first majestic silver

Richard Russell Q & A

November 5, 2002

Question -- What's behind this market advance, Russell? I thought this was a bear market.

Answer -- The bear market, according to Dow Theory, started on September 23, 1999. That would make it three years old. In the course of those three years stocks have lost over $8 trillion in values. More recently we've seen the major averages down six consecutive months. Only once before has that series been surpassed.

The Averages hit lows in July, rallied, then declined again to record a lower low in October. But the October lows were not substantially below the July lows.

While not the "perfect" low that I would have preferred (there were no 90% downside days), like the offensive side in football, we take what the defense gives us.

I thought the market gave us enough so that it was worth taking trading positions. I advocated buying DIAs, SPYs and QQQs. These are Exchange Trading Funds that are traded like any other stock. The are proxies for the Dow, the S&P and the Nasdaq. All are traded on the Amex.

In yesterday's site I made it even simpler. I reduced the trading to just Diamonds (DIA), which are proxies for the Dow. The Diamonds will move up and down in lock-step (or in percentages) with the Dow. My reasoning is that it's almost impossible to visualize a market correction in which the Dow is not represented or in which the Dow does not lead.

Question -- What are the fundamentals behind this advance?

Answer -- There may or may not be any fundamental behind a bear market correction. This advance may be just that -- a correction of three years of bear market damage.

The rotten current economic news is the phenomenon that will, for the most part, keep the public from joining in this bear market advance -- at least in the early part of the advance. The public will look for reasons, for explanations, for this market advance. There won't be any good news, at least during most of the advance. And the public ("confidence" has plunged to a nine-year low) is too battered, too discouraged after sustaining painful losses, to rush back into the market.

Thus, after losing large chunks of their mutual funds or 401(k)s, the retail public is not ready, monetarily or psychologically, to take part in this bear market correction.

So if you're looking for brightening fundamentals, better business, happy news -- before taking any kind of position in this bear market advance, you're wasting your time. There may not be any.

In a bear market advance you use a strictly technical approach. It looks like the bottom is in. It looks like stocks are "tired" of going down. You close your eyes, you take a chance, you buy. You don't try to pick the five stocks that you think will go up. You buy the market. Which area of the market? The Russell choice has been and is -- the Dow. How do you do that? Simple -- it's called buying the Diamonds (DIA).

Question -- OK, Russell, I'm in the Diamonds. How far do you think this advance can carry?

Answer -- I can only guess. The Dow has formed what appears to be a "head-and-shoulders bottom" pattern. As of yesterday, Friday, the Dow had not yet broken out of its head-and-shoulders formation. The high of the "right shoulder" was struck on October 21 at 8538.24.

Therefore, I'd say that any Dow close decisively above 8538.24 would constitute a breakout. How far could the breakout take the Dow? My guess again -- up to, and perhaps even above, the Dow's 200-day moving average, which now stands at 9293.

Or let's apply the 50% Principle. The bull market high for the Dow was 11722. The recent bear market low (October 9) was 7286. The halfway level of the entire bear market decline from 11722 to 7286 is 9504. If this is to be a full correction of the entire bear market loss in the Dow, this advance could test the halfway level or 9504.

Those are the benchmarks I'll be watching in order to gauge the strength or weakness of this bear market advance.

Question -- Why should I buy the Diamonds and take a chance on maybe scalping some profits in a bear market rally?

Answer -- It's strictly a personal choice. The answer is that "the market can do anything," and we don't know how far this advance can carry -- if at all. If you have the patience and the discipline to sit out this advance, regardless of where it carries, no problem, do it. But big bear market rallies don't come along every day or every month, and this one could be big enough and substantial enough to be worth playing.

Besides, there are all these seasonal and cyclical "pluses" associated with this advance, and I have already gone over them. There is the "good six months," the Presidential Cycle, the 20-year cycle. True, none of these may work this time. True, playing a bear rally is always risky.

True, "too many" people are hoping that October was the bottom. But as I said, you never get the perfect set of circumstances in the investing business. You pick your spot and you take your chances.

Question -- How will gold and bonds fare if this is going to be an extended advance in stocks?

Answer -- Gold should do OK; bonds should not do OK. I don't trade either one. I hold gold on the fundamentals, I hold muni bonds for the tax-free return. That's it.

Last week was the fourth advancing week for the stock market. That's only fair -- this four-week rising streak was preceded by 6 consecutive declining months for the market and six consecutive declining weeks.

S&P states that core earnings for the 12 months ended in June were $18.48. On that basis the P/E for the S&P was 48.7.

Barron's lists S&P earnings (not adjusted for options and pension expenses) at 33.69 with an actual dividend yield of 1.75%.

The S&P yield of 1.75% compares with the 3.97% yield on the 10 year T-note on which there are no state taxes.

Russell opinion -- stocks are still absurdly expensive.

The true (common stocks only) advance-decline ratio figures are -- Oct. 28 minus 4.93; Oct. 29 minus 5.07; Oct. 30 minus 4.77; Oct. 31 minus 4.67; Nov. 1 minus 4.19.

The Confidence Index has improved slightly over the past two weeks but is still dangerously low at 69.0. The CI is saying -- credit troubles in the period ahead.

And that wraps up this week.



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