RUSSELL ON THE BEAR MARKETMay 1, 2004 -- Uh oh, Russell's out of step again. On the cover of today's Barron's we read in huge letters -- "Bear Overboard!" and we see a grinning bull tossing a trussed-up bear off a boat into the water.
In today's feature article entitled "Just Resting," Barron's illustrates the situation with a picture of a laid-back bull smiling and clearly just resting. The article states, "More than 61% of the investment professionals responding to Barron's latest Big Money Poll call themselves bullish or very bullish about the prospects for US stocks through the end of the year. . . Only 12% of the Big Money managers currently call themselves bearish, a historically low reading, albeit consistent with last fall's tally."
OK, that appears to be the professional view. But it's not my view. My view is that an important market top has been completed, and that the primary bear market is read to assert itself again.
A bit of history -- following the 1929 crash, the market turned up in November of that year and a big upside correction advanced the market to an April 1930 recovery high. Volume was greater on the correction into the 1930 high than it was during most of 1929. Investors piled wholesale into the market again, believing that the bull market had revived.
But, in April 1930, the stock market turned down again, and the rest is history. Reporting on the situation, Dow Theorist Robert Rhea wrote that far more money was lost during the rest of 1930 than was lost during the 1929 crash.
Now, a few technical notes on the current situation. Lowry's in their weekend report notes that since April 27 their Selling Pressure Index rose by 17 points, the greatest three-day increase in their Selling Pressure Index in the last 15 months. By April 29 the Lowry's Buying Power Index dropped to its lowest level in over a month. Lowry's correctly asks, "Does this represent a sudden change in market psychology?"
At the same time, the advance-decline ratios on the NYSE and the Nasdaq have been plunging. There have been many comments regarding the validity of the NYSE A-D ratio, since it now contains over 50% interest-sensitive issues such as preferreds and closed-end funds. My comment is that the A-D ratio is still useful, since interest rates have such a large influence on stock prices.
Nevertheless, I run an operating-companies-only advance-decline ratio, and this index topped out on April 5. So any way you look at it, the majority of stocks on the NYSE (and the Nasdaq and the Amex) are heading down.
As subscribers know, I pay a lot of attention to new 52-week highs and new 52-week lows on the NYSE. I run five-day totals of each, and I take careful note of these totals, particularly on the rare reversals. Here's a recent record of the difference between the five-day totals of new highs and the five-day totals of new lows.
April 22 plus 155 (meaning that the five-day totals of new highs were 155 more than the five-day totals of new lows).
April 23 plus 48.
April 26 minus 122 (here's the reversal).
April 27 minus 198.
April 28 minus 207.
April 29 minus 237.
April 30 minus 280.
I find these figures scary. They show a trend decline in upside breakouts and a trend increase in downside breakdowns.
More technical evidence can be seen in the massive top and subsequent breakdown in my PTI, We also see Friday's new low in my Big Money Breadth Index.
On the April 9 site I drew attention to the very rare "double non-confirmation" that had appeared in the D-J Average -- with first the Industrials and then the Transports turning weak.
Putting it all together, my position is that the stock market since September 2002 has been in a typical bear market upside correction. Then, during the first quarter of 2004, the market formed a massive top, and now the primary bear market is ready to assert itself.
Unfortunately, during the bear market correction of 2002-2004, millions of Americans loaded up with stocks, mutual funds and refinancing cash (which they have spent). We have also seen what amounts to a buying-frenzy in homes, many purchased with little cash down and variable-rate mortgages.
On top of everything else, debt levels have been built to enormous levels, spurred by the Fed's artificial low interest rates. With short rates held at less than 1%, the Fed has rendered cash as something to be avoided, since at historically low interest rates, savers were literally driven out of cash and into well, "anything but cash."
Which reminds me of the old Wall Street adage which runs, "More money has been lost in the search for yield than any other financial endeavor."
Richard Russell
Editor-in-chief - DOW THEORY LETTERS
www.dowtheoryletters.com/dtlol.nsfThe 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.