Richard Russell On The Markets
February 14, 2008 -- When Mary Kamanu paid $409,000 for a house in Folsom, California, she never imagined that three years later it would be worth about 20 percent less and she would have to pay the bank more than $80,000 just to sell the place. "I'm completely upside-down on my mortgage, like a lot of people,'' said Kamanu, who wants to move 12 miles away to live with her fiancÚ in a suburb of Sacramento. "I know I'm going to have to come up with a big chunk of change.''
By the end of this year as many as 15 million U.S. households may owe more on their mortgages than their homes are worth, according to an estimate from Jan Hatzius, chief U.S. economist of New York-based Goldman Sachs Group Inc. That may fuel an increase in foreclosures, erode prices, and increase mortgage bond losses, he said in a Feb. 1 report.
"If borrowers who are underwater go into foreclosure, the properties are likely to be sold at discount prices and will further depress the price of housing,'' said Robert Engle, a Nobel laureate in economics who teaches at New York University's Stern School of Business in Manhattan. "It becomes a spiral.''
Russell Comment -- I don't like to start these sites with this kind of negative news. But I'm doing it for a reason. Of course, the stock market knows all about the housing problems as described above. The market knew about it weeks, even months ago. The reason I posted the piece above is to demonstrate that the news of the day has little to do with investing. It's the action of the market that has to do with investing. Or let me put it this way -- it's not the news that's important, what's important is the market's REACTION to the news. OK, the news is out regarding the problems of home-owners in selling their homes. What is the market's reaction? As far as the stock market is concerned, it's old news and news that's already been discounted. The market's reaction? Nothing.
What I'm interested in is the state of the stock market itself -- what's the market doing, where does it have to go to indicate that it's bullish or bearish, and what is its internal condition. So saying, let's take a look at Mr. Market.
Below is a daily chart of the D-J Composite, one of my favorite market "barometers." The Composite often leads the way for the rest of the market. The D-J Composite is composed of the 30 D-J Industrials, the 20 Transports and the 15 Utilities. So far, the Composite has enjoyed a nice advance from its January 22 low of 3989.65 to yesterday's high of 4284.60. This represented an advance of 7.3% . But now the test comes. The Composite has come up against its 50-day moving average, which stands at 4284. The next test -- to break out above its preceding peak into the area around 4350.
If the Composite can advance to 4350 I'll be really impressed. Of course, I don't know whether it can do it. But I'll be watching closely, because if the Composite can rally to 4350 it will achieve its first move above a preceding peak. And when the market does that -- well, that's impressive. A rise above a preceding peak tells us that the market is gaining momentum and that it has overcome a previous barrier or resistance level.
Meanwhile, RSI looks OK for the Composite as does MACD. So now it's up to the price action.
Below we see another test of the market, and here the picture is not that encouraging. This chart traces the bullish percentage (BP) of stocks on the NYSE. This index rose from an oversold 15% back on January 22 to 33.96 % yesterday. Wait, only 33.96% of the NYSE stocks bullish, that's not very impressive. It's telling us that on the rally from January 22 low, only one-third of the stocks on the NYSE moved into bullish trends. Frankly I would have expected a better performance. But then -- maybe I'm asking too much too early.
I've placed the blue horizontal line at the 50% or halfway level. I'll be a lot more impressed if the BP can advance up to, and then above the 50% level. That would mean that a majority of NYSE stocks are in bullish trends occurred. I'm watching and waiting.
Question -- Russell, what's the most impressive thing about the stock market action so far?
Answer -- The most impressive thing is that the market's been rallying in the face of bad news and bearish forecasts by the "experts." But the Composite has still not bettered a preceding peak. The rally could be just an oversold bounce. That's why I'm so interested to see whether the Composite can better a preceding peak and whether the bullish percentage on the NYSE can rise above 50%. You see, I don't want to buy an oversold "bounce," if I buy, I want to sure that I'm buying into genuine strength.
Bonds -- The bonds appear to have topped out. This occurs when the bond market senses an expanding economy ahead or rising inflation ahead. So what are the bonds sensing? Something "changed" on January 23, shown by the black reversal day on the chart. Today the long bond broke below its red 50-day moving average, indicating that rates are turning up. My guess -- the bonds are smelling inflation.
Gold -- Here's a daily chart of gold going back one year. Meanwhile, we're told that "gold is volatile" and "gold is dangerous" and "gold is overbought" and "gold is too expensive" and "when gold is over 900 dollars, jewelers can't sell gold jewelry." Again, it's all just jaw-boning, chatter, gossip.
Instead, let's do the simple thing. Let's see if gold can hold above its current rather steep bullish trendline. The trendline would allow gold to back off to 880 and still look good, actually look powerful. Of course, on any corrective action if gold can hold above 900 so much the better.
Gold has been battling against the doubters and know-nothings for the last eight years. The great mass of Americans still prefer fiat paper currency to real money. But that will change somewhere ahead. When that changes, we'll call it the third phase of one of the greatest bull markets in history. We're not there yet, not by a long shot. Meanwhile, gold continues its silent war against "printed wealth."
Editor-in-chief - DOW THEORY LETTERS
14 February 2008
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.