the dow:richard russell comments

March 2, 2007 -- March 2 (Bloomberg) -- Goldman Sachs Group Inc., Merrill Lynch & Co. and Morgan Stanley, which earned a record $24.5 billion in 2006, suddenly have become so speculative that their own traders are valuing the three biggest securities firms as barely more creditworthy than junk bonds. Prices for credit-default swaps linked to the bonds of the New York investment banks this week traded at levels that equate to debt ratings of Baa2, according to Moody's Investors Service. For Goldman, Morgan Stanley and Merrill Lynch & Co., that's five levels below the actual Aa3 rating on their senior unsecured notes and two steps above non-investment grade, or junk. Russell Comment --You want to make the big billions, then you have to take the big risks. And when you take the big risks, your credit rating may hit the skids.

Second Russell Comment: I see a rush for cash -- it's happening in every area of the economy including stocks. We're now seeing the other side of liquidity -- it's called the DASH for CASH.

Third Russell Comment -- Today both the Dow (and the S&P 500) closed below their December lows. Not good, not good at all.
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I keep my PTI figures daily on a point& figure chart. The PTI chart has the look of a huge head-and-shoulders top that is still in the process of forming. If I had to guess, I'd say that the PTI appears to need more work on its right shoulder, which means maybe another week or so of backing and filling, along with a few rallies. After that, unless there are some dramatic changes, I look for a serious breakdown of my PTI and with it, an accompanying breakdown of the stock market.

I think, possibly because of Fed chief Bernanke's soothing words, that this week's crash "felt" as though it was no big deal -- nothing worth losing sleep over. Bernanke may well be right, but I don't base my market analyses on the well-meaning words of a Federal Reserve chairman -- rather I base my analyses on what I see in my own market studies. I do know this -- the stock market will hold together as long as my PTI holds together. If or when my PTI heads down on a trend basis, the stock market will be going with it.

On my point&figure chart, the PTI turned minor-bearish with yesterday's closing figure of 5819. At 5814, my PTI would turn more decisively bearish. But as I said, the pattern appears to call for more backing and filling with perhaps a few market rallies. We shall see.

Point&figure charts have a way of forming patterns that you may not see with bar charts. I use bar charts, candle stick charts and P&F. Each has its advantages. Below we see a P&F chart of the Dow. Each box on this chart is worth 50 Dow points, and only rallies or declines of 150 Dow points or more are depicted on this chart.

The line of red Os is defining the right shoulder of a head-and-shoulder top. A decline by the Dow to 12050 would signal a major downside reversal in that four O lows would have been violated. This is a pattern that is well worth watching. As I said, 12050 on the Dow would be very bearish.


Below we see a P&F chart of GLD, which I use as a proxy for gold. Gold has been sinking back into supply, possibly because there are increasing doubts about inflation. But more likely, I believe we're seeing a rush for cash. And people who hold gold may be selling their gold to raise cash. With GLD dropping to the 65 level, we finally have enough for a three-box reversal, actually it's four boxes down as you can see (red 0s) on the chart. From the bullish standpoint, all this activity is occurring on the top side of the ascending blue trendline.

Gold is the most emotional of all tradeable items with the possible exception of oil. Remember, rising gold represents a danger to the fiat money interests, and that includes both central banks and governments. Thus, central banks and governments will always do what they can to thwart any increase in the price of gold. Ultimately, however, gold has always triumphed over fiat paper and this will not change. It won't change because much as governments would like -- no government can print wealth. A government can get away with the illusion that paper is wealth, but in the end too much paper is always created, and with that action the illusion falls apart.


I've talked about the Japanese yen and the carry trade. With the yen providing very low interest of .25% (or more recently 0.50%) speculators have borrowed billions of dollars worth of yen at low rates. They sell the yen (which drives down the price), and place the money in other higher-yielding items. Of course, when you borrow the yen you are obviously short the yen, which is fine -- that is, unless the yen rallies. If that happens, your short position gets squeezed.

The daily chart below tells an interesting story. The yen appears to have bottomed. Next, we see an explosive rise with what we call "runaway gaps" to the upside. In a "flash" the yen has surged past its blue 50-day moving average and today the yen actually closed above its red 200-day moving average. This surge has caused many in the carry trade to rush to cover their yen short positions. No one knows how large the carry trade is -- I've heard estimates anywhere from $350 billion dollars to a trillion dollars. At any rate, if the yen continues to surge, there may be some costly dislocations and even bankruptcies. The concept of risk might even return to the markets. And wouldn't that be a novelty.



When fear arises and the concept of loss returns, investors rush to the comparative safety of their home currency. In the US this means a return to the dollar and Treasury paper. Below we see a daily chart of the YIELD on the bellwether 10 year Treasury note. Over the last few weeks, investors have poured into the notes and in so doing they have knocked the yield down from 4.90% to roughly 4.60%. This with the US economy still being reported as "robust." But what happens if the US economy starts to weaken? If that happens, the yield on the 10 year T-note could drop to 4.25% or even below 4.0%. And then? Then Bill Gross will have been correct. The trend of interest rates, as he suggested, will have been down. And Bennie and the Feds will have their work cut out for them.



TODAY'S MARKET ACTION -- My PTI was down 6 to 5813. Moving average was 5790, so my PTI remains bullish but by a shrinking 23 points.

Mar. crude was down .36 to 61.64.

Transports were down 73.22 to 4782.25.

Utilities were down 6.62 to 474.07.

There were 813 advances on the NYSE and 2453 declines. Down volume was 74% of up + down volume.

There were 74 new highs and 45 new lows. My 5-day high-low differentials plunged from Thursday's plus 545 to today's plus 396.

Total NYSE volume was 3.34 billion shares.

S&P was down 16.00 to 1387.17.

NASDAQ was down 38.21 to 2368.00.

My Big Money Breadth Index was down 8 to a new low of 745.

Dollar Index was up .05 to 83.73. Euro was down .06 to 131.90. Yen surged up .59 to 85.65. Brit. pound down a big 1.71 to 194.31 as the carry trade unwinds. A lot of carry trade money went into the high-yielding Brit. pound.

Bonds were higher.Yield on the 10 year T-note was 4.51%. Yield on the long T-bond was 4.65%. Yield on the 91 day T-bill was 4.87%.

CRB Commodity Index was down 3.66 to 404.60.

April. gold was down 21.00 to 644.10. Mar. silver down 69 to 12.96. Mar. platinum was down 33.40 to 1211.80.

GDX down 1.47 to 37.68. HUI down 11.06 to 323.29.

ABX down .80, AEM down 1 .65, ASA down 1 .95, NEM down 1.41, SSRI down 2.20.

My guess -- People who are squeezed are dumping their gold and silver to raise cash. Never fear, gold and silver are not going down the tubes, they'll be values when you and I are just foot notes in the family album.

STOCKS -- My Most Active Stocks Index as down 7 to 435.

The five most active stocks on the NYSE were -- AMD down .61, F down .18, GE down .13, PFE down .25, and S up .01.

The VIX was up a big 2.79 to 18.61.

McClellan Oscillator down 75 to -226.

CONCLUSION -- The D.C. chorus including Bernanke and Paulsen are saying that everything's all right. Mebbe. The real story will be told out of the NYSE and the NASDAQ, not out of Washington. It's going to take a bit of time to see just what we've got here, but this is not the time to be leveraged or on margin. There should be plenty of interesting reading over the weekend. And they say it's going to be a warm beach weekend coming up in Southern Cal. Choices, choices, maybe I'll just read on the beach.

See you Monday, and don't forget that dash for cash.

Russell