"The Consensus seems to be that all we're experiencing is a 'long-needed correction.' That's not my conclusion; my conclusion is that the bear is back. I don't look for a happy Monday. As I've been saying, this is not the time to be in stocks. Get into T-bills instead.
"There's something ominous occurring in the US economy, and the stock market is sensing it.
"No, you won't read about it in the WSJ, and you won't hear about it on CNBC. They haven't a clue, but I can see it in the action of the market. And if you listen carefully, you can hear it -but to hear it you have to learn the 'language of the market.' The language of the market, what the devil is that? It's called Dowtheory-ology, but unfortunately almost nobody speaks it today."
Those were the words of Richard Russell in "Richard's Remarks," dated March 19, 2004. Mr. Russell, whom I read every day as a subscriber to The Dow Theory Letters" is the dean of the Dow Theory, which has largely become out of fashion over quite a few years. In my view, it is about to go back into fashion-big time, as the second leg of the bear market turns more serious. Mr. Russell uses a host of technical tools to try to listen to the language of the market, but as a Dow Theory practitioner, the most important tool is the confirmation or non-confirmation of the Dow Jones Industrial Average and the Dow Transport Average. When one makes a new high or a new low, to become legitimate, they need to confirm one another.
On March 10 after the close of the market, Richard had this to say:
"Yesterday I noted that although the Dow closed below its critical February 4 low of 10470.74, the Transports had failed to confirm. The critical comparable level for the Transports was 2822.11. Today the Transports confirmed the breakdown of the Dow by closing below 2822.11. The die is cast."
In other words, the bear has begun to growl as he is stirring from hibernation. As Mr. Russell frequently notes, the job of the bear is to maul as many investors as possible. To do that he allows the market to have some sharp rallies along the way to keep people hopeful and suck them back in before he swings his mighty paw broadly through the air and slams them into the ground with another few 100-point down days. Then the sun shines again for a few days or even a few weeks and Bang! We go through the process again.
Gradually, the psychology becomes increasingly pessimistic until the time arrives when we really do see a process of capitulation. As a 57-year-old investor, believe me I know what capitulation is. I saw it in the 1970s in the stock market. I saw it again in the 1980-82 time frame in equities, and I have seen it and experienced it personally in the gold market when no one wanted to buy NovaGold at $0.09 even though it was raking in about that much per year in cash flow!
That same psychology will take place in the equity markets, and it is looking more and more like the process is underway. The equity markets are looking more and more to me like they did in 1999 and 2000. We are seeing record amounts of new cash being fed into the stock market via unsophisticated mutual fund investors. So we get a spurt in the indexes and then Bam! Money is raked "off the tables" by the big money players like the really rich guys and hedge fund players. Time and time again we see this in the Dow and other major indexes.
In other words, we see a topping process as noted in the chart below, which is in fact a picture of equity distribution from average folks who really do believe what they're told by Kudlow and Cramer on CNBC and by the big time investors like Buffett, Soros, and Templeton, who are taking their chips off the table. It is a sad story that repeats itself at every market top. It is a pattern I recall very clearly as a young man in my early twenties in the early 1970s when a senior accountant at a major aluminum company used to tell me, "Jay, please don't buy stocks now. We are going to see a crash and it could be as bad as the 1930s." I didn't have much money in those days, so I avoided big losses. But I didn't believe the accountant. I had to learn, as they say, "the hard way." So it is with the vast percentage of folks in the market today.
Stocks are Breaking Down
The below pictures the topping pattern in the Dow. But this pattern is widespread over most segments. I took a look this Friday at all of the sector Index charts provided at www.decisionpoint.com and following the chart below is a summary of how the share prices of the various sectors are doing:
BEARISH SECTORS
Mildly Bearish (Current prices below 20-day moving averages)
Banking
Consumer non-cyclical
Financials
Oil Index
Oil Services
Services
Telecommunications
Moderately Bearish (Current prices are below the 50-day moving averages)
Biotech
Brokerage
Chemicals
Computer Hardware
Computer Software
Consumer
Cyclical
Health Care
Internet
Networking
Retail Holders
Technology
Dow Transports
Strongly Bearish (Current share prices are below the 200-day moving average)
Airlines
Computer Technology
Pharmaceuticals
Semiconductors
BULLISH SECTORS
Mildly Bullish (Current prices above 20-day moving averages)
NONE
Moderately Bullish (Current prices are above the 50-day moving averages)
NONE
Strongly Bullish (Current share prices are above the 200-day moving average)
Gold & Silver Stocks
Natural Gas
Real Estate
Utilities
As you can see, the overall picture is rather gloomy now as far as our equity markets are concerned although there is a major disconnect between this clear current reality and where most people think the markets are going. This psychological disconnect from the primary trend for stocks tells me that we are still in the very early stages of a major, major bear market in equities. In other words, we agree with Richard Russell's view that "There's something ominous occurring in the US economy, and the stock market is sensing it."
It should be noted that the two oil sectors are very close to the 20-day moving average and could swing back into a mildly bullish camp anytime.
On the bullish side, the performance of gold and silver stocks is no surprise to readers of this letter. But as with equities in general, there is and has been for quite some time now, a disconnect with what is going on in these markets and general market perception. Even though gold has been a tremendously successful sector, I am confident in saying that if I were to walk down the streets of New York and poll investors about whether they are invested in gold and gold shares, the positive answer to that question would come from less than 1% of the folks polled. Again, this psychological disconnect with the bullish primary trend for gold tells me we are in the very early stages of a powerfully major bull market in gold. The same holds true for silver by the way, which has been even stronger than gold of late.
GOLD
After a period of consolidation in the gold markets and with the Japanese throwing in the towel in their attempt to fool Mother Nature by dropping untold trillions of yen from helicopters, it looks like gold is ready for a new assault toward higher grounds. The following chart has suggests that gold may be about to break out to test its $431 high earlier this year. Silver looks even better. Both gold and silver stocks should begin to perform better in the days and weeks ahead.
March 22, 2004
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com