the dow:richard russell comments

August 13, 2007 -- (Bloomberg) -- Credit markets are telling central banks what to do, and it isn't what Ben S. Bernanke or Jean- Claude Trichet had in mind. Days after reaffirming their interest-rate stance against inflation, central bankers may be forced to do an about-face. Traders are abandoning bets on imminent rate increases in Europe and Japan, and some even speculate the Federal Reserve may execute an emergency cut.
Behind the changed outlook is concern that the steps central banks have already taken -- pumping cash into markets on Aug. 9 and 10 to avert a credit collapse -- won't be enough to keep global growth from stalling. In the days before, Fed Chairman Bernanke, 53, and European Central Bank President Trichet, 64, were saying inflation, not financial instability, was the biggest risk.

As the new week begins, the risk is that the extra liquidity won't keep money flowing through the financial system, threatening to push up borrowing costs on everything from mortgage loans to credit cards and hobbling economic expansions. That may force central banks to rethink their strategies.

Russell Comment -- What we're seeing is a massive bubble (in everything) that's in the process of deflating. Huge infusions of money will help, but recovery is going to take time (see comments on real estate below).
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Next, let's deal with a few facts and issues.

(1) I've stated that we are, and remain, in a primary bull market. There may be corrections, sometimes severe corrections, within the framework of a primary bull market. We may be in such a correction now. If so, many "experts" will label this correction a bear market, but that's a matter of definition or simply what you want to call it.

(2) On the July 30 site I outlined my studies of the 50% Principle. I said that I placed great emphasis on what the Dow does at the 50% of halfway level of a major advance. The rise from the 2002 low (Dow 7286) to the recent 2007 high (14000) advanced took up Dow 6714 points. The halfway level of that rise is 10643. The primary trend of the market will remain bullish as long as any decline halts this side of 10643.

Thus, for instance, we could have a decline (some would call it a "bear market decline") of 2000 points. That would take the Dow down to 12000. At that level the market might be sold-out and a powerful base might have formed. Since 12000 is above the 50% level of 10643, the primary trend would remains bullish and the bull market would remain intact.

Nobody knows whether this correction is over or whether it has a little further -- or maybe a lot further to go. But if the market does have further to go on the downside, the place to watch is Dow 10643, the 50% level. I hope that's clear to subscribers.

(3) We've now had three 90% downside days, July 24, July 26 and August 3. According the Lowry's, three 90% downside days without an intervening 90% upside day has only occurred during bear markets. Lowry's is labeling this a bear market.

(4) As of Friday, the stock market was oversold. I thought the daily chart of the Dow (below) was interesting and really self-explanatory. Check out the slow stochastics at the bottom of the chart. The market should be ready, or very close to ready, for a rally.

(5) As of now, none of the major stock averages is actually down for the year. It's hard for me to believe that this correction (or "bear market") has hit bottom while all the major stock averages are still up for the year.





(6) As of Friday's close, 41.93% of the stocks on the NYSE were graded bullish , which is the low for the year. This is illustrated on this P&F chart below. But as you can see, back in 2003 the Bullish Percentage dropped to 26% (at the 26 box). That was the last time the market was fully oversold. I'd be surprised if the Bullish Percentage didn't decline to 30% or lower between now and October-November of this year.



At least five items point to recession or at least the hint of a recession before the year 2007 is over --

(1) The ratio of coincident to lagging indicators has dropped to a low for the year.

(2) We've had three 90% downside days this year -- actually four if you count the 90% downside day of June 7. That's typical bear market action.

(3).Industrials and Transport both violated their June lows, turning the secondary trend of the market bearish.

(4) The percentage of stocks on the NYSE that are bullish (BP) dropped to 41.93% on Friday.

(5) Lowry's Selling Pressure as of Friday's close was 72 points above Buying Power, the widest negative spread of the year.

Russell Advice -- Take advantage of any rally to lighten up on stocks or funds in the days ahead.

Below we see the rise of the euro. The euro is expensive on a purchasing power parity basis, and the dollar, in comparison, is cheap. This is a plus for US exporters, but inexpensive negative for US tourists heading for Europe. For the American tourist, everything in Europe is expensive. For the European tourist, the US is bargainville.



Interestingly, gold in terms of euros has formed a huge triangle. Which way will the triangle break? This is a key question. Ultimately, I expect gold to break out and head north against every paper currency. But as usual, it will take time.



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Real Estate -- A jumbo mortgage is anything above $417,000. The cost of a jumbo mortgage may vary, but it's now close to 8% for a fixed. Say a person wants to buy a $3 million house on the East or West Coast. He can deduct the interest on only the first million dollars (yeah, people forget that) That means he's going to pay say 7.5% for the other two million on his mortgage, assuming someone will give him a mortgage. So he's foregoing around $45,000 a year on the first million, because he could be collecting that amount on a T-bill. And on the other $2 million it's costing him $150,000 a year on his mortgage. That almost $200,000 a year or near $17,000 a month to buy his $3 million house. Then there's insurance, upkeep, and taxes on his home. Should he buy that $3 million house? He's decided to wait.

Russell opinion -- The real estate market is effectively being shut down. Unless a buyer is willing to slap down CASH (and not many can or will). Buyers are being frozen out of the market. Therefore, expect home prices to come down as inventories of homes continue to build. The fact is that more homes (new and resales) are coming on the market than can be absorbed, certainly not at today's prices and today's financing.

Furthermore, next year a huge amount of mortgages come up to be reset -- to refresh your memory (statistics from the Aug. 6 site) the figures below, in billions of dollars, show the dollar amounts of resets which will hit this year and next year. Note that from January to June, 2008, over half a trillion dollars ($521 billion to be exact) in mortgages come up for reset -- and most will be reset at higher costs. I expect 2008 to be a watershed year for homes and the real estate business in general. If you're thinking of buying a home, my advice is -- wait a while.



TODAY'S MARKET ACTION -- My PTI was down 2 to 5936. Moving average was 5906, so my PTI remains bullish by 30 points.

The Dow was down 3.01 to 13236.53. No movers in the Dow today.

Sept. crude was up .15 to 71.62.

Transports were up 49.76 to 5011.49.

Utilities were up 2.18 to 493.50.

There were 1610 advances on the NYSE and 1672 declines. UP volume was 51.00% of up + down volume.

There were only 21 new highs and 224 new lows. My 5-day high-low differentials improved from Friday's minus 2480 to today's minus 2092.

Total NYSE volume was 3.51 billion shares.

S&P was down .72 to 1452.92.

NASDAQ was down 2.65 to 2542.24.

My Big Money Breadth Index was down 4 to 788.

Dollar Index was up .41 to 81.09. Euro was down .81 to 136.17. Yen was down .06 to 84.49.

Bonds were a bit higher. Yield on the 10-year T-note was 4.77%. Yield on the long T-bond was 5.09%. Yield on the 91 day T-bill was 4.53%.

CRB Commodity Index was up 1.23 to 417.06.

Aug. gold was down .70 to 680.90. Sept. silver was down 1 to 12.85. Oct. platinum up 7.80 to 1287.10.

GDX down .72 to 39.13. HUI down 5.28 to 340.74.

ABX down .70, AEM down .22, GG down .35, NEM down .78, SSRI down .86.

See comment above for gold. Rising dollar putting pressure on gold.

STOCKS -- My Most Active Stocks was down 1 to 563.

The five most active stocks on the NYSE were -- EMC up 1.33, PFE down .10, GE down .06, C down .46.

The VIX was down 1.73 to 23.57.

CONCLUSION -- Not much of a rally today, although after four 90% down days I expected something more -- maybe tomorrow. Breadth turned down at the close as did the Dow. Only 21 new highs. PTI was down 2 points. A pretty blah performance -- the market still has real estate on its mind. Can you blame the market? I'd lighten up on any rally.

And that wraps it up for "Mystery Monday."

Tomorrow, folks, looking forward, as always, to tomorrow (is this a crazy business or what?)

Russell
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I want to address the horrendous collapse of TMA, Thornburg Mortgage. It was my understanding that TMA has no subprime paper, and that Mr. Thornburg himself was buying the stock only a few months ago. I'm wondering whether anything has changed or whether TMA is a disaster simply because it has the word, "Mortgage" is in its title. The stock is paying a huge dividend now, assuming the dividend can hold. That's all I know about this stock. What's scary is that if TMA remains a solid company, this is the market's appraisal of any company in the mortgage business. If it is, then housing is going to go through hell before the whole industry has finally straightened itself out. I note, by the way, that the stocks of all the big building were down again today -- not to new lows, but nevertheless subject to big breaks. Latest, Bear Stearns says TMA may reduce its dividend and sell assets. Sell it or is it too late? Probably too late.
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My mistake !! this piece below is from John Murphy's terrific site on stock charts. Sorry, John.

"TURN OFF YOUR TV SETS ... As I've watched the performance of cable business TV over the last couple of weeks, I've been shocked by their lack of balanced market coverage. It seems that every guest is a suit from Wall Street telling us that the subprime problem is contained and that the economy is great. Each day they're proven wrong they bring in more Wall Street suits. Some TV anchors have stopped becoming objective observers and have turned into cheerleaders and Wall Street spokes-people. One female anchor last week referred to those selling stocks as "lemmings" jumping off a cliff. She added that she didn't like lemmings. Some anchors have displayed almost disdain for those with a more bearish view. I guess lower prices mean lower ratings. The best advice I can give at this point is to keep your eyes on your charts and turn off your TV."
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Dear Mr Russell

An interesting point - I talked about the third speculative phase of a primary bull market to a friend, and he said that had all changed. Individuals are now investing in Mutual Funds and the like, and they behave differently. We wont see a blow off as we have before. We may have seen the top already.

Perhaps you have a view on this possible change in character of the market?

Yours
Richard Pooler

Russell Reply -- Tell your friend that individuals never behave "differently." Once they get the bug of speculation, they beg, borrow or steal, and they come up with the money with which to plunge into the stock market. I've never seen it to fail. It's a matter of timing, and the time must be right.