Richard Russell On the Markets
Every period or stretch in the stock market has its own unique characteristics. Every once in a while I'll ask myself, "Five years from now as I look back at this period, what will I be saying about it?"
OK, I'll ask myself that question now. What about the current period? If I had to characterize it in one simple way, I'd say, "What was remarkable about the years 2002 and 2003 was investors' stubborn, almost surreal, optimism. Nothing, it seemed, no turn of events, no ridiculously high price/earnings ratios, no dearth of dividends, no micro-dividend yields, no parade of accounting frauds, no stream of phony "pro forma" earnings, no deterioration in bond ratings, no impending war -- nothing, it seemed could turn investors bearish.
Back to the present -- even now with the Dow down four weeks in a row and with much of the rally off the October 9 lows wiped out, advisors remains bullish by a ratio of almost two-to-one over bears.
Why the relentless bullishness, why the stubborn optimism? It doesn't matter "why." What does matter is the fact -- bullishness and optimism reign. And the question -- can this continue? Obviously, I can't predict moods and sentiment. I can only guess.
My guess, based on the deterioration that I see in the stock market, is that somewhere ahead, today's ingrained bullishness is going to turn to panic. How will this come about? I think it will materialize if or when the major averages break below their October 9 lows.
Wait a second Russell, you're saying that you think the major stock averages will break below their October 9 lows? What do you base that on?
I base it on my technical reading of the market. I've been telling subscribers that my Big Money Breadth Index has broken to new bear market lows (below the October lows). My Most Active Stock Index broke below its October low last week. We've seen a number of "distribution" days, days in which it is obvious that institutional money is leaving the market. We've seen the deterioration in the Lowry's statistics.
What is obvious is that there's a buyers strike on. Nobody, it seems, wants to buy stocks. And I turn to that old stock market adage, "It takes real buying to move stocks up -- but in the absence of buying, stocks will fall of their own weight."
All of the above suggests to me that the market, in its own good time, is going to break below the October lows. One of the beliefs of the bulls runs like this -- "OK, a lot of stocks have been hurt. And January turned out to be a rotten month for stocks. Furthermore, February has not been much better. But with it all, the market is now oversold, and the major stock averages are still well above their October lows. Thus, it's clear that October 9 was THE LOW for the market. The market has been declining week after week, the bad news is out, and still we're holding above the October lows. How can you be bearish about that performance?"
And there's a logic to the above. And the logic may hold as long as the major averages remain above the October lows. But -- what if the averages break below the October lows? If that happens, I believe the current bullishness and optimism could turn to panic literally overnight.
So here's what I think we could see ahead. First, a break below the October lows. Then near-panic or outright panic as months of optimism turn to FEAR. The fear will be expressed by a series of 90% downside days as identified by the Lowry's studies. These 90% downside days are days when down-volume is 90% of up + down volume and down points is 90% of up + down points. Points are changes in the price of stocks. Each day Lowry's adds up all the accumulated points of stocks that were higher (NYSE), and all the accumulated points of stocks that were lower.
I can make the calculations for volume but I depend on Lowry's to calculate the points and announce whether we've seen a 90% downside day or not.
Consider this -- we haven't had a single 90% downside day since April 3, 2001, despite all that has happened.
At any rate, this is what I expect in the months ahead. A breaking of the October lows. A series of declines characterized by 90% downside days. And finally -- at last, an important bottom -- a bottom in which I will urge subscribers to buy stocks for maybe the first great upside correction in this bear market.
If all the above comes to pass, how will we know that this long-awaited "final bottom" won't be the end of the bear market?
I don't know whether it will or not. I'll be guided most by valuations. But one thing at a time. First let's see if the October lows are violated. Then let's see if we get those 90% downside days. If this scenario develops, we'll take it from there. In other words, one thing at a time.
The Dow is down 5.72% for the year so far, S&P is down 5.70%. Nasdaq is down 3.97%. Wilshire 5000 is down 5.63%. Investor's Business Daily's Mutual Fund Index is down 4.99%. Few people have been making money so far in this fourth down-year of the bear market. And a lot of people have been sustaining losses.
Here are the figures for the real (all common stocks) advance-decline ratio (minus closed end bond funds, ADRs and preferreds) -- Feb. 3 minus 2.83; Feb. 4 minus 3.03; Feb. 5 minus 3.22; Feb. 6 minus 3.53; Feb. 7 minus 3.94.
The week ended with the S&P selling at 27.82 times trailing reported earnings while providing a dividend yield of 1.95%. These are hardly bear market bottom figures, but maybe this time it's different.
The bond market tends to zero in on credit quality, and the bond market is a lot less emotional than the stock market. The Confidence Index (I seem to be only guy on the planet who still follows this statistic) dropped from last week's low 72.0 to this week's still lower low of 71.1. This is the lowest CI figure since the 69.0 figure of November 1, 2002.
For traders -- the stock market, based on the McClellan Oscillator and on Lowry's short-term index, is in heavily oversold territory, which in a bear market means that the market is in a territory where ANYTHING can happen. My advice -- don't try to trade this market, it's in an area where it can "take your head off."
That, I believe, does it for today. But be sure to read John Mauldin's latest epistle on www.2000wave.com As usual, it's a beaut.
More recently, Argentina went into a major slump owing massive amounts of money to foreigners. What was the result?
Yesterday's press reports brought news that the Argentine peso lost 70% of its value last year...with domestic inflation running at about 40% per year. The Argentine economy collapsed another 12% last year.
Are we in America headed towards the pampas? Or the land of the sinking sun? We don't know. For all we know, we have a 'round-the-world ticket, with stops in all the world's troubled economies.
So we buy gold...and prepare to enjoy the trip...
Richard Russell
Editor-in-chief - DOW THEORY LETTERS
http://www.dowtheoryletters.com/dtlol.nsf
February 10, 2003
The inimitable and venerable Mr. 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.
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