RICHARD RUSSELL: THIS IS A BEAR MARKET RALLY
Deep thoughts here from one of the all-time greats:
I don’t believe most investors understand the significance of the possibility that the March to October rally was an upward correction in a bear market. The majority of analysts believe that the advance that started from the March lows represented the beginning of a new bull market. I disagree, and I’ve explained in detail why I do not believe March marked the start of a new bull market.
For the sake of argument, let’s just assume that I’m right and that what we’ve seen since March was a bear market rally. If that’s true, we’re in a very dangerous situation. It appears to me that the rally is in the process of topping out. Again, let’s assume that we’ve been in a bear market rally. If the rally is indeed topping out, then the stock market will soon be again in the grip of the bear.
The rally ran from March to October, a period of seven months. In other words, the bear market has been “held back” for a period of over half a year. My thinking is that the bear is “angry” at being held back, and it will probably want to make up for lost time in the period ahead. From everything I see, hear or read, I gather that almost everybody believes the March lows are safe, that they will not be violated, no matter what.
However, if the bear market rally is now in the process of breaking up, my thought is that stocks could decline very rapidly, much faster than most people are prepared for. If late-coming traders suspect that the rally is over, we could see a frenzy to get out of this market. This along with a panic from pros who want to get out with what profits are left.
Source: Dow Theory Letters
all market participants were focused on the FED yesterday and mostly ignored the elections, which in my opinion have bigger long term ramifications for the market. I think it was very significant that democrats loss two key gubernatorial elections in states that Obama carried. yesterday’s election results raise some interesting questions for me.
1. the public is clearly unhappy with the direction of the country and are sending a message to Washington that Govt Bailouts, Wall Street bonuses, spiraling deficits, bloated government, and double digit unemployment are unacceptable. Obama has lost his glow because of health care and is now in danger of becoming a scapegoat president. Will we see a policy shift from the Obama administration?
2. How will the Obama administration react to this canary in the coal mine mid-term election results? will they panic and step up stimulus or obey the will of the people and stop bankrupting the country?
3. What happens if the economy double dips in 2010 and we have another banking crisis just as the next wave defaults hits from commercial real estate, credit cards, option ARMS, ALT A mortgages? Will Obama risk his presidency by backing another banking bailout or will he let the banks be nationalized?
You are right on the reality of the mess were in!.
Highway to Hell here we come !.
If the rally is fake (like 07-Jul08) then look for the big trade to reverse. Jul08 was short banks – long oil, now it’s allegedly short USD – long foreign risk … EUR-USD fwd vs. spot has been creeping down, QQQ, EMB, EEM look weak. Look for a surprise bankruptcy in Dubai, or some Malaysian tycoon’s empire collapsing, that should trigger a scramble for eurodollars … it will be a mid-tier (2Small2BSaved) collapse, which won’t be helped by fed swaps (the fed has to keep their gunpowder dry for the regional banks … their own mid-tier problem).
What I really want to know is what his proprietary trend index (PTI) is doing relative to the moving average.
“My PTI was down 2 at 5957. The moving average at 5952, so my PTI is bullish by 5″
Market would range from here for some months; won’t advance significantly as there is no more free money from Fed thru QE to game the market, but no reason to short either because the bears have been burnt so hard and no hedge funds are shorting lest they end up like Galleon; as Faber correctly pointed out, once risky assets drop decisively (ie oil below $70), Fed would re-start buying treasuries and pump the risky assets and the O-team would jam the airwaves with stimulus 2 plans. Market would track within 1000-1060 range until March 2010. The HFT computers would be quite happy with the daily ranges of 1% to 1.5% and volume seems to have found a higher average in the past 1 week, bears would make some money, day traders and momos would go along, and pension funds would not need bailout.
My guess.
The bear trap has been set. If the bears can kept the S&P500 below the 50-day on close for a few more weeks, the bears will gain confidence and make larger bets. The Ben’s banks will blow them out with a massive short squeeze and the market will rocket higher. They just need a catalyst to justify the move. (Where is Meredith Whitney these days?)
If the market slowly recovers to its October high near 1,100. Then the sell off will be fast and furious as those scared by the recent sell off run for the exits.
Or do I have things backwards?
Richard Russell began publishing Dow Theory Letters in 1958, and he has been writing the Letters ever since (never once having skipped a Letter). Dow Theory Letters is the oldest service continuously written by one person in the business.
Russell gained wide recognition via a series of over 30 Dow Theory and technical articles that he wrote for Barron’s during the late ’50s through the ’90s. Through Barron’s and via word of mouth, he gained a wide following. Russell was the first (in 1960) to recommend gold stocks. He called the top of the 1949-’66 bull market. And almost to the day he called the bottom of the great 1972-’74 bear market, and the beginning of the great bull market which started in December 1974. Here are a few of his recent insights from the Dow Theory Letters.
ON THE DOLLAR
“It’s clear (at least to me) that Obama is following the path Roosevelt took during the Great Depression.
In 1933, the government devalued the dollar by 41% by raising the official price of gold from $20.67 to $35 an ounce. Devaluation makes debt easier to handle. In devaluation, the dollar value of debt remains the same, but all other assets would be worth more (in nominal terms) whether it was a house, a stock, a car or an ounce of gold.
How our creditors who own trillions of dollars in their reserves will react to dollar devaluation I really don’t know, but a devalued dollar is a lot better than nothing. The Bernanke Fed is trying desperately to bring back inflation, and devaluing the dollar is the surest and quickest way to inflate.”
ON THE STOCK MARKET
“We tend to forget that every move, large or small, in the stock market is entitled to a correction. I believe that the rise from the March lows is simply a correction of the huge bear market decline which preceded it.
Normally, a secondary correction will recoup one-third to two-thirds of the ground lost during the preceding bear leg. To refresh your memory, the preceding bear leg carried from 14164.58 on October 9, 2007 to 6547.05 on March 9, 2009 — a total loss of 7617 points. A one-third correction would carry the Dow to 9083. A two-thirds recoup of the bear market losses could take the Dow back to 11619.
Subscribers should know that following the famous 1929 crash which took the Dow from 381 to 198, a correction took the Dow back to 294 in early 1930. That correction turned the entire investment community bullish. The public piled back into the market. However, the correction had nothing to do with an improving economy. In fact, the great 1929-1930 correction was followed by the greatest market wipe-out and economic depression in history.”
What? You mean that all of those pesky inconvenient laws of economics HAVEN’T been repealed like the mainstream has been saying (or at least implying) for the past several months? There really is still no such thing as a free lunch? Markets can go DOWN as well as up? All foolish bets DON’T win (or get covered by some greater fool)? We CAN’T borrow our way to prosperity? Changing people’s perception doesn’t actually change the underlying reality?
I guess a lot of people who seemed to believe those things will be in for quite a shock once the underlying reality does reassert itself.
Charle:
You make cents watch out fools.
I’m shocked people are so willing to front run the employment numbers. With so little hiring going on, the market could tumble significantly with any hint of disappointment.
As long as interest rates are close to zero, the capitalization of any assets will be high. What do you get if you divide $100 worth of income generating assets by zero?
3 paragraphs of nothing. If the market has topped out it will begin going down – prophetic! “The bear is angy”? Thats your rational for the market testing the March lows.
I don’t think people read Russell for his superb fundamental analysis. They read his stuff because he’s probably the most veteran trader on the planet and has a pretty good feel for things. Your point is valid, but I think you’re reading the wrong source in Russell if you’re looking for in-depth fundamental analysis.
for those interested, there are no “economic laws”; merely economic theories–
Who cares whether it is a bear mkt rally or a bull mkt rally. Its a rally .. play it
remember the game HOT POTATO – or the phrase ” GET ON THE TRAIN BEFORE IT LEAVES THE STATION ” figure it out for yourself
Been waiting for this bear rally to reverse for months. All I want to know is whether gold and silver mining shares will join the dive this time. Any historical clues?
In response to Gary:
I don’t think that Gold and gold shares will participate in a marked equity market correct, if we ever see one at the rate that liquidity is pumped into the system.
However, I am of the camp that feels that we are long overdue for a reality check in the markets but back to the point, here are a few reasons why we shouldn’t see gold and gold stocks participate in the massive down move.
1. When the markets melted down the last time, Hedge Funds were forced to liquidate everything. That means, everything with a bid attached to it was hit. It was a ruthless “sell everything” debacle and nothing was spared.
2. Since then, many hedge funds have been wiped off the face of the earth. Should a massive deleveraging situation come again, there are fewer hedge funds out there and fewer of them holding junior exploration companies, or miners. Just look at Canada’s venture exchange, the home of many junior gold stocks and exploration companies WHO FOR THE MOST PART have not rallied nearly as much as the major indexes.
3. As a result of point two, I think the safety trade this time around will be circa late 70′s when we saw a major market melt-up in gold and gold related shares. Everyone and their grandmother wanted gold stocks, any gold stock at that time.
4. As a result, we can not overlook the fact that inflation is here. You can not keep the printing presses running around the clock and not be naive enough to expect inflation not to be a factor. As a result, gold, metals and related issues will take the cash coming out of bank stocks and all the other junk that is grossly overvalued. Some of the yields have now reached in the decimals with P/E ratios at historical highs. Who in their right mind would be buying equities at this moment is beyond me.
5. There is a shortage of gold production. Central banks want their gold. There is no supply. Any gold issue with gold in the ground will catch a bid.
These are my views….please don’t invest on the basis of them.
Just general observation: Fannie Mae buying MBS (mortage backed securties) with our tax dollars is just wrong. Also, FMN mortgage for lease is just wrong. Mr. Bernake taking Interest Rates to ZERO and keeping them at ZERO (that is .00%)is wrong. Being retired, my savings times zero is nothing. Merchants where I live don’t accept “nothing” for payment of there product or service.
So when will you be convinced about the bull market? when we take off all time highs?
Has Richard Russell now reversed his position:?
“Richard Russell, editor of Dow Theory Letters, is one of the technical analysts who, in light of the joint new highs of both the Dow Industrials and the Dow Transports, are now officially bullish on both the secondary and primary trends of the stock market.”
http://www.marketwatch.com/story/another-dow-theory-buy-signal-2009-11-18