THE DOW TRANSPORTS CONFIRM, NOW WHAT?
Don’t take it from me, take it from the master, Richard Russell:
The question — What are the Transports telling us? And my answer is “who cares?” In the great majority of instances, we don’t know the reason why the stock Averages are doing this or that. We follow the Averages blindly (via Dow Theory) the way a blind man follows his seeing eye dog. And when we mix technical analysis with our own “common sense” and emotions, we are on the path of going wrong.
It’s clear to me that we are in a rally within a secular bear market (some will call it a cyclical bull market). In other words, it’s coming within the confines of a long-term or secular bear market. Old timers saw this same situation during the 1966 to 1974 bear market. At that time we saw a series of cyclical bull markets, all coming within the framework of a long-term or secular bear market.
In the end, that secular bear market ended the way most bear markets end — amid black pessimism and with blue-chip stocks at great values or “below known values.”
What was missing at the March 9 lows? Extreme pessimism was absent as were the great values in blue-chip, dividend-paying stocks sporting yields of 6% to 10%.
One thought continues to haunt me. Can a 27-year bull market (1980 to 2007) be corrected by a two-year bear market? Most bear markets have tended to last from one-third to one-half as long as the preceding bull market. In other words, the bear market that started in 2007 did not last as long as I would have expected, nor did it produce the great values at the bottom that I would have expected.
However, we take what the market gives us, but we also have free choice. We don’t have to swing our bat on every pitch. The market will always be here, and we can chose the pitches we want to swing at.
Personally, I’m willing to sit tight and watch the show. Despite today’s excellent stock action, I have my eyes on my Big Three — the bonds are getting whacked today, the dollar is lower, and as I write August gold is up 3.00 to 956.40.
As always, great stuff from Russell.
I am certainly not one to question someone with decades more experience in markets than myself though I am trying to understand better some of the statements. One statement that caught my attention was the reference to 66-74 being a cyclical bear. Looking back at both INDU and SPX data the period from 66-74 shows several bear markets and several bull markets. The net movement over that period was sideways. In a “bear” market I would expect lower lows and lower highs. Grant it the market did not make upward progress but there were huge bull runs at least equal to the bear runs. Not sure how that period is characterized as a”bear” market. True bear markets in stocks (unlike say commodities) seem to last for much shorter durations and in time are always reversed. The fall from the top at 14000 more than cut the DOW in half which is about as much damage as any (except the great depression) bear market has ever done so perhaps expectations for DOW 3800 are a bit overdone. That said, a retest is highly likely at some point if for no other reason there are some gaps to fill starting way down off the March 6th lows.
Perhaps a good analog for what is going on right now is the crash of ‘37 in the DOW. It made a similar bottom and so far is retracing a similar bounce. We seem to be moving along the same timeframe. It retraced about 62% of its final leg down before settleing into a range. It did eventually take out the lows a few years later briefly. Also, this crash appeared to have been caused by issues with banks like this one.
In my experience, you don’t last decades in this business without learning how to hedge in your writing.
On the one hand, he says,
“We follow the Averages blindly (via Dow Theory) the way a blind man follows his seeing eye dog. And when we mix technical analysis with our own “common sense” and emotions, we are on the path of going wrong.”
But later, he says,
“Personally, I’m willing to sit tight and watch the show.”
This may or may not be an admission he is not following the model.
Some services will later conveniently only remember whichever of those statements was most correct & cite it as validation of their prowess. I don’t read Richard enough to know if he does the same thing…
vfsv,
Richard Russell has been in this business for 50 years. I don’t know if he’s hedging his forecast but he tells it like he sees it. Perhaps he would buy if this wasn’t a cyclical bull within a cyclical bear. Part of surviving this market and remaining a student of it all his life is that he has intuition. His intuition knows better than to buy in right now. Perhaps his mind’s eye says to him that there’s much more risk than he likes it at this stage. He is also more conservative by nature due to his methods and age.
Just because a buy signal has been issued doesn’t guarantee a large return. In fact, nobody really knows how far it can go. In Feb-March when the primary sell was reconfirmed on Dow Theory that was right around the bottom. Russell put the bull back on the subscriber site but I definitely sense that he is very skeptical of the actions the government has been taking and his bias remains on the bear side. He does remind people to keep their minds open for new developments. I believe that is sound advice. You can’t argue with price action right now. It’s clear as day we have a stampede and shorts are being trampled to death. All IMHO.
Not trying to discredit Russell’s work but it is a technician’s thinking frame to compare current cycle to history. But this dependence always leads to wrong prediction. one thing can be guaranteed is that the path of stock market in next 10 years will resemble nothing in history.
But I don’t think Russell sends conflicting message here. All he is trying to say is that he is long term bearish, intermediate term bullish, short term bearish. And his strategy is to pick up a spot and buy pull back (swinging on pitches he like).
Brian
It appears that you’ve misunderstood. The 66-74 period is referred to as a secular bear market, not a cyclical bear. And within that period were several cyclical bulls and bears. Over that time the stock market didn’t change much, starting and ending in the 80s on the S&P 500. But the valuation decreased over time, with P/E shrinking. A secular bear doesn’t have to go down in the nominal measure of the market index, but it does create better valuations at the end to launch a new secular bull market.
All the extreme intervention in the markets with aggressive monetary and fiscal policy has undoubtedly changed some of the dynamics at play here and made historical comparisons difficult. But Mr. Russell and people like Dr. Hussman are skeptical about this rally or cyclical bull because it does not have the marks of a sustainable move that characterized previous cyclical bull markets. The participation has been narrow with decreasing volumes, and many other internal measures look more like the short lived rallies in history rather than like sustainable bulls.
Maybe there’s a new paradigm at play here but it’s doubtful that’s the case. Instead this looks more like the extreme movement during the last big credit crisis/debt induced economic downturn that brought on deflation and huge structural changes; the ‘29-’32 market. Time will tell.
I actually believe Russell’s timing for moving to a bullish stance is horrible. Obviously, he is bearish long-term, but turning bullish AFTER a move like this is not wise in my opinion….
http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID2393449&cmd=shows157911977&disp=O
Chart 1.2.1; DJI went above Jan highs, DJT didn’t
TPC
Isn’t that precisely why he’s skeptical and “willing to sit tight and watch the show”? He’s a bit cryptic in his message but seems to be unwilling to buy in although somewhat hamstrung by traditional Dow theory. I don’t know if the full text makes it more clear what his intentions are.
I think this shows the failings and weakness of Dow Theory as it doesn’t take into account enough factors to judge the market. Dr. Hussman’s method, for instance, takes into account a number of internal measures to ascertain the sustainability of a market advance and other economic factors. We don’t know exactly what he looks at as it is proprietary, but he obviously has not trusted this rally. Unfortunately that has kept him out of a large advance, but only the fullness of time will show whether that will be a wrong move. His is a pretty conservative approach, only wanting to take market risk when it is not just a gamble.
Onlooker,
I get the same impression. His wisdom is endless, but Dow Theory no doubt has holes in it. I prefer to use it more as a supplement to many other indicators. It is by no means the end all.
Van71,
Is that maybe a different timeframe than Russell uses? Looks like a long-term chart….
TPC
Russell, as well as other technical analysts, never have a crystal ball. They merely watch the windsock of market. It won’t take much to reverse his bullish call, all he need is Industrial and Trannie close below July low jointly. So longing stocks in any pullback from now would be low risk trade. Russell also made infamous bullish call in May 2007, but it did not cost him a dime since Dow theory sell signal flashed at same price level after six months.
I’m surprised that Russell isn’t dating the secular bear as starting in 2001, but maybe that’s indicated by Dow Theory. In any case, I would dispute his assertion that there were no 6-10% dividend paying blue-chips at the Mar 2009 lows (VZ 7.5%, MO ~10%). Also, I thought 9 down weeks out of 10 ending with the March lows was extreme pessimism. I know I was scared. That said, I started scaling out in late April and have been amazed at the strength of this rally.
Dow Theory shorthand–The DJTA confirms this bull move with Higher High–ck
The “Bee in the Bonnet” is that the DJTA 12month MA and the 12 month Yr/YrROC are also set to give BUY signals IF-IF-IF the market holds these levels into the month end close!! A “Maalox Moment” for Richard and the Theory.
On the other hand only 9 of the 20 Transports are above their 52wk MA.
What is curious to me is that the spokesman for BNI and UNP both said that rail
volume expansion is nowhere in sight!!!–Consider this–If they made that statement at a Bull Market High would’nt that be a BYE-BYE signal?? Whats the difference at a Bear market low?–markets can go lower!
The Market is telling us that things are better NOW than they were 12 months ago.
The Market is telling us that prospects are better in the Future.
Listen to the Market–The Market is never wrong.
You only get these “hallucinations” on TPC–AWF
“Turning bullish after a move like this is not wise.” But you are still bullish. Does that mean you wouldn’t take on new positions after such a move?
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