Russell On Possible Bear Market Signal
Very short term -- as of Friday's close, the Dow had been down seven out of the last eight days, This left the Dow "straining" on the downside. Today the Dow closed higher, which relieved the strain.
However, the technical picture is clearing up at last. And again, it's incredible in this multi-trillion-dollar industry that so few investors, traders, analysts, professionals, have learned to read the story that is being told by the market. It's comparable to an auto mechanic who hasn't learned to drive.
At any rate, we're now dealing with a classic Dow Theory situation, and it's all laid out in the two daily charts shown below.
Here's the story. The two D-J Averages, Industrials and Transports, plunged to secondary lows on August 16, Industrials at 12845.78 and Transports at 4672.35.
From the August 16 lows, the Averages rallied with Industrials reaching a record high of 14163.80 on October 9. As you see on the lower chart, the Transports failed by a wide margin to confirm. This set up the potential for a classic Dow Theory bear signal.
The signal for a primary bear market would be given under the following conditions. Both Averages, and I emphasize BOTH, must now decline and break below their August 16 lows. The authority of the signal would be heightened if the two Averages were to break below their August 16 marks simultaneously, and an increase in volume.
A violation of one Average, unconfirmed by the other, would not constitute a bear market signal. In fact, a violation of one Average, while the other Average stubbornly refuses to follow, could represent a bullish non-confirmation.
We are at a dramatic juncture, and the picture is quite clear. It's now a matter of whether the Industrials and the Transports, one or both, hold above their August 16 lows. If BOTH Averages, Industrials and Transports violate their August 16 lows, then the tide of the market will have turned and we will be dealing with a primary bear market.
I will add that if a bear market is signaled, and there is no guarantee that it will be, but IF a primary bear market is signaled, it would be best to be out of all common stocks.
Again I'll repeat, the critical August 16 lows were 12845.78 for the Industrials and 4672.35 for the Transports.
Question -- Russell, if a primary bear market is signaled, do you think it would be a reflection of declining corporate earnings or could it be a forecast of further trouble in real estate?
Answer -- There's absolutely no way of knowing. It could be either, it could be both, or it could be something else that is not now receiving any recognition. I've used this simile before, and I'll use it again. When you're standing on the railroad tracks, and the train is hurtling toward you at 110 miles an hour, it doesn't make a bit of difference whether that train is the Midnight Special or the Wabash Canon Ball, you had just better get the hell off the track.
Remember, I'm not predicting that a primary bear market will be signaled. I'm just telling you, my subscribers, what the situation is and what to look for IF those August 16 lows are violated.
Question -- Russell, if we do receive a bear signal, would there be any special reasons to take the signal seriously?
Answer -- Primary bear market signals are rare, and I always take them seriously. But I would take a bear signal ahead particularly seriously. This is why --
First -- Nobody seems to have noticed that the current structure in the Averages sets the market up for a potential bear market signal. I haven't read anything about the structure -- nothing! Therefore, if we do receive a bear signal, it will be totally unexpected. And that's NOT good.
Second -- Lowry's Buying Power is now at a six month low. And even more important, Lowry's Selling Pressure as of Friday was a big 145 points above the Buying Power Index. This is both a negative position and a negative spread in the two indices.
Third -- New lows on the NYSE have been rising. Here are the new lows for the last six days -- 56, 80, 103, 122, 152, and today 176.
Fourth -- As of today's close, my PTI was only 18 points above its moving average. Thus, my PTI was only three days away from a potential bear signal.
Question -- Russell, I see that gold has been whacked today. If gold is real money, why are frightened investors turning to T-bills and short notes instead of real money, gold?
Answer -- Gold is an asset like a diamond or a section of coastal land or a Matisse painting. Over time, gold will appreciate against fiat paper. But T-bills or cash is what everything is denominated in. If the dollar turns really weak, it may drop 1% or 2% in terms of purchasing power. But unless there is a total panic out of dollars, dollars are probably the safest place to be in a deflationary collapse.
Gold is denominated in dollars and is treated today as more of a commodity than as money. Thus, in a weak market with deflationary overtones, gold will be hit. But gold is a timeless asset or pure wealth. Ten years from now gold will still be an asset while who knows whether the dollar will still be around.
Conclusion -- In these times, you need both -- gold and dollars -- but for different reasons.
Question -- If, and I say IF, we do get a bear market signal, do you think it will have deflationary implications?
Answer -- Yes, absolutely. If a bear market is signaled, all assets will be hit, and particularly US and European housing. If we receive a bear market signal, it will then be up to the central banks of the world to start an enormous reflation campaign. I've said all along that we're moving into a situation that can be best described as "Inflate or die." If a bear market is signaled, the central banks and the various governments will have to start spending and inflating as never before! Otherwise, the world will sink into deflation.
Richard Russell
Editor-in-chief - DOW THEORY LETTERS
http://ww2.dowtheoryletters.com
October 22, 2007
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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