Richard Russell Comments

After last night's significant movement, I thought folks would be interested to read Russell's take. What's significant for Dow theorists, is that the transport index has finally confirmed the previous low in the industrials thus satisfying Dow's criterion for a continuing bear market.
AnnaP




October 9, 2002 -- I'm guessing, but I would say that 95% of what you read each day regarding the economy and the markets has to do with fundamental news. Today we read about the West Coast dock strike being held off for 80 days, we read about Abbott Labs cutting 2,000 jobs, we read about AT&T's cable-V unit cutting 1,700 jobs. we read that Calpers may buy a stake in NY's $1.7 billion Time Warner Center, we read that German production has risen for a second month out of three. I look at the latest St. Louis Fed's charts, and I note that "Commercial and Industrial loans" are sliding to new lows.
We read the Wall Street Journal, the Financial Times, Investor's Business Journal, The Journal of Commerce, we read a dozen investment advisory reports. And what does it all come down to? It comes down to a knowledge of current events. How does that help us in investing? How does all that reading help us in gauging where the stock market is -- and where the stock market may be going?

I'll tell you the truth -- it doesn't help us one damn bit.

Wait, there's one caveat -- when a BIG news event hits the wires, the stock market's response to that news often tells us something about the current state of the stock market.

I'll admit it. I read everything I can get my hands on. I read ten newspapers a day, and I read a daily pile of advisory stuff, and I read a load of magazines every week. But I don't read all these item because they help me with my stock market studies. I read them because I like to know what's going on. And I read them because I like to know what other people are thinking.

But when it comes to the stock market, I blot out everything else and turn to my own thoughts and studies. For instance, I'm watching that 2033.86 Transportation low of last September. If Trannies close below that low, the primary trend of the stock market, under Dow Theory, will be reconfirmed as bearish.

Will Transports confirm? Early in a bear market, when one average breaks to a new low, in the great majority of cases the other average (in this case the Transports) will confirm. Maybe not right away, but in due time. Nevertheless, the Transports have not yet confirmed, and I'm fascinated to see whether they do or do not break below 2033.86 (this is written well before the close of today's session).

I'm watching the VIX. Yesterday it closed at a very high 49.3. That tells me that option-writers (option-sellers) will charge you big bucks if you want to buy options on the S&P. The very savvy option-sellers think some big moves are coming in the market, and if they sell you an option on the S&P, they're going to charge you a lot -- because they want to protect themselves.

A lot of amateur analysts are saying that this high VIX is pointing to a bottom for the market. That might be the case if the VIX were spiking up, but the VIX is just staying high. To me that speaks more of option-sellers protecting themselves than a rising tide of fear on the part of option-writers. The real fear indications come when the VIX spikes up to new highs.

I'm very aware of upside volume on the NYSE. It's fading. That tells me that there isn't much demand for stocks. That tells me why every rally seems to fade almost before it gets started, even though the market continues extremely oversold.

I note that the Arms index, the put/call ratio, the short interest ratio, the McClellan Oscillator and a dozen other indicators that worked beautifully in the bull market have ceased to work in this bear market. What does that tell me? It tells me why so many "bull market analysts" have been wrong over the last couple of years.

It also tells me that this is a bear market, but it's not a "normal" or "typical" bear market. It tells me that this is a "power-house" bear market, a monster, a relentless brute that has, so far, paid no attention to the regular, time-tested methods that have worked in bull market corrections and lesser bear markets.

In Letter after Letter I've shown you, my subscribers, the huge "head-and-shoulder tops" that have formed in almost every stock average and index. In over half a century of studying markets, I've never seen anything like these tops. In fact, if you don't have access to monthly charts, you can't even see these huge, ominous formations.

I've shown where in almost every case in these formations, the long-term or 20-month moving averages has dropped below the even longer-term 40 month moving averages. These are extended. long-term bearish signals. These negative moving average signals suggest that this bear market has a long way to go.

I'm watching the D-J Utility Average breaking 200 and literally crashing. The Utility Average is the stodgy, "safe" average. It's the average that has provided the decent dividend yields. The Utility Average has often led the rest of the market. What are we to make of this Utility collapse. Let me put it this way -- "It ain't bullish."

I'm watching Ford (with a $120 billion in long-term debt) smash to a ten-year low. Ford bonds are selling at 88 cent on the dollar. Could Ford, breaking 7 today, go belly-up? I think it could.

Along with Ford, GM today at under 32 is trading at a five-year low. Morgan Stanley has just come out down-grading the auto stocks. A little late, but that's the analysts for you. A stock goes down 80% and they turn bearish on it.

A few months ago Bill Gross of giant Pimco announced that the bull market is bonds was over, dead. I disagreed. I disagreed because I saw the bear market in stocks continuing, and if the bear market continues, the Fed in its desperation to ward off deflation will drop rates and drop them again and again.

As subscribers know, I loaded up with AAA bonds a few years ago, and I've suggested that subscribers do the same. I haven't sold a single bond so far, and I note today that the long Treasury bond is up 25 ticks to a new high.

How about inflation? The bond market (they're my experts on inflation) shows that the differential between the yield on the 10 year T-note and the yield on the inflation-adjusted 10 year T-note (TIPS) has dropped to a new low this morning of 1.42. Inflation? The bond market sees less and less inflation. In fact, with new high in the long Treasuries, the bond market is thinking or even saying -- deflation.


According to Wilshire Associates, since the 2000 high for many major averages, this bear market has wiped out $8.5 trillion in values. This is huge, it's the biggest loss in dollars of any bear market in history. It's almost a year's worth of US Gross Domestic Product. It's equal to the combined GDP of Germany, India, France, Britain and Italy. And you have to wonder what Greenspan (Knight of Britain) thinks of all this. Oh yeah, Greenie says that things are tough but they're getting better.

Greenspan is and interesting case. Going back to what he wrote about gold and the "shabby secret" of those who opposed gold, you have to wonder how he justifies his stance and his position today. My opinion is that he "sold out" for power. He's on an ego trip. My further opinion is that he'll somehow pay for his sell-out, probably with an ultimate collapse of his so-called reputation.

Speaking of collapse, this is how Merrill Lynch's clients have fared so far in the bear market. This is a list of Merrill's clients most popular positions and how each of their picks has done so far this year --

AOL Time down 66.8%
AT&T down 40.3%.
AgereB down 85.2%
Avaya down 5.1%
Cisco down 52.5%
Citigroup down 40.9%
ExxonMob down 16.8%
Gen. Elect. down 41.7%
Home Dep. down 50.5%
Intel down 58.0%
IBM down 52.8%
John&John down 1.0%
Lucent down 86.6%
Merck down 21.8%
Microsoft down 32.1%
Oracle down 41.6%
Pfizer down 25.5%
VerizonCm down 31.8%
Walmart down 8.6%

The 1929 to 1932 bear market was the worst in US history. That bear market lasted 34 months and battered the Dow down by 89.4%.

This bear market signal was given in September 1999. That means that according to Dow Theory this bear market has lasted 37 months.

But figuring from the Dow bull market peak in January 2000, the bear market has lasted for 34 months.

How long could this bear market last? The preceding bull market ran from 1982 to 1999 or 17 years. Figuring that this bear market could last from a third to one half as long, we could be in for a 6 to 8-9 year bear market. Figuring from 1999, this bear market could take us into 2005 to 2007.

The Nasdaq 100 has now lost over 83% of its total value and is fast approaching the disastrous losses of 1929-32.

TODAY'S MARKET ACTION -- The D-J Transportation Average broke below its September 2001 low today. In doing so, it confirmed the prior bearish action of the Industrials. Under Dow Theory, the twin penetrations reconfirm the primary bear trend. The bear market is still very much in force.

Ultimately we will have a final joint penetration which will be the last one of this bear market, just prior to the birth of a new bull market. But today's re-confirmation is not that one.

My PTI was down 6 today to 5202. The moving average is 5246. This wide spread between the two would probably call for a rally if this was a bull market. Unfortunately it is not. Nevertheless, even the shorts should not over-play their hand. The proper place to be now in on the sidelines -- just watching this ghastly show.

The Dow was down 215.22 to 7286.27 to near a five year low. Movers in the Dow today were CAT down 2.46, GM down 31.02 to near an eight year low, JNJ down 2.29, and UTX down 2.09.

Nov. crude was down .13 to 29.35.

Transports were down 102.33 to 2013.02. The market is telling us that traffic, shipping of goods, travel, all of these will be slowing down.

The Utilities dropped an absolutely shocking 17.82 to 167.57. Nothing is safe in this market.

There were 475 advances and 2831 declines. Upside volume was 259 million and downside volume was 1.558 billion. This was an 85.7% down-day for volume, but it was NOT a 90% downside day. They lie ahead.

There were 19 new highs and 608 new lows. My High/Low Index was down 508 to a new bear market low of minus 7001.

Total NYSE volume was 1.83 billion shares.

S&P was down 21.78 to 776.77.

Nasdaq was down 14.98 to 1114.23 on 1.73 billion shares.

My Big Money Breadth Index was down 6 to 699.

Dec. Dollar Index was down 112 to 107.37. Dec. euro was up 122 to 98.66. Dec. yen was up .74 to 81.41.

Dec. Nikkei is crumbling, down 350 -- to lowest level of the bear market at 8380.

Bonds at new highs with the Dec. 30 year T-bond up 25 ticks to 114.20 to yield 4.66%. Dec. 10 year T-note up 18 ticks to 116.05 to yield 3.58%.

Dec. gold up 1.40 to 320.60 and holding above its rising 50-day MA, which stands at 316.90. Dec. silver down 2 at 4.35. Jan. platinum up 9.40 to 576.30. Dec. palladium up 8.40 to 323.00.

XAU down 1.11 to 61.68. HUI down 1.73 to 108.87.

Gold/Dollar Index ratio up 4.68 to 299.09 and above its rising 50-day MA, which stands at 293.50.

Gold shares being hurt by the broad decline in all common stocks. NEM down .52, PDG down .087, ABX down .36,AEM up .14, HL down .36. GG up .18, GSS up .09, KGC up .05, MDG up .03. Hard time for us gold share owners, but as long as the Gold/Dollar Index keeps rising, it's OK.

STOCKS -- My Most Active Stock Index dropped 9 to a new bear market low of 149.

The 15 most active stocks on the NYSE were -- mighty GE down 1.35 to 22.00, F down .60, MOT down 1.45, JPM down 1.18 to 15.42, TXU down 2.18 to 15.00, C down .96, AEP down 5.31, PFE down .51, AOL up .07, XOM up .15, EMC up 12, TXN down .75, HD down 1.59, GM down 2.58.

Few more -- S (Sears) down 3.33 to 28.44, BAC (Bank of Amer) down 3.09, D (Dominion Res.) down 5.59. MER down 1.34, GS down 2.32, KSS down 1.61, COST down 1.13, MAY down 1.39, FD down 1.87, DIS down .45, ED down 2.95, SO down 2.05, AIG down 2.36, MSFT down 1.00, IBM down 1.98 to 55.07, FNM down 2.23, MCD down 1.66 to 16.56.

McClellan Oscillator plunged to minus 250. This in an acute oversold figure, but this is a Big Poppa bear market, and so far it's not paying attention to any of the "normal" oversold indications. Hold your hat, we' in for a big ride either up or down. But it sure bothers me that we've not yet had any of the 90% downside days. They're coming, they are coming.

CONCLUSION -- A liquidating market, but what's frightening is that we aren't seeing any 90% down-days yet. For this reason, I'd have to say that complacency still reigns. What's it going to take to shake investors out of their apathy or stubbornness, a mile-wide meteor hitting the earth? Maybe a war?

Trillion are locked up in 401(K) plans and people somehow thing they shouldn't touch these plans. They're holding for the long haul. A disastrous way of thinking in this huge bear market.

As for the mutual funds, they're still stuffed to the gills with stocks, and they tell people that they're paid to simply pick the winning stocks, rather than move out of a bear market. Of course, the great majority of mutual fund managers have never dealt with a real primary bear market -- and, if you remember, they're dealing with "other people's money."

I believe the mutual fund business is in for a real mess. There's a class action suit against Merrill where one of Merrill's funds went down 90%. The suit asks a $1 billion from Merrill. They'll be more of these.

My own feeling is that this bear market will be the graveyard of mutual funds. Hedge funds and ETF's and Index funds will take over. Mutual funds make no sense any more, and this idea will slowly catch on with the mutual fund holding public. Management fees for the fund run about $75 billion a year. For what? And you pay taxes on mutual fund profits, even if the funds has collapsed. For what? Mutual funds -- an idea who's time has passed.

Well, that's about all for today. Let's see what Thursday brings.

Your scribe from the great American (parched) West,

Russell


It looks like the US is sliding into war with Iraq. The low-level warfare between allied pilots and Iraqi air-defense gunners is heating up, and many consider these the opening rounds of Gulf War II. The Bush people can't wait "to get it on."

If so, the Iraqi word is "Stay out of the desert." In Gulf War I the Iraqis were sitting ducks as they fought on the desert and lost tanks by the hundreds to our planes. If there's war again, this time the Iraqis will pull back to the civilian inhabited towns, and it will be house-to-house fighting as per World War II. Anybody who has been in hand-to-hand and house-to-house fighting will tell you that it's a nightmare with lots of casualties.

During World War II I traveled from Ancona to Florence, and there wasn't a single house along the way that was not pocked with bullet holes or broken up with tank fire or howitzers. Furthermore, the roads were all dotted with Teller mines. Just a few thoughts if Bush declares war on Iraq.