Russell On The US$, DOW & GoldAn increasingly recessionary looking U.S. economy will likely require 1% real short rates and 3.5% Fed Funds in order to stabilize a potential growth contraction in lending not witnessed since the early 1970s or, to be honest, Roosevelt's depressionary 1930s. We can only hope that Bernanke, Paulson, and their cohorts recognize the danger and that the music keeps playing with the lights still turned on." Those are the latest comments of Bill Gross, managing partner of the giant PIMCO funds.
Russell Comment -- I know that a quarter point cut is the consensus, but another half-point cut would not surprise me.
Meanwhile, the eyes of the world and the mouths of a thousand "experts" are trained on the US Dollar. And the talk is that the dollar is headed "lower, lower and lower." The weekly Dollar Index is shown below, and according to my interpretation, the dollar has become rapidly oversold. The histograms are now contracting toward zero. And the space between the declining 10-week and 40-week moving averages has become awfully wide. The dollar may decline further, but I wouldn't short it here. The dollar should be close to a rally, but I wouldn't buy it here either. When a fundamentally weak item becomes oversold, best to leave it alone.
How about those D-J Averages? What we're seeing now is a case of classic divergence, meaning one average heading one way and the other choosing a different path. however, in the current instance, the divergence is dramatic. The Dow has been advancing ever since its August 16 low. And the Transports have been doing, well, nothing since their August 16 low.
"Yeah, well I can explain. The high price of oil has hurt the Transports, so it's no wonder they haven't followed the Dow." That's excellent reasoning, but I don't buy it. I don't care what the "reason" is, all I care about is the fact that the two Averages are diverging. When that happens it's dangerous to follow the leader -- or to short the lagger. I prefer to watch the show and wait to see how it all works out.
Let me put it this way -- when the Averages disagree, they're telling us that "something is wrong." It doesn't tell us what's wrong, it's just that "something" is.
Gold -- Hey, hey, up and away! Not so fast. Or I should say -- maybe it's been too fast. That gap of a few days ago suggests a bit too much enthusiasm. And the declining volume on the rise suggests that gold's following has been dropping off as gold careens higher. RSI has hit the overbought level, and MACD is scraping the ceiling. I'm not saying that gold is definitely ready to correct, I'm just saying that it should have been bought a few weeks ago -- or better still, a few years ago.
Richard Russell
Editor-in-chief - DOW THEORY LETTERS
http://ww2.dowtheoryletters.comoctober 30, 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.
