RICHARD RUSSELL EXPECTS THE NEXT DOWNTURN TO BE “VICIOUS”
Despite the incredible 60% rally and chatter of a new secular bull market many investors remain highly skeptical of the equity markets. David Rosenberg recently released his 10 reasons why the rally is over and Meredith Whitney says the market is again at risk of a downturn. But there is perhaps no one more skeptical of the rally as the great Richard Russell, author of the Dow Theory Letters.
Russell continues to believe we are in a secular bear market and currently believes we could be in a topping process preceding a “vicious” downturn:
I haven’t liked the stock market. I can’t tell with any certainty at this time, but this bear market rally could be in the process of topping out. If it is, I think we’re in for a vicious collapse. Remember, rallies in a primary bear market are movements against the main force or tide of the market. In other words, during a rally, the bear forces have been held back. When a bear market rally breaks up, the market tends to make up for lost time. That means the declines tend to be rapid, violent and vicious. As I said, I can’t tell with certainty whether the advance from the March low is breathing its last. But if it is — watch out; it’s not going to be pretty.
Perhaps scariest facet of another potential leg down is the ramifications with regards to government and monetary policy. Russell believes a substantial downturn below the March lows would mean the Fed policy has completely failed:
By the way, IF the advance from the March low is topping out, here are the implications. It would mean that all the Fed’s machinations and efforts to halt the deflation have gone to waste. Furthermore, if the March lows are violated (and nobody believes they will be) we will probably be in the final and most costly and frightening leg of this bear market.
While I agree with Russell that we are in the middle of a secular de-leveraging bear, I have a more difficult time believing that the market is about to revisit the March lows any time soon. In my opinion, the panic phase of the downturn is behind us. What’s ahead is likely to be more similar to what Japan experienced in the mid to late 90′s – a series of economic starts and stops that never materialize into the secular bull everyone is looking for. Bernanke’s policies will fail just as Greenspan’s same approach failed, but they are unlikely to fail in the spectacular fashion that would help scholars, investors and the American public wake up to the backwards approach of the current Federal Reserve system.
Source: Dow Theory Letters
Russell changes his mind just about every other day. Just a few days ago Russell was touting a Dow Theory confirmation of the transports, and put up a big BULL photo to finally signify that the PRIMARY trend of the market had become bullish. After a 60% bear market rally??? C’mon, that’s just nuts. Also, there is no proof whatsoever that this silly “Dow Theory” has any value. No edge whatsoever. Some “theory”!
He’s an old likable guy, who I read every now and then to pass the time, but his so-called advice has little practical value in terms of predictions and he makes precious few actual/specific investing calls. Like most goldbugs, he’s finally looking “right” about gold – until gold gets clobbered again in the coming years and he doesn’t tell people to sell. He’s good when he’s talking about his experiences and in teaching people general concepts about investing and the markets. He says a lot of stupid things that are merely beliefs/myths and are easily shown to be incorrect. He has a very low rating in terms of accuracy of his predictions.
These newsletter writers help pass the time, but give a false sense of security and comfort to those who need it. Snake oil.
Russell has been more consistent than you’re giving him credit for. I read him every day and he has been bearish on the primary trend for several years now. He has gone short-term bullish a few times, but never changed the primary trend.
Nonsense.
I cant remember the exact day, but within the past two weeks, he changed his mind (yet again) and put up the image of the bull, as well as stated that due to the transports confirming the rally that the PRIMARY trend (as well as the secondary trend) is BULLISH. Look at the archives of his daily remarks on his website, and you will see it in black and white.
Richard Russell needs a new day job. The stockmarket is not kind to psuedo intellectual, theoretical mumbo jumbo of any kind
The most valuable information provided by RR is his Primary Trend Index relative to his moving average. The rest is recreational reading.
Now is not Then but just keep this in the back of your mind:
“The Great Crash: 1929″ by John Kenneth Galbraith
“The man with the smart money, who was safely out of the market when the first crash came, naturally went back in to pick up bargains. The bargains then suffered a ruiness fall.
Even the man who waited out all of October and all of November, who saw the volume of trading return to normal and saw Wall Street become as placid as a produce market, and who then bought common stocks would see their value drop to a third or a fourth of the purchase price in the next twenty-four months. The Coolidge bull market was a remarkable phenonmemon. The ruthlessness of its liquidation was, in its own way, equally remarkable.”
One thing we hear very little about is the Asian/emerging consumer versus the developed world. If the great US bull market was driven by increasing debt … and emerging asia is expected to lead global growth … is there evidence of this in emerging asia **consumer** credit stats?
I am not so sure that the March lows won’t be broken at some point going forward, however, I don’t think that it will happen until maybe 2011 or later – after the bears are convinced that we are out of the woods. I think that we could even see 550 on the S&P500 if interest rates spike much higher in the future. I rather doubt that much higher rates will come all that soon.
I also think that at 1,075 the S&P 500 is just about in the middle of its likely range over the next year or so (say 900 – 1250). 900 is close enough to long-term trend fair value to interest value managers and 1,250 certainly isn’t out of the range of possibilities with interest rates remaining low and margins remaining somewhat above the historial average as firms hold down costs by not rehiring workers.
A range of 4% above and 4% below 1075 seems to be about as far as the market will likely go between now and year-end. That said I am probably wrong and the market may collapse or breakout tomorrow.
Rob,
It would take something really awful to break the March lows. I just don’t see anything on the horizon that could even compare with a Lehman bankruptcy. Not to the mention the fact that the earnings picture now looks pretty decent. The ingredients for a major crash like that just aren’t here. Could they develop? Sure, but they aren’t here now.
How about USA defaulting?
USA is not pegged to another currency and hence cannot default – we just print money. Expanding the monetary base is, however, inflationary and does put upward pressure on interest rates.
Double digit interest rates could send the market into a tailspin like 1973-74. That is one reason why I think it is a story for 2011 at the earliest. More likely 5 or 6 years in the future. (Earnings at 70 and a P/E at 8, would take the S&P500 to 550). The only thing that I can think of that would drive the P/E so low now that everyone knows the Fed will rescue any too big to fail institution are high long-term interest rates coupled with another leg down in the recession (and maybe a few debt defaults by some quasi important countries although that would probably act to strengthen the dollar). I don’t see how a weakening dollar and low long-term interest rates can coexists forever. Currently the weaker dollar seems to be supporting market valuations but that relationship might change in the face of higher interest rates or a disorderly dollar decline. If the market does take a plunge it would not stay down there very long, but it might take a few years to get back to today’s level.
I am not saying that it is likely. I am saying that it is certainly still a potential risk (or opportunity depending how you look at it).
Much more likely is a widely sideways scenario.
I share your view re: March lows, TPC. It’s too easy and lazy of a thought process (take out the previous low, re-test, yadda, yadda, yadda). Why? What’s special about 666 that matters at all? Nothing.
Unless we saw the “end of the world” situation return, with the collapse AGAIN of major financials and other blue chips, we won’t come close to those capitulation lows which were the result of massive selling by hedgies. Even a double-dip recession, stimulus fading, etc., won’t take us near those lows. Could we see something like 850 in 2010? Sure. It’s possible. But we could just as easily see 1,300 too (surprise to the upside). Impossible to predict. But a revisit to extreme lows like 666 is very unlikely to happen unless something *unforeseen* takes place. It would take a total collapse. And while I’m bearish, and dismayed at the insanity we’ve witnessed the past few years, I sure as heck am not hoping for that to happen. If it does, we would *ALL* be in a world of hurt, one way or another.
Russell might be right one day but I don’t think there will be anything vicious any time soon. I’d say vicious would apply if we go through stimulus I, II, III and they all fail, then March lows should break and head a lot lower. S&P 62% retracement is still in the cards, IMO. I give RR lots of credit for his insightful comments on the state of the economy. Like Rosie, you cannot depend on RR to give you the perfect timing. Although if you follow his PTI and the Dow Theory signals, it should at least keep you on the right side.
Let’s hope not like Japan because they hit bottom at -80% in year ~13. We are in year 9. However, since our response is very similar to Japan’s we may match them – who knows maybe we can out do them.
http://dshort.com/charts/N225-SP500-deflation-series.html?N225-SP500-overlay-real-peaks
TPC,
I agree with Russell, and you can add several others in that camp not the least of whom is Prechter. While everyone was blowing Prechter off three weeks ago, it appears that his call on gold dropping was dead on. Anyone who played that trade could have cleaned up, the opportunity was there. David Tice ,Comstock and there are others ( some of whom I have read here) have also made the same prediction as Russell. I do agree with what I think you are backstopping your analysis with, and that is the unpredictability of how much money this government is willing to basically throw away trying to defeat a primary trend. All they can really do is delay the inevitable, just as Japan has done and look what it has done for them. In this case the primary trend is nothing more than a mountain of debt that must be paid or writtrn off.
Russell should of retired when he had a stroke. He sounds like a broken record GOLD<GOLD<GOLD talk about pumping your book .
There are so many black swans lurking out there that it is impossible to think that the market will hold up over the next few years. There are major terrorists events likely to occur (we just re-invaded Afghanistan), an oil shock, currency crises, sovereign defaults, real estate that simply never turns around (note Japan), industries that disappear, environmental issues (floods, hurricanes). My simplest scenario is a massive currency unwind in which people realize that the US is after all the largest country in the world and the US dollar is “safe” relatively speaking. A mad rush to that would send oil down, commodities down, and stocks WAY down.
Edna,
I am starting to fall into your camp on the long-term view of our US dollar. Something tells me not to give up on the USA, maybe it’s the amount of corruption in other countries in comparisons to our own. People are still dieing to come here, that’s for sure.