I think Richard Russell's piece tonight is very good. I post it as a promotion for his web site
dowtheoryletters.com
November 13, 2002 -- Somehow, the national psyche just cannot believe that we're in a primary bear market that will ultimately take stocks down to the level where they represent "great values." . I guess after a 25-year bull market (1974 to 1999), today's investors just have had no experience with, no inkling regarding really hard times.
Talking about a deepening bear market to the average person is like talking about the atmosphere on Pluto. It's beyond their experience and ken.
Day after day we hear or read "new bull market" forecasts. Day after day I hear fund managers and analysts on CNBC recommending this stock or that stock to "outperform" in the period ahead. A few days ago we heard Alan Greenspan explain that he dropped short rates to help the nation get through this "soft patch" in the economy.
Meanwhile, almost daily some Fed governor comes out telling the world that all is OK. The latest purveyor was Fed Vice Chairman Roger Ferguson who announced that recent data suggests that business spending is rising and that there is no evidence that monetary policy has lost its clout.
It's understandable -- the Fed has "shot it's load" with its latest drop of half a point in short rates. The Fed is now desperate to reverse consumer pessimism and keep Mr. and Mrs. America buying, buying, and buying.
Many so-called stock market technicians are talking the same way. After all, the latest Investor's Intelligence posting show that 49.6% of advisors and letter-writers are bullish vs. 29.3% who are bearish.
Meanwhile, the argument that the technicians, or at least the bullish technicians, are using is that the internal structure of the market has "bottomed." We've seen the lows.
On July 23 the Dow hit a closing low of 7702. The following day there were 917 new lows on the NYSE. Next came a spirited rally. The rally was followed by a second plunge to an even lower Dow low on October 9 of 7286. But this time new lows were only 604. The later October 9 low failed to produce as many stocks breaking down as was the case in July. Also, volume in October was well below volume at the July lows. Therefore, goes the argument, the "internal" low point for the market was recorded on July 23.
Is this a valid argument? I think it would be fairly convincing if we were in a primary bull market. But because all the above occurred within the context of a primary bear market, I don't believe it is valid.
My guess is that in due time the market will come down and the averages will break below the October lows as the major down-leg, which I term the "A" leg, extends.
Remember, the market is now in the "third year" of the widely-advertised "Presidential Cycle" when the market "always rallies." Secondly, the market is now in the "good six months" (November to April) when the market always rallies. And finally, the market is at the bottom of the 20-year cycle (1942, 1962, 1982, 2002) when the market always bottoms.
So it will be fascinating to see whether the market "obeys" all the time-honored "rally periods," or whether this bear market will defy the forecasts of the ever-hopeful bulls.
Volume tends to precede price, which is why each day I post the percentage of upside or downside volume. So far, the downside days have been more powerful than the upside days, and you can check this for yourself as each day's volume action is discussed.
In the meantime, I will again refer to the KEY indicator for the market, the D-J Industrial Average. The "monitor" for the Dow is its 200-day moving average, which is simply a "smoothed out" measure of the Dow. The 200-day MA is now declining by about 6 points a day. The latest reading for the 200-day MA of the Dow is 9244, a new bear market low.
Below the 200-day MA is the 50-day MA, which stands today at 8166. This is a KEY level at this time, since as long as the Dow holds above 9166 I classify the Dow as "neutral bearish." But if the Dow falls below 8166 this would be a "sell signal," in which case I would say that the Dow has again turned clearly bearish.
Here's another subject I want to talk about. In my study of bear markets I note that the "smart money" tends to protect itself against the disasters of the last bear market. But it's the UNEXPECTED that often proves to be the killer in a bear market.
I know and everyone else knows that the huge levels of debt are a potential disaster in this bear market. I know and everyone else knows that Chinese and Indian competition is murder. I know and everyone else knows, at least I think they know, that unemployment is becoming frightening.
However, here's something else I've been watching. You remember I was noting that the Confidence Index had dropped to its lowest level since the 1940s. I said that the CI was "saying" credit troubles ahead.
One of the major agency that insures bonds is giant MBIA Inc. Billions of dollar of California bonds are insured by MBIA (symbol MBI). I note that this stock has topped out, and today the stock broke below a 20-day consolidation. In March MBI sold for over 60. The stock was 45 on November 4. Today MBI broke below 39.
Nobody is watching MBI. What I wondering is -- what happens if MBI, which insures billions of dollars worth of bonds, runs into trouble? The implications are momentous. At any rate, I'm watching this stock with great interest. MBI hit a low of 34.93 on October 9. Let me put it this way -- that low better hold.
Just one of the things that conceivably could come "out of left field" in this bear market.
TODAY'S MARKET ACTION -- Remember, in this business -- "It ain't what comes and goes 'em -- it's the way they close 'em."
And after bouncing all over the place in reaction to Saddam and Greenie, they closed 'em up, but only slightly and very unconvincingly.
My PTI was up 5 to 5242 which was 4 points above the moving average. The latter stands at 5238. I'd call the PTI indecisive but very slightly positive.
The Dow closed up 12.49 to 8398.49. There was one mover, and it was MRK, up 2.02 to 52.80,
With the war "on hold," Dec. crude sank .71 to 25.19.
Transports were up 10.19 to 2290.88.
Utilities were up 2.31 to 193.05.
There were 1571 advances and 1671 declines. Up-volume was 724 million and down-volume was 694 million. Up-volume was a mere 51% of up + down volume, really a stand-off day even though the Dow was up.
There were 20 new highs and 53 new lows. My High/Low Index was down 33 to a new low of minus 8386.
Big Board volume was 1.44 billion shares.
S&P was down .42 to 882.53.
Nasdaq was up 11.71 to 1361.27 on 1.88 billion shares.
My Big Money Breadth Index was unchanged at 727.
Dec. Dollar Index was up .42 to 105.24 (dollar's like a cat -- it has nine lives). Dec. euro was down .49 to 100.48. Dec. yen was down .42 to 83.27.
Dec. Nikkei was down 90 to 8440.
Bonds were firm. The Dec. 30 year T-bond was up 7 ticks to 113.02 to yield 4.79%. Dec. 1- year T-note was up 6 ticks to 115.08 to yield 3.83%.
Dec. gold was down 5.80 to 318.90. A lot of speculators bought gold on the thesis that we were nearly at war. When Saddam caved in, they dumped their gold, probably at a loss.
Remember, the more times gold backs off into its base, the stronger that base becomes. You know the old saying, "Whatever doesn't kill you makes you stronger." Apply the same thing to gold -- "Whatever doesn't knock it's huge base apart makes it stronger." Gold's base is huge.
Dec. silver down 4 to 456.00. Jan. platinum up 6.60 to 585.30. Dec. palladium unch. at 288.00.
You can see the difference between holding gold coins and holding gold shares. There's a psychological difference. When I hold gold coins I never give price changes a second thought. I'm holding something outside the system, something that will be money when my grandchildren are old. The gold stocks are different -- the leverage is there, but so are the problems. The metal and the stocks are two different items. One is ultimate safety, the other is a speculation on higher gold prices.
Gold/Dollar Index was down 6.80 to 302.90.
XAU was down 2.42 to 65.19. HUI was down 4.75 to 116.84.
NEM was down .68, PDG down .55, ABX down .52, AEM down .44, HL down .31,
Gold A-D was down 18 to 1061.
STOCKS -- My Most Active Stock Index was down 3 to 193.
DIA up .15 to 84.45. Aw, you've got a profit on this one, but a stop in at 83.95.
The 15 most active stocks on the NYSE were -- C down 1.56,GE up .15, MO up 1.02, S down 190 (Sears) to a nine-year low of 20.80, GLW up 2.90, T down .38, THC down .02,HPQ up .59, EMC up .19,, PFE down .84, MU down .87, TXN up .24, F down .11, BMY down 1.97, SBC down .69.
Few more -- GM up .19, IBM up .20, MER up .14, FNM down .01, TXU up .30, ED up .86, TE up .50, AIG down .37, MSFT up .85, KSS down .16, WMT up 1.13, CSCO up .55, INTC up .55, DD down .32, DIS up .35. FD up .76.
VIX was up .89 to 36.28. Option-writers still in a state of high-nervousness and they aren't stupid.
McClellan Oscillator at plus 14 and continuing to look weak, very weak.
CONCLUSION -- Dow and S&P both look as though they have formed little head-and-shoulders tops. The Dow had better hold above its 50-day MA, which today stands at 8167. If the Dow breaks under 8167 I think the market is going to have a bad time.
What's the consensus belief at this time? I'd say that it's that October saw the low for this market, a low that should launch the market higher -- based on the Presidential Cycle and the "good six months" ahead (the "good six months" being November to April).
So what would be the biggest surprise, the most unexpected move possible? It would be a decline that takes the market to new lows below the October lows.
I'm not saying that that's going to happen. Through long habit, I always tend to dream up the least expected path for the market to take.
I guess the second least expected path would be a trading range with the market making little or no progress during the coming six months.
I do think because we're now a month off the October lows that everybody has forgotten that this is still very much a bear market. In fact, I don't think the public and most of Wall Street even understands what a primary bear market is all about.
Leaving you with that thought, I am your ever-pondering servant,
R. L. Russell
Many, many thanks for those subscribers who were kind enough to send me places where I can retrieve historical statistics on the averages. Again thank you, thank you!
We're preparing a two-CD package of all Dow Theory Letters from December 1958 to November 2002. Every Letter (I have never missed a date) over the last 44 years is on these two CDs. All my goofs, all my right calls, all my philosophy, all my sweat, all my worries, all my struggles, all my thrills -- it's all on these two CDs.
The documents are in Adobe Acrobat format (PDF) and the CDs are independably searchable. The cost is $300. Recommendations -- PC running Windows 2000/NT/98/ME/XP and Internet Explorer 5.0 or greater. The CDs should be compatible with Macs, although that hasn't been tested yet. Once shipped, refunds will not be given unless the product is damaged, in which case we'll send you a replacement.
Forty-four years of real-time struggles, thrills and hand-wringing -- all for $300. I wish I had something like this when I first started. The CDs will be shipped in mid-December.
So Saddam accepted the UN's drastic conditions. I thought he would. He's a survivor, and this is the way he believes he'll survive. What's Bush going to do now about "regime change"? So they'll rid Saddam of all his weapons of mass destruction, whatever they are, and Saddam will still be Iraq's dictator. Then what? Or will Bush find some loophole which will allow him to "go in." I don't think he can do it, because the eyes of the world will be too focused on the whole picture -- including, of course, Mr. Bush.
And very important -- most of the world does NOT want a war in Iraq. To invade Iraq on a pretext, I believe, would be almost impossible for Bush to get away with. The whole world would denounce the US if Bush plays "funny."
I think it all boils down to inspectors being given total freedom to search Iraq when and where they please. I think Saddam, finally backed in a corner, will give the UN what it wants.
I mentioned that New York City is running a $1 billion deficit this year and a projected horrendous $6 billion deficit for next year. This is going to mean a rain of pink slips hitting the City. Comments below from Crain's New York Business --
"Construction is crumbling. Contracts for new building and major renovations in New York City fell sharply in the third quarter. . . . The F.W Dodge report, which covers the immediate metropolitan area, shows that the value of contracts for new construction and major renovations in the third quarter plunged 35% compared with the same period last year."
Russell Comment -- The biggest industry in NYC is finance, and finance is in trouble. |
