Richard Russell:
www.dowtheoryletters.com
>>Gold up, commodities surging, dollar weak, stocks weak, crude oil strong, factory utilization down, corporate credit weak, stocks overvalued -- it's a hodgepodge, and you just have the pick the strongest and most persistent trends and go with them. I'm picking gold to rise, stocks to fall, and the economy to go with stocks.<<
September 9, 2002 -- THE MOST RECENT ISSUE OF DOW THEORY LETTERS HAS BEEN POSTED TO OUR SITE.
Each day I receive a mass of letters, reports, suggestions, theories, ideas, from market student around the world. Every conceivable type of study is sent -- cycles, momentum studies, stochastics, candle sticks, MACD, point & figure, detrending, etc. You name it, and I receive it.
For 44 years I've called by service, "Dow Theory Letters." And I was serious about the name. My position in the market has always been, and still is, based on the Dow Theory. Everything else is a sideline. Obviously, I watch and take a great many studies seriously, but I want to make one thing clear -- The Dow Theory shouldn't be mixed up or adjusted by other studies.
For instance, cycles are interesting, but they are not part of Dow Theory. Cycle followers might tell you that there's a four-year cycle, and that when the four-year cycle hits its low you should "buy." That's interesting, but Dow Theory simply tells us that "Neither the duration nor the extent of a primary movement can be predicted in advance."
So the Russell "take" on cycles is that they are interesting, sometimes they work and sometimes they don't work -- but the Dow Theory statement position is the safe position. The Dow Theory simply tells us that "when the primary trend of the market is down, we don't know how far the market will go on the downside, nor do we know how long it will take the market to reach its "target."
I've emphasized that the very basis of Dow Theory has to do with values. Charles Dow emphasized "change." Dow was a serious student of human nature, and he told us that the surest phenomenon in the market is the swing from bullishness and extreme overvaluation to bearishness and extreme undervaluation -- and then back to bullishness and extreme overvaluation again.
Exactly how the market gets from one extreme to the opposite varies from bull market to bull market, and from bear market to bear market.
And, of course, that's where the various "other studies" come in. Over the years I've learned this -- bull market studies will tend to malfunction in bear markets. In other words, the studies that many analysts use in bull markets just don't work in primary bear markets. That little "item" over the last year or so has cost a lot of analysts, and certainly a slew of economists, their following and in some cases their jobs.
A fascinating case study of the above is now in operation. There are now $70 billion various derivatives outstanding in gold. Most of these derivatives are held by six large banks, and most of these derivatives are matched against each other, so that actual risk is a lot less than it sounds. The number of longs and shorts held by the banks are not disclosed.
But in the Commitment of Traders area, the Comex tells us weekly exactly what's happening. For instance, the latest figures show that the "commercials" (large brokers, banks, etc.) increased their gold short position from 35,000 contracts last week to this week's total of 41,000 gold contracts sold short.
Thus, we see that the commercials (who tend to be correct) have increased their shorts positions in gold. But in my opinion, the primary trend of gold is now bullish. Thus, I'm of the opinion that the commercials are going to be wrong. They are on the wrong side of the major trend, and my guess is that they will be forced to cover at a loss.
When a market is shorted, it means that an added supply is thrown on the market. In a bear market this added weight will often knock an item down. But if shorts are built up against the primary trend, the power of the primary bull trend will force the shorts to the wall -- they will be forced to cover their shorts, usually at higher prices.
Day after day we can see and "feel" this battle in the gold market. No matter where gold closes, I note that each night, almost invariably, "they" try to knock gold down (the market is much thinner at night, which means that it's easier to pressure gold down a point or two in the evening session).
But slowly, persistently, gold is rising. On December gold, the next upside target would be to close above 327. Beyond that lies the June 4 high close of 330.90. Above 330.90 --I believe we would see an acceleration of a short squeeze on gold.
But to go back a few paragraphs, what I'm talking about here is that when the primary trend is up, that's the single most important piece of information that the investor or speculator can obtain. All other studies are simply adjuncts of the main primary trend study. And it's the Dow Theory that identifies the direction of the primary trend.
I want to warn subscribers that there's no automatic method of interpreting the Dow Theory. The theory has to do with psychological phases, values, action of the averages, volume indications, and a bit or artistry. Stock market analysis has never been automatic, which is why no system has ever been invented that is foolproof where the market is concerned. Yet, I've found the Dow Theory to be the best and most reliable of all stock market methods. As I said, all it takes is a lifetime of study and a bit of artistry.
In its simplest terms, bulls markets generate fortunes. Bear markets destroy fortunes.
I've mentioned before that I consider all today's zero-financed auto sales and all today's thinly-financed housing sales, as potential fodder for the bear. The Greenspan Fed may think that unloading all these cars and homes on the public is a clever ticket out of the current "economic weakness."
I don't agree. I believe that all that is happening is that consumer are loading themselves with more and more debt. As such, consumers are putting themselves in an ever-worsening position to weather the coming bear market storm.
Who's being hurt worst by this bear market? This is an interesting question. The vast majority of Americans still depend on their paychecks, rather than their portfolio. From this standpoint, job losses are hurting most Americans rather than losses in stocks.
Check these figures out -- the bottom 60% of American families, ranked by income, hold an average of only $4,000 worth of stocks. The bottom 80% own just 4.1% of total stock holdings.
By contrast, the top 1% of stock-owners hold 47.7% of all stocks.
So as I see it, the "rich" have been hurt worst (financially) by the bear market is stocks. But the middle class and lower-middle class and the poor have been hurt worst by job losses.
In the meantime, July figures show that manufacturing utilization in the US has sunk to a new low of 74.4%. In other words, the US is now using only three-quarters of its manufacturing capacity. The recession is pressing ever-harder on the manufacturing capacity of the US. And the truth is that between the "new globalization" and the bear market, manufacturing jobs have either been exported overseas of have just "disappeared" because of the recession.
In the rarefied world of expensive jewelry, we can see what the rich are doing. Bulgari announced its first quarter profits were down 60%. Compagnie Financiere de Richemont, which earns most of its money from Cartier, announced that earnings had plunged 66% in the last fiscal year. My local jeweler friend tells me that business this year was the worst in 23 years.
Let me put this way -- the rich appear to be "pulling in their horns." And the rich have a habit of cutting back before the poor do.
The cross-currents in this market are extraordinary. For instance, the commodity indices area now surging, but at the same time the long bonds are near their highs. Inflation? Deflation? Which one is in the saddle?
Honestly, I can't tell. But if corporations have no pricing power, if they can't raise their prices while at the same time the underlying commodities are rising -- there's going to be a profits squeeze. Figure that one out.
Gold up, commodities surging, dollar weak, stocks weak, crude oil strong, factory utilization down, corporate credit weak, stocks overvalued -- it's a hodgepodge, and you just have the pick the strongest and most persistent trends and go with them. I'm picking gold to rise, stocks to fall, and the economy to go with stocks.
TODAY'S MARKET ACTION -- Stocks down earlier, up later, with my PTI up 5 to 249 and the moving average at 259.
The Dow was up 92.18 to 8519.39; no Dow movers today
Oct. crude was up .12 to 29.73.
Transports were up 8.35 to 2263.42.
Utilities were down .60 to 234.06.
There were 1843 advances and 1385 declines.
There were 73 new highs and 41 new lows. My High/Low Index was up 32 to minus 3730.
Total NYSE volume was 1.13 billion shares.
S&P was up 9.04 to 902.96.
Nasdaq was up 9.31 to 1304.61 on 1.25 billion shares.
My Big Money Breadth Index was up 4 to 743.
Dec. Dollar Index was up .16 to 107.10. Dec. euro was down .13 to 97.93. Dec. yen was down .21 to 84.55.
Sept. Nikkei up 95 to 9330.
Bonds were about unchanged. The Dec. long T-bond was unchanged at 110.20 to yield 4.86%. Dec. 10 year T-note was down 2 ticks to 112.25 to yield 4.04%. Dec. muni futures were up 2 ticks to 108.25.
Dec. gold continues to creep up -- although "they" hit it every night in the after-market. Dec. gold up 1.30 to 322.80. Dec. silver up 6 to 4.60. Oct. platinum up 11.00 at 553.40. Dec. palladium up 1.80 to 333.20. So all metals up today.
Gold/Dollar Index ratio up .05 to 301.20.
XAU gapping up 2.91 to 76.04. HUI up 4.67 to 137.85.
NEM up .63, PDG up .17, ABX up .36, AU up 1.80, AEM (bought some more today) up .50, HL up .06. DROOY acting well.
STOCKS -- My Most Active Stock Index was up 5 to 255.
The 15 most active stocks on the NYSE were -- EMC down .02, JPM down .32, AOL up .20, PFE down .13, C up .79, GE (was anything left after Jack Welsh got his?) up .48, Q up .17, T up .10, NOK up .23, TYC up .35, F up .60, CPN down .49, WR down .62, MOT up .30, MO up 1.59.
Few more -- GM down .06, DCX up .59, F up .60, IBM up 1.30, MAY up .40, TGT up . 60, KSS up 1.73, WMT up .50, MRK up .60, AA up .71, DIS up .54, DD up .83, D down .52, ED down .12, TXU down .03, AEP down .46, PG up .90, CSCO down .07, INTC down .08.
McClellan Osc. up at 90 today. The Oscillator has a "toppy" look.
CONCLUSION -- Nothing much proved today on this low-volume advance. I'm watching the commodity indices, they're roaring higher. Money going into housing and NOW into commodities. I feel that gold is still being held back by large hedgers and shorts. Commitment of traders shows an increase in commercial gold shorts. The big boys along with the central banks just don't want higher gold. But then, who gives a damn what they want?
All the major stock averages continues to fluctuate below their 50-day MAs and all 50-day MAs are below their 200-day MAs.
The smart thing to do now is to do nothing (but use market strength to get rid of whatever stocks you have left, except for gold shares).
See you tomorrow --
Russell
Note - Be sure to read the article on gold by James Turk in the current issue of Barron's.
The Fed -- May I suggest that subscriber click on the rense.com and then click on to "Grand Illusion, A Phone Call to the Fed."
This site will give you some insight into the unconstitutional private banking system that we call the Federal Reserve.
I guess it's always a case of "follow the money" Bush has been trying to get France and Russia to line-up behind his "get Saddam" campaign. Both Russia and France are permanent members of the UN Security Council.
Problem --Iraq owes Russia and France between them $9 billion. Russia has been working with Iraq on a $20 billion project to develop a giant Iraq oil field. Bush is expected to signal to Russia that lucrative contracts, now frozen under UN sanctions against Iraq, could be realized with a "change in regimes." France is also known to have commercial interests in Iraq.
And this from Peter Baker, Washington Post Foreign Service -- "Every day Russian companies drill or ship as much Iraqi oil as they can under UN auspices, and they dream of the day when they can do more. Almost everyone here seems to have a hand in the Iraqi pot, from engineering firms to machinery manufacturers to politicians. . . the depth of Russia's economic ties to Iraq, actual and potential, poses a serious challenge to President Bush as he contemplated a military attack to overthrow Saddam Hussein's government. Russia supported the US was in Afghanistan, but it has warned against any invasion of Iraq, its longtime ally."
Last Friday I listened to Tom Friedman (NY Times editorial columnist) talking on National Public Radio. He said when you conquer a country "you own it." Referring to Afghanistan, he noted that we now have large military force there, and they will have to be there for years. If we conquer Iraq and win, it will take a huge military presence and massive of amounts of money to turn Iraq into a democracy and keep it that way, assuming that we can do it at all.
In his new book, "Longitudes and Attitudes, Exploring the World After September 11", Friedman states that September 11 was the beginning of World War III. I hope he's wrong, but I suspect he's right.
Lionel Hampton is dead, long live "the Hamp." Hampton broke the color barrier when he joined Benny Goodman's quintette along with Teddy Wilson and Charlie Christian (both were black) back in 1936. The Goodman quartet and later his sextet produced what, in my opinion, was arguably along with Billie Holiday's combos, some of the best jazz ever created. I still love to listen to those Goodman recordings. Benny didn't give a damn what color you were -- he just wanted great musicians.
Then in 1941 my all-time favorite jazzman, Roy Eldridge, shocked the music world when he joined Gene Krupa's big band. That was the first time a black man had ever played with a big-time big white band. Those of us who were jazz fans were thrilled. But it was a nasty business -- when the Krupa band stayed at a hotel Roy was forced to stay someplace else in a black-only hotel. Finally, Roy was so incensed and disgusted that he went to Europe for a spell. Nevertheless, Krupa featured Roy in his all-white band and history was made. Those were the days.
I understand that yesterday there was a real New Orleans-type parade in Harlem as the Hamp's coffin was marched down the avenue to his church let by the Marsalis band and thousands of marchers. Hamp deserved it, he was one of the last of the old-time greats who had seen it all. Only one of the old-time greats is left, genius Benny Carter, who, I understand is still playing in his 90s. Benny played with all of the greats -- on alto sax or trumpet and he also composed. |
