me, you put yourself on the line.
When you do that, you take a chance of looking
like a damn fool. And if the stock market has the
opportunity, believe me, it will make you look
like a damn fool, at least for a while.
Everybody in this business is wrong at times. The
fatal error is to stay wrong. I think we're in a
major bear market. If it turns out I'm wrong, I'll
confess. Right now I believe I'm correct.
Q: What's the most interesting facet of any
serious study of the stock market?
A: The market's uncanny way of looking ahead, of
discounting the future. And the incredible part of
great primary swings from extreme optimism at the
top of a bull market to black pessimism at the
bottom of a bear market is the public's and the
investment community's inability to recognize and
accept change.
Q: If you can't or won't predict a specific
bottom, please categorize it.
A: I think this bear market probably will end
vastly lower. What series of incidents will turn
investors stone bearish? I don't know how it will
happen. But my answer is that 5,000 years of human
nature indicate that this market will end in the
cellar. All human history
tells us that there are, and will be, swings from
pessimism to optimism and back to pessimism, then
back to optimism.
Q: Is there any historic connection between a
strong bull market and the bear market that
follows?
A: The bigger the bull market, the more
speculative a bull market, the more flagrant the
price markups in a bull market, the more there is
to correct when a bear market finally takes over.
If that's the case, then I can't discount the
ossibility of this bear market becoming a whopper.
After all, it will be correcting the biggest and
longest bull market in U.S. history.
Q: Why can't the market just level off and stay
relatively high? What law says it must head down
into the depths?
A: Obviously, no law states that. But all my
studies suggest it. Bull markets normally don't
just fade out and level off. When the bull dies,
the bear takes over, and the correction process
begins. In this process, things go wrong,
sentiment changes and dirty water begins to seep
out from under the closet door. Secrets are
exposed, corruption shows itself, fantasies turn
to nightmares, and
bull-market dreams become bear-market horrors.
Don't ask how or why. It's simply the way bear
markets work. The sad part of it is that bear
markets work just the opposite of bull markets.
Just as bull markets climb a wall of worry, bear
markets descend on a ladder of misplaced optimism.
Q: You've written that in major declines, big
industrial blue chips, the Dow-30-type stocks,
usually are the last to really crack. Why is that?
A: First, investors just hate to part with them.
They don't believe big blue chips also can
collapse. Second, these are the most liquid
stocks. At the bottom of a bear market, when you
really can't get a decent price quote on anything
else, these are the stocks that still can be sold.
Q: On that note, thank you very much. |
