Richard Russell on deflation scenario.
--borrowed from:
bearsden.net
July 26, 2002 -- Here's a bit of logic (at least I think it's logic) that I've been mulling over. The Dow closed at a low of
7702 on July 23. The next day we had that spectacular 488 point gain in the Dow. But the breadth on that day wasn't
particularly impressive, this despite the big Dow gain. Next, we had two mixed days and today was a subdued up-day.
However, I noted that yesterday, downside volume was ahead of upside volume, and there was no real follow-through to
the upside. Today was not much better.
We should give the market a few more days, but already it seems to me that large interests aren't coming into this market --
this despite months and weeks and days of unrelenting decline.
So where does the logic come in? It strikes me that if "big money" won't rush in here to pick up "bargains," then the market
will have to go lower. The big boys evidently aren't convinced that we've seen an important bottom.
In the past, following important oversold market bottoms, we have seen what I term upward "breadth thrusts" on large
volume. This kind of action tells us that large interests have decided that "THE BOTTOM" is in, and that it's time to buy --
and buy big time. We've yet to see that kind of action.
But remember, the market is still oversold, and what I'd expect coming up is an erratic market, with the current oversold
condition of the market being worked off. One good way of monitoring the oversold condition of the market is via the daily
readings of the McClellan Oscillator -- these readings are posted on this site every day.
After its January to July cave-in, the dollar looks to be forming a base for an upside correction. I think the key here is
whether the Sept. Dollar Index can rally above its July 5 closing high of 108.12. I'll continue to monitor the path of the
dollar, as I do daily on this site.
The 30 year T-bond is arguable the most sensitive instrument for gauging inflation or the lack thereof. This bond continues
to hold near its high, and it continues to hold well above a rising trendline that started from the March low.
Another gauge of inflation that I watch carefully is the yield on the 10 year T-note as compared with the yield on the
inflation adjusted 10 year T-note known as TIPS. The T-note yield is 4.40% while the TIPS yield is 2.73%. The
differential is down to 1.67 and the differential continues to sink. The indication here is declining inflation.
A third inflationary gauge is the price of gold. Believe me, the Fed would love to see gold pushing up these days rather than
sliding. There are a lot of reasons why gold moves up or down, but a rising trend of gold would tell the Fed that their
inflationary efforts were starting to work.
Yeah, I know, the central bank would like to get rid of gold altogether, but at this juncture, believe me, the Fed would love
to see rising gold, an indication of inflation rather than deflation.
And speaking of gold, I thought today's action really smacked to me of deflation. The 200-day moving average for gold
stands at 298, and we'll just have to see whether gold halts its decline this side of 298.
The declining price of gold clearly is negative for all of us who hold gold, but the much more important consideration is
whether declining gold is now saying "deflation." If that is the case, the nation is in for some very nasty times ahead.
On the much bigger picture, the 20-month moving average for gold on May 2 crossed above the 40-month MA. This
occurred after 5 years in which the declining 20-month MA held below the declining 40-month MA.
Thus, on the very big picture I see gold in a primary bull market. On the big picture, again, the 40-month MA for gold
stands at 281 and the shorter 20-month MA stands at 283. At the worst, I would think the 280-283 area should represent
strong support for gold.
I'll repeat again that the greatest potential danger ahead would be net deflation. Deflation would put pressure on the
massive debt structure of the US. The specter of possible deflation (following the Japanese example) strikes terror in the
heart of the Fed.
What we're seeing now is the Fed pitting all its sources against the possibility that the US economy will lapse into a
condition of net deflation.
My own thinking is that the KEY to whether the nation sinks into net deflation or not -- is the housing industry. It is critical
that housing prices continue to hold. A general slide in housing prices, I believe, would set off net deflation and push the US
on the Japanese path.
By the way, Japan's Nikkei stock average, which has held above 10,000 since February, plunged below 10,000 again this
week, and I write the Nikkei stands at 9,720. In Japan it's deflation in all areas, now including its stock market (see the
e-mail at the end of this report.
OK, I admit it -- I've just got deflation on my mind. Here's what I see, and it's all militating towards deflation --
The differential between the T-notes and the TIPS is down to 1 .67.
The 30 year T-bond is just off its high.
The falling price of gold.
Copper, the universal metal, gapping down and plunging this week.
Lumber topping out in March and sinking ever since.
The increasing negative sentiment of consumers.
The Goldman Sachs Spot Commodity Index topping out in early April and moving sideways since.
Again, let me repeat that the only PLUS in the picture is the price of housing. If the housing bubble bursts, it's Katie bar the
door.
TODAY'S MARKET ACTION -- Today was just about what I expected, the market moved up -- but not very
impressively.
My PTI was up 5 to 5220 with the moving average at 5276.
The Dow ended up 78.08 and up for the week to 8264.39. There were two Dow movers, IBM down 2.95 to 66.40 and
MSFT up 2.52 to 45.35.
Sept. crude was down .23 to 26.54.
Transports were up 18.21 to 2254.79.
Utilities were down 1.54 to 216.99.
There were 1993 advances and 1776 declines.
There were 16 new highs and 335 new lows (I'm getting wrong info on high lows so I'll have to check this with the papers
tomorrow.
Total NYSE volume was a contracting1.79 billion shares.
S&P was up 14.14 (up for the week) to 852.83.
Nasdaq was up 22.03 to 1262.11 on 1.67 billion shares.
My Big Money Breadth Index was up 8 to 732.
Good surge in the Sept. Dollar Index which was up 142 to 105.90. Sept. euro down 142 to 98.53. Sept. yen down 173 to
84.23.
The plunging yen didn't help the Sept. Nikkei, which was down 85 to 9,745.
Bonds were mixed -- the Sept. 30 year T bond was down 9 ticks to 105.29 to yield 5.30%. Sept. 10 year T-note was up 6
ticks to 111.01 to yield 4.36%. Sept. muni futures down 8 ticks to 105.29.
Gold took it in the cush-cush, with August gold down 6.40 to 303.30. Sept. silver down 19 to 4.66. October platinum was
down 5.40 to 523.20, and Sept. palladium was up 2.85 to 334.45.
XAU dropped 3.76 to 55.73. HUI was down 9.52 to 95.00. So it's back to the drawing boards with the whole universe of
gold.
NEM down 1.05, PDG down .49, ABX down .57, AEM down 1.60, HL down .57. I'll have more on gold in the regular
Letter going out Monday.
STOCKS -- My Most Active Stock Index was up 3 to 241.
The 15 most active stocks on the NYSE were -- TYC up 3.78, AOL up 1.26, MOT down 1.28, PCS down .70, GE up
1.15, FON down 1.95, C up 1.09, PFE up 1.39, XEL down 4.39, AWE down .27, JPM down .10, T up .36, L up 1.10,
XOM up 1.19, TXN up .20.
More -- AIG up 3.71, MER up .51, FNM up 2.62, GS up .27, GM down .67, CSCO up .21, AOL up 1.26, KSS up
1.14,TGT up .14, TIF down .55, MRK up 1.54, AA up 1.40, CAT up .76, DELL up .18, D up .10, D down 1.63, COST
up .47, FD down .24, KBH down .70.
McClellan Osc. at minus 80, and erasing much of the oversold condition.
CONCLUSION -- Market continuing to work off its heavily oversold condition. So far no "upside thrust" on big
breadth and big volume. Where are the eager big-time buyers? They just haven't come in off his "bottom." If they don't
come in by next week, I'll be more and more convinced that this market has to lower before "big money" thinks stocks are
cheap enough for them to "load up" on.
In the mean time, the market is taking a rest from going down. Hey, it's entitled.
What a week! I'm tired.
Russell
From an e-mail received yesterday --
TOKYO, July 26 (Reuters) - Japan's household spending jumped in June as consumer prices fell for a 33rd straight
month, throwing the spotlight back on Japan's battle with deflation at a delicate time when unemployment is rising and
wages are frozen.
The nationwide core consumer price index (CPI), which excludes volatile fresh food prices, slipped 0.8 percent in June
from a year earlier and fell 0.1 percent from May, the government said on Friday.
In a sign that falling prices will likely continue, Tokyo's core consumer prices, tallied a month ahead of nationwide
figures, fell 1.0 percent in July from a year earlier, the 34th straight month of decline. |
