Richard Russell On The Markets
March 26, 2008-- (Bloomberg) -- U.S. consumer confidence fell more than forecast in March as Americans' outlook for the economy dropped to the lowest level since Richard Nixon was president.
(Bloomberg) -- Home prices in 20 U.S. metropolitan areas fell in January by the most on record, a sign the housing recession is deepening, a private survey showed today. . . . Wall Street banks, brokerages and hedge funds may report $460 billion in credit losses from the collapse of the subprime mortgage market, or almost four times the amount already disclosed, according to Goldman Sachs Group Inc. Profits will continue to wane, other analysts said.
"There is light at the end of the tunnel, but it is still rather dim,'' Goldman analysts including New York-based Andrew Tilton said in a note to investors today. They estimated that residential mortgage losses will account for half the total, and commercial mortgages as much as 20 percent.
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The news seems to get grimmer and grimmer. So why isn't this stock market falling apart or even crashing? The reason is that the stock market has probably already discounted the grim news. The market never discounts the same thing twice. At the January lows, I believe the D-J Averages discounted the WORST that could be seen ahead.
Question -- How could the market do that? Back in January few people foresaw the financial disasters that are now surfacing.
Answer -- I never doubt the extraordinary ability of the stock market to "see" ahead, to discount the future. The real problem, is that very few people are capable of reading or deciphering what the market is "saying."
The chart below is a daily chart of the Index of new highs and new lows on the NYSE. On January 22 there were 1,114 new lows on the NYSE. Since then the we've never seen more than 759 new lows. Yesterday, we saw the first reversal when new highs of 29 surpassed new lows of 25. Today in a down-market there were only 30 new lows on the NYSE.
Since January 22 the number of new lows have contracted by 97.7% to yesterday's 25. The contraction implies a shrinking of downside pressure. Many stocks are now off their lows and most stocks are well off their highs. Therefore, even it the market strengthens, it will take time before we can see any dramatic increase in new highs on the NYSE. The important phenomenon, so far, is that new lows have been shrinking.
It's important to realize that just because the new lows are drying up does not mean that the stock market is ready to head higher. It simply means that the downside pressure is subsiding. The market could remain fluctuating in "no man's land" for quite a while -- at least until the housing foreclosure-mess appears to have hit bottom. I think housing remains the chief worry for the Fed, for Washington and for the markets.
What's with gold? Looks like a correction to me. Referring to the P&F chart of GLD below, GLD plunged to the 90 box, thereby turning bearish in P&F terms. Today GLD rallied to the 94 box. If I had to guess, I'd guess GLD is now going to consolidate. However, a drop to the 89 box would be bearish. GLD may back and fill for weeks, even months, and thereby build up a base. But as long as GLD holds above the 89 box, I'll accept the gold situation as constructive.
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Richard Russell
Editor-in-chief - DOW THEORY LETTERS
http://ww2.dowtheoryletters.com
March 26, 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.
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