Richard Russell: “A hard rain lies ahead”

Love him or hate him, 85-year old Richard Russell is the doyen of investment letter writers – having been at it for more than half a century – and his views as expressed in his daily Dow Theory Letters always make for stimulating reading. The paragraphs below summarize the R man’s “big picture” view of the U.S. stock market.

“I want to say that I have a number of reasons for being convinced we have been in an upward correction [referring to the rally that commenced in March 2009] in an ongoing primary bear market. Some of this is based on my interpretation of the 50% Principle, plus my analysis of the very poor action of the “internal market” [i.e. market breadth] over recent weeks.

“I envision the Dow dropping to test, and possibly violate, the 6,547 level. I don’t know whether this will take place this year, but I wouldn’t be shocked if it does. It would not surprise me if the Dow tests the 6,547 level. And if that happens, I can almost guarantee the US will have sunk into the much-feared “double-dip” recession.

“If the US begins to shrink into a double-dip recession, I expect the Obama administration to go ‘wild’ with new stimuli and ‘make-work’ programs, all of which will be financed with higher taxes (‘soak the rich’) and a further major expansion of the Federal Reserve balance sheet. I would also expect every central bank in the world to simultaneously open their money-printing spigots wide, wide, wide.

“Conclusion in a nutshell: the secret of the forthcoming picture lies with the action of the U.S. stock market. Again I’ll remind my subscribers that the function of the stock market is to discount the future, not to mirror the present. All news is history. Or as Wall Street puts it, “news known is news discounted”.

“One of the biggest mistakes amateurs make is to think something they know is unknown and not already discounted by the market. Despite this, the media insist on describing every move of the stock market as being a reaction to some current event or some new government statistic. They couldn’t be further off the mark. As I read it, the poor action of the current stock market is telling us that the future for the U.S. is bearish and a hard rain lies ahead.

“At this juncture, sophisticated, wealthy people are not concerned with increasing their fortunes, rather they are searching for ways to conserve what wealth they have.”

Source: Dow Theory Letters, July 19, 2010 & http://www.investmentpostcards.com/2010/07/21/richard-russell-%E2%80%9Ca-hard-rain-lies-ahead%E2%80%9D/

Richard Russell (Dow Theory Letters): Lowry’s statistics do not favor a new bull market

“The Lowry’s statistics do not favor the argument that a new bull market has started. Normally, based on the long history of the Lowry’s studies, when a new bull markets starts, their Buying Power and Selling Pressure Indices move apart by roughly the same number of points.

“The fact – since the March 9 low, Lowry’s Buying Power Index has gained 57 points, but their Selling Pressure Index has only dropped 20 points. This is at sharp variance with all other bull market starts in the Lowry’s history.

“Basically, when a new bull market starts, the background is that the urge to sell has been exhausted. The pressure to press that market down further has disappeared. Thus, the market is left in the hands of those who wish to buy. In the current case, there is still a potential supply of stocks to be sold. In other words, the situation is not correct for the start of a new bull market, based on 76 years of the Lowry’s data.”

Source: Richard Russell,The Dow Theory Letters

Richard Russell (Dow Theory Letters): Are we in a bear market rally or a new bull market?

“(1) The market turned up in a V-shaped reversal off the March 9 low. However, almost all bull markets start with a period of accumulation. This entails a sideways move, sometimes taking weeks or even months. Or it may require a non-confirmation of the Averages as per December 1974. At the March low, we saw neither – no indication of accumulation. And that bothers me.

“(2) At the March lows, we did not see the ‘great values’ that usually accompany major bear market bottoms (i.e. P/E’s in the 5-8 area, average dividend yields of 5-6%).

“(3) The market was severely oversold at the March lows, a condition that often sets off a ‘relief’ (‘let off the pressure’) rally. The advance was probably triggered by the severely oversold condition of the market.

“(4) The one thing a money-manager cannot afford to do is be on the sidelines during ‘what could be’ a major rally. Once the market started up from the March 9 low, many money managers leaped in. The big short positions were immediately squeezed. The rise became a momentum advance. Retail buyers moved in, many trying to retrieve some of their brutal losses.

“(5) The rally moved up ‘too fast’ – action more typical of a bear market rally than the slow, plodding rise that is characteristic of the advance in a new bull market.

“(6) Two groups that led the rally were Financials and Consumer Cyclicals. Interestingly, these two groups contained respectively 5 billion and 2.7 billion shares sold short. This suggests strongly that a significant part of the rally was fired up by short-covering in these two groups (thanks Alan Abelson for this information).

“(7) Many investors and analysts turned optimistic after the market had rallied for only a few weeks. At true bear market bottoms, investors remain stubbornly sceptical or bearish for months after the bottom. Remembering 1974, people were actually angry when I turned bullish at the bottom. I was receiving hate letters and subscription cancellations.

“All of the above have kept me skeptical and cautious about this rally.”

Source: Richard Russell

Is this a true bear market bottom? – Richard Russell (Dow Theory Letters)

“… the market is now about one month off its March 9 low. Yet already the mood has changed, public sentiment is turning almost rosy, and analysts are openly urging people to buy stocks.

“The bear is doing its job. In less than a month, the Dow has recouped 20% of its 7,617 bear market losses. If the Dow was to retrace the normal one-third to one-half of its loss since late-2007, the following is where the Dow would be. A one-third recovery would take the Dow to 9,086. A one-half recovery would take the Dow to 10,355. Last Thursday the Dow ended the week at 8,083, which was 1,003 points short of a one-third recovery.

“It seems to me that this is awfully fast for the business news to turn rosy – only one month away from the March 9 ‘supposed’ bear market bottom. Bear market bottoms don’t tend to work that way. After a true bear market bottom, it often requires many months before the crowd and the media turn bullish.

“To repeat, I’m suspicious.”

Source: Richard Russell, The Dow Theory Letters, April 13, 2009.

What are the markets trying to do? – Richard Russell (Dow Theory Letters)

“The market situation has seldom been more confusing. Many analysts are convinced that we are in a new bull market. Others (me included) believe we are in a bear market correction (rally).

“Because of the confusion, I’m going to step out and make a few guesses (might as well, since nobody really knows what’s going on).

“(1) I believe that we’re in a secondary (upward) correction of a bear market. I’m going to guess that this correction could rise further or at least last longer than most people are expecting. A bear market rally is supposed to convince the majority that a new bull market has started. The rally will often continue until a large number of investors are back on board, and then the bear will kill them as it fades away, leaving the new optimists high and dry and with losses.

“(2) Gold is in a downward correction of its primary bull market. Gold may decline or stall until it convinces the majority of gold-fans that the gold bull market has died. Holders of ‘paper gold’ and gold futures and options will be frightened out of their holdings. What we’re experiencing now is the big correction that often occurs prior to the third speculative phase in gold. Holders of physical gold (coins, bars) will do best, since they will tend to hold on to their gold positions no matter what.

“So what are the markets trying to do? They’re doing what they always do, keep investors in the equity bear market and keep investors out of the gold bull market. Why would they do that? Because that’s the very nature of markets. Markets tend to thwart the majority. And that’s logical and self-evident. If markets existed to make money for the majority, then most market participants would be millionaires, and we know that sadly, that is not the case.”

Source: Richard Russell, The Dow Theory Letters, April 7, 2009.

Watch out for fizzling rallies – Richard Russell (Dow Theory Letters)

“The following from Financial Sense: The latest 23% surge in the Dow Jones Industrials towards the psychological 8,000-level, is its seventh significant rally of 1,000-points or more, since October 2007. During the bear market from 1929 to the bottom in 1932, the Dow Industrials fell by almost 90%. There were six bear-market rallies during that stretch, with returns of more than 20%, each one fueling a sense of renewed optimism. Yet each counter-trend rally ultimately fizzled-out and unraveled, before market indexes skidded to new lows.

“As 2009 opened, three weeks before Barack Obama took office, the Dow Jones Industrials closed at 9,034 on January 2nd, its highest level since the autumn panic. The Dow Industrials melted down to as low as 6,500 on March 6, for an overall decline of 30% in two months, and to its lowest level in 12-years. The Dow Jones Commodity Index skidded to a six-year low, after tumbling by 57% since last July.

“We are now in the third Dow rally of 1000 points or more since October 7, 2007. The first over-1000 point rally started in March, 2008. The second started on November 17, 2008. The most recent over-1000 rally started on March 2, 2009. The first two rallies were wiped out with new lows in the Dow after the rallies fizzled.”

Source: Richard Russell, Dow Theory Letters, July 3, 2009.

Identifying a bear market bottom – Richard Russell (Dow Theory Letters)

“First, based on the 76 years of the Lowry’s studies, prior to a bear market bottom, it is usual for their Selling Pressure Index (supply) to decline significantly, indicating that the desire to sell is being exhausting. Secondly, Lowry’s Buying Power Index (demand) begins to climb well before the final bear market bottom.

“This is NOT what has occurred. From its March 9 low, the Buying Power Index has risen an impressive 46 points. However, and this is the big problem, since March 9 Lowry’s Selling Pressure Index has declined by a mere 13 points. Thus, Selling Pressure has only dropped half as much as Buying Power has advanced. This suggests that there is still far too much desire to sell built into this market. Any cessation of buying will therefore succumb to selling, and this is NOT how new bull markets start. Selling Pressure is still far too high.

“From another standpoint I continue to believe that this advance is not the beginning of a bull market. Primary movements in the stock market tend to have a slow, persistent plodding look. In contrast, corrective moves tend to be rapid and violent, often spurred on by panic short covering. The action of this market since the March lows has the look of a secondary correction. The speed and the steep angle of ascent is suggestive of a bear market rally.

“Since March 9, the Dow has gained roughly 940 points in nine days. Thus, the Dow has regained 15% of its bear market losses in a mere nine days. This is bear market correction-type action.”

Source: Richard Russell, The Dow Theory Letters, March 31, 2009.

Why I am bullish on gold – Richard Russell (Dow Theory Letters)

“I started building my gold position in 1999. At the time gold was flat on its fanny well below 300 – what few gold mining shares were still alive were selling under $5. I wrote at the time that many gold shares were so cheap that you could buy them as if they were perpetual warrants. My gold position now is comparable to my market position back in 1958. My gold position represents maybe 30% of my total worth. Why have I done this again?

“For the following reasons:

(1) I believe gold is in a major or primary bull market. I believe the gold bull market is currently in its second phase. This is the phase where sophisticated and seasoned investors and the funds enter the market. I don’t believe the public is in the gold market to any extent. They are interested and watching the action, but they do not have the nerve to buy gold. In fact, the public doesn’t know how to buy gold, although ads are now appearing telling them of the ‘wonders’ of gold and how they can buy the coins (at huge premiums over spot gold).

(2) If there is only one bull market in progress, it will attract broad new coverage and attention – just as Thursday’s $70 rise in gold did.

(3) I believe the bear market in stocks will continue erratically and the deflationary trends will persist. This will drive Fed Chairman Bernanke up the wall, and I think he will stop at nothing (including massive printing of dollars) in his effort to halt deflation.”

Source: Richard Russell, Dow Theory Letters, March 20, 2009.

What are the signs of a final bottom? – Richard Russell

“Will the evidence come from the D-J Averages? I think it might. At the final bear market bottom, we should see:

(1) a dramatic non-confirmation by either the Industrials or the Transports (this is what occurred in 1974).

(2) or we might see an extended ‘line’ in the Averages, in which the Averages fluctuate within a 5% zone for many weeks on low volume. At some point both averages will surge higher on increasing volume.

(3) Values – We will see blue chip stocks selling ‘below known values’ with P/E ratios at single digits and the yield on the Dow near 6%.

“In the area of the final bear market lows, public attitude towards stocks and the stock market will be black-pessimistic and even angry. Wall Street will be despised and denounced as a scam. Actually, we are beginning to see just a bit of that via the highly-publicized debate between Jim Cramer and John Stewart, in which Stewart literally calls both Cramer and Wall Street a fraud.

“Already the public is turning against Wall Street, and, of course, the Bernie Madoff scheme only adds to the public anger against the ‘crooks of Wall Street’. Already, the ‘buy and hold’ creed (religion?) is being denounced along with the image of stocks as wealth-building vehicles. Warren Buffett is being tarred and feathered – Berkshire Hathaway lost billions of dollars over the last year, despite Buffett’s cheer-leading role a few months ago when he announced that he was buying stocks.

“Taking it to the present, the big question is whether we have already seen the bottom of the bear market and whether the recent strength in the market is the beginning of a new bull market. My opinion is that the latest rally is part of a bear market correction – not the beginning of a new bull market. The primary trend was recently re-confirmed as bearish when both the Industrials and the Transports broke to simultaneous new lows.

“One hint as to where we are is that prior to a major low, Lowry’s Selling Pressure Index (supply) turns down while their Buying Power Index (demand) leads on the upside. This did not occur at or near the recent lows.”

Source: Richard Russell, Dow Theory Letters, March 16, 2009.

Richard Russell (Dow Theory Letters): Potential buyers of gold?

“Here are some figures, the first number is the nation’s holding of gold and the second figure is the percentage that gold is of their reserves. Nations with low percentages of gold in their reserves may be expected to be potential buyers of gold.

US – owns 8,135 metric tons of gold … Gold makes up 64.4% of US reserves. The US will not sell any of its gold.
Germany – 3,412 … 64.4% of reserves
IMF – 3,217 …
France – 2,508 … 58.7%
Italy – 2,451 … 61.9%
Switzerland – 1,040 … 23.8%
Japan – 765.2 … 1.9% (a potential gold-buyer)
China – 600.0 … 0.9% (should be a big buyer)
Russia – 495. 9 … 2.2% (is a buyer)
Taiwan – 422.2 … 3.6% (should be a buyer)
India – 357.7% … 3.0% (should be a buyer)
UK – 310.3 … 14.5% (sold most of its gold at the low price)
Saudi Arabia – 143.0 … 11.4% (should buy gold)
South Africa – 124.4 … only 9.0%
Australia – 79.8 … 6.3%”

Source: Richard Russell, Dow Theory Letters, February 18, 2009.

The Point & Figure – Richard Russell from Dow Theory Letters

Richard Russell (Dow Theory Letters), 84-year old doyen of investment newsletter writers, interprets the technical situation as follows: “The Point & Figure chart below may currently be the most important single chart in the world. This is the DJ Industrial Average, and it’s in the act of testing its November 20 low. If the Dow violates its low, it will have confirmed the prior bearish penetration of the Transportation Average. If that happens, the primary bear market will be reconfirmed. But if the Industrials stubbornly refuse to break to a new low, then the inference is that something else is happening. The inference is that the bear market may be forming a temporary bottom.”

“What I think we’ve seen, so far, is the end of forced selling. At this point, professionals are trying to gauge whether the huge market collapse of 2007-2008 has discounted the worst to come or whether ‘the worst’ still lies ahead,” said Russell. “The drama should be played out over the next week or so.”

Survival plan for unprecedented situation

“Don’t be married to any specific scenario. Anything may happen in response to the current situation. Follow the market – the market will know what’s happening before anyone else.

“The best survival plan is to be diversified. Nobody knows who or what will be ‘the last investment standing’. Will it be Treasury paper, high-grade bonds, real estate, diamonds, T-bills, cash, top-grade corporate stocks or gold?

“T-bills are the choice of many sophisticated investors. But T-bills are denominated in dollars, and dollars are vulnerable as are bonds or any other items denominated in Federal Reserve notes (‘dollars’).

“Real estate and diamonds represent intrinsic wealth, although they are not instantly liquid, meaning that they cannot be instantly turned into cash.

“Gold has been accepted as wealth for thousands of years. When all other forms of supposed wealth crashes (deflates) or becomes suspect, the last wealth asset to stand will be gold. Gold has no counter-party nor has it any debt aligned against it. Gold needs no central bank to ensure its acceptance. Gold is accepted everywhere and in any quantity as a form of indestructible, eternal wealth.

“Today, investment money is so suspicious of the viability of any given asset that they are placing their money in an item that bears the full faith and credit of the US government – I’m referring to Treasury paper. Actually, one major worry with T-bills is a possible collapse of the dollar.

“The following are my suggestions as to where an investor might place his money.

“AIG bonds (the government has bought the preferred stock of AIG, and the bonds should rate higher). Invest with the government.

“PHK – the high-yield fund run by PIMCO – speculative, but an interesting fund that’s 60% in investment-grade bonds.

“CD’s that are backed by the FDIC up to $250,000.

“Gold (GLD or CEF) or actual gold coins if possible.”

Source: Richard Russell, Dow Theory Letters, February 3, 2009.

Resistance of the Dow

Here is Richard Russell’s (Dow Theory Letters) interpretation of the situation: “Frankly, I’m very impressed by the stubborn and continuing resistance of the DJ Industrial Average. I don’t think many analysts realize the extreme importance of the Industrial’s steady refusal to violate its November 20 low. The action of the Dow contains the answer to the trillion-dollar question – ‘Is the bear market in a halting process – or will the stock market signal a continuation of the primary bear market?’

“So here we are – at a crossroads to history. The market will issue its verdict when, and only when, it is ready. But for now – if there’s anything traders love, it’s a market rising in the face of lousy news.

“An optimistic outcome would be a continued refusal by the Industrials to close below 7,552. An obviously more bullish outcome would be the DJ Industrial Average and the DJ Transportation Average continuing to rally and ultimately (both Averages) bettering their early-January peaks.

“Clearly, the most bearish outcome would be the Industrials finally breaking below the November 20 low and thereby confirming that we are still locked in a continuing primary bear market.”

Gold – very bullish action

Richard Russell (Dow Theory Letters): Gold – very bullish action

“During the great gold bull markets of the 1970s to 1980, gold topped out at a price of 850 per ounce. For months now, gold has been ‘testing’ the 850 level, first rallying above 850 and then sliding below 850. Currently, February gold is trading at 891. I consider this to be very bullish action. The current gold action is taking place in the second phase of the new gold bull market. The second phase has seen many hedge funds and a small segments of the public become interested in gold.
“I believe the third speculative phase of the current gold bull market lies ahead. This is the phase where the public jumps wholesale into the market. It’s the phase where I expect to see a much higher, even frenzied, gold price. This final phase of the gold bull market will be accompanied by international doubt regarding the value and viability of fiat currency.
“Fiat money is being created in great quantities by almost every central bank in the world. Imagine, the foolishness of trying to ward off insolvency by creating ever-larger quantities of paper money. The worse off the economies of the world, the more fiat currency will be created.”

Source: Richard Russell, Dow Theory Letters, January 23, 2009.