RUSSELL: HERE COMES THE “SECOND ROUND OF PAIN”
Recent action in the markets has Richard Russell growing increasingly concerned about the future market performance. He is now warning investors of an impending “second round of pain”:
“I know of only one rule that always holds true for the stock market. The market will advance to a state of overvaluation and over-enthusiasm, and this will usually identify a top. The top is followed by a long road to a state of over-pessimism and undervaluation and this will identify a bottom. We call the extended and winding travels between these two — bull and bear markets. Most unusual is the investor who can stay invested for the full length of a bull market or the investor who will remain OUT for the full length of a bear market.
Why so? It’s because of greed that investors won’t stay out of a bear market. And it’s because of fear that an investor won’t stay in during the full length of a bull market. I’ve often likened the stock market to a living animal. It’s an animal that is scheming and fighting to part us from our money. It’s been said that never has anything invented by man been so frustrating to man as the stock market.
The remarkable thing about the stock market is that it contains the sum total of what everybody knows about absolutely everything. It’s been said the “everybody knows more than any one person.” And that’s what I find so fascinating about the stock market. The combined wisdom of hundreds of millions of people are reflected in the action of the stock market every minute and hour of each session.
The trick is to interpret the action of the market and what the action is telling us. I’ve searched for 50 years trying to find that “pot of gold,” and as far as I know, nobody has ever succeeded. It’s the eternal mystery, it’s the everlasting puzzle. The day that some genius fully understands and beats the market, that day the market will cease to exist.
I note that most analysts are now bullish, and that they are recommending stocks for the “continuing advance.” At the same time, most economists are optimistic, arguing that the “longest recession since World War II has ended.”
Typical, last March everyone was bearish and the market was establishing a temporary bottom. Now that everyone is optimistic, the stock market is topping out and the public (the amateurs) are about to receive their second round of pain.”
Source: Dow Theory Letters
Not probably accurate on one point. “…the public (amateurs)” are about to fell the pain. If you take mutual fund flows as a decent indicator, they have not been flocking to equities. The consistent flows have been into bond funds. This rally has been mostly the ‘pros.’
Sure they ran to bond funds, sure rates are near historic lows sure there is “some” upside potential for bonds..is the risk reward there? Seems to me that rates doen’t have anywhere to go but a lot of downside exists in bonds.. Fade the crowd..not today…but look down the road.. Equities are going to at least have a correction, if not something more (probably not this time) and bonds will do well. However the crowd is going to get hammered because they will stay in Bond funds long after the bloom is off the rose. And don’t kid yourself, most retail players still are overweight equities – that’s what they’ve been sold… by the Talking Heads..Just look at a bond chart from 1980-81…the writing is on the wall.
Yes, amateurs have been going to the bond market, but it has been ‘topping’. When it collapses, as MorganStanley has predicted, they will feel unbelievable, mind-numbing pain. So RR is essentially correct: the public is going to feel pain. And it won’t just be those who own stocks and bonds, the ‘ripple effect’ will get us all. Own real thingsof value (‘hard assests’), not pieces of paper.
This guy cracks me up! Do people really pay for analysis that busts out the old greed / fear chestnut and pretends it’s wisdom? Now that’s a bad investment.
Was this written 100 yrs. ago before technical analysis, Investors Business Daily, LEI, and other indicators were invented. Only a very simple minded person would rely on sentiment alone. One star.
would be interesting to know where his PTI is compared to its MA
I admire his track record. He is absolutely right.
He is right on many levels. Especially the behavior of crowds and the counter-intuitive aspect of successful investing. Buy fear, sell greed. TO be a successful trader, this is the major psycological impediment we must all master. After all discipline is probably one of the primary aspects to success. Doesn’t matter if you have the Holy Grail of trading. If you can’t execute you are doomed to failure.
The retail “investor” is trapped in a defective process called “Buy & Hope.” Wall St shifts 100% of the risk to these “investors” and takes the loot to the bank. Retail investors do not understabd the concept of “open trade” profits, not worth the paper their printed on. Wall ST. can get away with it in a SEcular Bull Mkt. All boats rise as they say but we do not live in that world anymore…The pain is only just getting started.
It’s not so simple as you said. Many investors have background information and expectations based on such information.
In this case I therefore only can say: “Buy! Buy! Buy! And to you I will say: “Better late (at some higher prices) than never!”
what are the alternatives- where does one invest before the fall?
that needs to be addressed….
any time bond funds are up 60%+ in a year is time to worry about being long in bonds.
Worldlygirl, that’s the point. You don’t invest. You sit in cash. It’s not return on principal. It’s return of principal. Unless of course you have a longer time frame then it’s precious metals. It’s the only currency left. It’s a lot easier to inflate paper than it is silver or gold.
Hi!, All:
Have you ever been to a horse race & placed your $’s on a horse, because you believe, by whatever info. about the Jockey, the horse, track conditions, contendaers etc., your bets are going to be placed on the winner? Well, whether your horse wins or looses, the house gets your “bet” money doesn’t it?
So, when it comes to the stock markets, you do your due dllegence regards your bets and then let the market (obove it’s the horse race)let you know if you win your bets or loose your $$’s but, still, the house gets your commissions for placing your bets either way doesn’t it?
Therefore, whether you’re beting on horses or stocks, the commissioned brokers win, because they are the “sure money” men, through their collections of unencumbered, risk free commissions via millions of bets placed before the action begins for you.
Henry Ford Sr. said that all major league sports are run exclusively by their owners/promoters, in order to make money off of contestent zeal. Therefore, how long would horses race, stocks trade or ball players play, if nobody showed up with their $$’s to trade?
Maybe though these are just plain good ole joe distractions we need in life, so that our problems seem less significant and overwhelming pluss something to focus on and talk about daily? Once in awhile we get to feel a winner, but the house wins every time but, don’t give up, you just might be the next lotto player to take home those multimillion $ jackpot to invest in the Stock Market, take the family out to the ballgame for years or take some friends out to bet on the horses all in the name of having some fun in this otherwise boring existance!!?
RUSS SMITH, CALIFORNIA
resmith@wcisp.com
Don’t underestimate Richard. He is seldom wrong, but that comes with his great background and years of experience. He is one of the few great market minds that I try to read everytime I see him published. He is often wrong about some personal social views, but he hits a homerun in his market advice almost everytime. He eats, breaths and lives the market, and has for over eighty years. Old?…yes! Knows the market?…Yes! Experienced?….in the market very much so! Experienced in living the good life?….Maybe not…tooo much market!
With these OLD market theories, no wonder he hasn’t found a pot of gold in 50 yrs. If you’ve been wrong all this time, why should we listen/read you now? If you are really lost, try I.B.D. or stick with bonds.
This guy doesnt trade is usually afraid to buy and hold . His news letter is all about gold . I get it already .
I have read Richard Russell’s Dow Theory Letters (daily) for more than 4 years along with a raft of other economic missives from pundits of every persuasion. He understands the fundamentals driving the world economy like no other analyst and I agree with him we are in for a world of hurt. A PhD in the Crash of 1929 (Bernanke’s flimsy credential) gives us no clue as to what lies ahead. I am betting on Russell’s 56 year study of the market. He alone admits when he is wrong and admits what he doesn’t know. His insight is worth its weight in gold. If I hadn’t followed his advice through these recent financial calamities I’d be bankrupt. He saved my savings and my sanity along with it.