Richard Russell Wisdom Waves
What should the bottom of the market look like?
FEAR - What "should" the market look like at a true bottom? Peter Eliades is a prodigious researcher, and he has come up with some extraordinary and revealing statistics relating to major bottoms in the stock market. This following research is based on Investor's Intelligence's forty years of polling bullish advisors vs. bearish advisors (Investor's Intelligence, 30 Church St., New Rochelle, NY 10801). The statistics are quite amazing.
What Eliades' research shows is that important market bottoms have been accompanied by long periods of bearishness on the part of investment advisors. Here are some typical and rather startling examples.
In May 1970 the market recorded an important low. For 27 of the 28 weeks prior to that low, there were more bearish advisors than bullish. Actually, bears outnumbered bulls for three months even after that 1970 bottom.
Prior to the historic 1974 bear market bottom there were 27 consecutive weeks in which bears outnumbered bulls.
Again, prior to the March 1978 low, for 17 out of 20 weeks bears outnumbered bulls.
Prior to the classic 1982 bottom, bears outnumbered bulls in 34 out of 35 weeks.
Prior to the July 1984 low, bears outnumbered bulls for 19 consecutive weeks.
In 1994-95 there were 46 consecutive weeks in which bears outnumbered bulls - at the end of that period the Dow was higher than when the 46 bearish sessions began.
Then Eliades wraps it up. "Since the October 1998 market bottom to the present day, there have been only nine weeks with a plurality of bears over bulls." In all of 2002 while the market was "falling apart" there were two consecutive weeks in July in which bears outnumbered bulls and there were two consecutive weeks in October.
The latest count as of last week shows bulls at 40% and bears at 31%. Even after a very poor January, even with the nation facing a crisis in Iraq, the bullish percentage remains stubbornly above the bearish percentage. Does this suggest that an important bottom is at hand? Does this suggest that October 2002 was a classic bottom? I'll leave the answer to you.
What's the state of Real Estate?
One of the big questions of the day is - whether real estate is in a bubble or not. This is a critical question, since a huge amount of America's wealth is tied up in real estate.
Over the weekend I looked at a little house which is for sale a few blocks from here. The seller is asking $1.3 million for the house. The house is 1800 sq. feet, it was built in 1928, and it's in a good location. It's a flimsy little house, two story, and my guess is that it cost around $6000 when it was built. The only good thing about the house, as I said, is its location. The price of $1.3 million is laughable, but I'm not laughing because it wouldn't surprise me if the house sold for that price. To my mind, the house is worth $50,000 mainly because it's in a good location.
But believe me, house prices have risen into the wild blue yonder. By my old yardstick, a house always costs you 10% a year to carry, and this includes repairs and the cost of carrying a mortgage. The question then becomes, what can you rent the house for? If you can cover your costs (as I said 10%) with your rental fees, then the house is priced reasonably. If you can't even cover your costs with rent, the house is overpriced.
Today most people can't begin to cover the cost of a house via a rental. By my reckoning, this means that homes are overpriced. I remember when real estate was underpriced. My father was in real estate all his life. Back in 1942 I used to go over "breakdowns" of real estate in New York.
In those days brownstones were selling at "give-away" prices. For example, a brownstone that was half-rented would sell for 10,000 or more. With a mortgage of $10,000 down, the place would generate a profit of 25% to 35%. There were brownstones available all over New York, and today they would be selling in the millions of dollars. But in 1942 if people had any money they were hanging on to it and not willing to buy anything.
So real estate in 1942 was the direct opposite of what it is today. In 1942 for a little money you could buy a great bargain, a building that would throw off up to 35% return the first year. Today, for a lot of money you can't buy a building that will throw off a profit. Today, you buy real estate for "pride of ownership."
INVESTMENT POSITION - The bear remains in the box. Yes, it's still very much a bear market.
I'll make this simple. Subscribers should be basically in cash, plus gold coins and gold shares. Subscribers ask, "Russell, if this is a bear market shouldn't we be short or in a bear fund? My feeling here is that if you are in cash, then by proxy you are really in a short position. Why? Because as the primary bear trend drives stocks lower over time, your cash will enable you to buy an increasing amount of stocks. In other words, the lower the stock market, the more you will be able to buy with cash.
THE DOLLAR - The greatest danger to the US markets, to my mind, is the possibility of an all-out dollar crash. To my mind, the biggest miracle in finance today is that the dollar has not totally collapsed over the last few months Well, to be honest, the dollar has not done that well. I show here a monthly chart of the Dollar Index along with a 12-month moving average.
From its high of 121.28 set in July 2001, the Dollar Index has now declined to a February 2003 low of 98.60, a loss of over 18% in two years. But today the trade deficit is running at a rate of over half a trillion dollars a year, the national debt is over $6.4 trillion, and we are close to what could be an expensive war. All of these suggest that the dollar could be on the edge of the precipice.
LATE NOTES - This morning the D-J Transportation Average broke to a new low below its February 13 closing low - to its lowest level since October 9. This brings up the very important question - will the Dow confirm the breakdown of the Transports? To confirm on the downside, the Dow would have to plunge below its comparable February 13 low of 7749.96. If the Dow confirms by violating its 7749.96 low - be prepared for the Dow to test its bear market low of 7286.
As this is written (Monday) I note that the Dow has been extraordinarily resistant to breaking down. The Dow this morning is still 175 points above its February 13 low of 7749.96.
The bear market picture, sad to say, entails a lot more than the potential war against Iraq. Remember, the bear market started in 1999, when Iraq was not a question. A bear market problem, and a big one, is that the finances of the US are literally "unsustainable." A study by a group of economists concludes that either government expenses must be cut drastically or revenues to the government must be increased by 20% to 38%. In view of this, all eyes should be focused on the dollar.
Richard Russell
Editor-in-chief - DOW THEORY LETTERS
http://www.dowtheoryletters.com/dtlol.nsf
February 24, 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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