Russell On Dow, Gold & US Dollar
Economists were expecting a 250 to 350 thousand rise in unemployment. The figures announced this morning was 112,000, which was less than half the median expectation. On the news the long T-bond surged 1 and 20/32nds and the Sept. Dollar Index dropped .70, breaking below the support in what looks suspiciously like a "head-and-shoulders" top."
The two paragraphs below are from the always excellent King Report (July 1 report) --
"A stunningly disturbing Chicago PMI trumped the Fed rate hike. The action in the markets yesterday suggested a change in economic perceptions. It could be the beginning of the end. The ugly ChicagoPMI details: 56.4 expected; employment fell to 53.6 from 54.8; production collapsed to 53.9 from 71.1; new orders collapsed to 56.8 from 74.4; prices paid jumped to 84.5 from 80.
"You can forget all the post mortems on the Fed decision and communiqué; the real talk in the money world yesterday was the astonishing collapse in the Chicago PMI."
I keep harping on the thesis that following a burst bubble (learning from the Japanese experience) it will require massive inflation to keep the US economy from sinking into recession and deflation.
Along these lines, M-3, the broad money supply, was down $10.4 billion for the latest week ended June 21.
This morning the Sept. 30 year T-bond was up 1 and 18/32nds to 108.13. This was a new high on the rally that started on May 13, at which time the bond was selling at 101.24. So is the bond market thinking inflation or deflation? You make the call.
On the rebound from the 2000-2002 down-leg of the bear market, the Dow regained 78 percent of its losses, the S&P regained just short of 50 percent of its losses, and the Nasdaq recovered 26% of its losses. Conclusion -- the blue chip D-J Industrial Average put in, by far, the strongest performance.
In analysis, it often pays to see what the strongest stock average is doing. And below we see the story. This is a daily chart of the Dow. And the following are my observations.
The Dow failed to confirm the new recovery highs in the Transportation Average. Bearish.
The Dow chart depicts a series of declining peaks. Bearish.
The shorter (50-day) moving average turned down on March 9. Bearish.
The blue histograms at the bottom of the chart are just breaking below zero. Bearish.
RSI at top of chart rallied above it previous peak, unconfirmed by the Dow. Bearish.
My conclusion based on the action of the Dow is that this market is facing potential major trouble.
The next chart I want to show is a daily chart of the US dollar. This too, is not a pretty picture. Here we see the Dollar Index breaking below its June 8 low. We also see the (red) 50-day moving average new well below the (blue) 200 day moving average. Note that both of these MAs are now trending down, meaning the momentum for the dollar is to the downside. On top of everything else, the blue histograms are about to turn negative. As I said, it's not a pretty picture.
There's an irony in the current situation. The weaker the US economy, the more the need for the Fed to increase liquidity and the greater the need for the government to spend and run deficits -- both processes calculated to ward of the forces of deflation.
But the more the Fed inflates, and the larger the government deficits, the weaker the dollar. If the Fed and government are successful in warding off deflation, the dollar's fate is still in question. If deflation takes over, the international value of the dollar could cave in -- since deflation would crush the US economy and turn foreigners bearish on the dollar.
Either way, the dollar would be in danger. Which is one of the important reasons to hold gold.
As I see it, the US economy is showing signs of slowing down. This means that the Fed will be extremely hesitant to raise rates any further, particularly prior to the November election. The current low (1.25 percent) Fed funds make the dollar unattractive from an interest and income standpoint.
Thus, the whole stock market-US economy picture now seems to be in limbo, with the possibility that the stock market and the US economy could tip either way.
On this basis, the stock market remains both confusing and unattractive for retail investors. This is reflected in the current low volume on the exchanges. Nobody really know what to do, and this leaves the day-to-day trading to the hedge fund managers, program traders and the speculators.
Richard Russell
Editor-in-chief - DOW THEORY LETTERS
www.dowtheoryletters.com/dtlol.nsf
July 3, 2004
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.
Email this Article to a Friend 
Printer Friendly Version
