the dow: richard russell comments

May 27, 2008 -- I love three-day vacations. Actually, it was never meant to be a vacation, it was a weekend plus Memorial Day. I was in only one war, and it's obviously the one I relate to. World War II was a seminal event which like a giant hell-magnet, drew in almost every nation in the world. The list of the dead and wounded on both the Allied and the Axis side was unbelievable -- in all, military and civilian deaths added up to 56 million people, many died in the most savage and horrible way. But all that is largely forgotten today. Now Memorial Day is basically a time for shopping. So be it.

I started out in the infantry and ended up in the Army Air Force. I often think of my friends and many close buddies who died in the War. It's hard for me to believe that today, 63 years later, men are still fighting and killing each other. Young men somehow think there is glory in war. Ultimately, they find out that there is no glory in the business of killing, maiming, torture and endless agony.

But life goes on, and it's time again for me to write about the markets. So here's a progress report (or lack of it) on the stock market.

Based on recent action, I'm thinking that oil may be topping out. I don't care what anyone says -- oil is a commodity. Commodities tend to top out on rising spikes,and oil has been on such a spike. If July oil hits 128, the chance of a top-out increases. If oil tops out, it would be a major plus for the Transports, which in turn could be a technical plus for the entire stock market. Note: With diesel over 5 dollars a gallon, most of the independent truckers are losing money while many have simply parked their trucks and are waiting for the price of diesel to come down.

On the negative side of the coin, the Lowry's statistics are deteriorating. Their Selling Pressure Index (supply) has been rising. But more ominous, their Buying Power Index (demand) has declined to a multi-year low. Any time the Selling Pressure Index dominates the Buying Power Index, it's a negative for the market. But in the same situation, if Selling Pressure dominates and the Buying Power Index breaks down, that means that the path of least resistance for the market is down -- and I'm afraid that's where we are now.

You can immediately see the problem as you study this P&F chart. The Dow, on its latest decline, has closed below its bullish or rising trendline. This is an obvious technical negative, and it could send the Dow lower to test its next support level at the 11750 box. Based on the breaking of the ascending trendline, I sold half my position in DIA (this is the Diamonds, an exchange traded fund, which tracks the Dow).


But what about the companion Average, the Transports? Here the picture looks much brighter. The Transports are still holding above their ascending trendline, so that even in an event of an Industrials decline to a new low at the 11600 box, there's a good chance that the Transports would not confirm. Remember, the technical situation will only look bleak if BOTH the Industrials and the Transports break to new lows.



Below we see a chart of the very broad Wilshire 5000 Index. What's unusual is that the Wilshire (at least on a P&F chart) looks stronger than the Dow. True, the Wilshire just turned bearish when it hit the 13500 box, and it may head down to test its rising blue trendline. But the basic bottoming structure of the Wilshire looks superior to that of the Dow.

We'll just have to wait to see how strong the downside momentum of this market is. From the bull's standpoint, of course, the hope is that the stock market will become solidly oversold while the Wilshire Index holds above the 12700 box -- the 12700 box is the low of the entire structure.



Subscribers must note that I have been using P&F charts more frequently. I want subscribers to become more familiar with P&F analysis, and one of the best ways to do this is by making frequent reference to the current situation as seen in the P&F charts. One great advantage of P&F is that it provides constant points of support and resistance.

Whereas bar charts show every rally, every decline, every wrinkle in the stock market's action, P&F shows only the important price action while eliminating both time and volume. In tracking price action alone, a P&F chart will often clarify the picture, bringing to light patterns that may be lost during periods when volume and the passage of time tends to obscure what is really happening.

Question -- Russell, I've taken in all the discussion above. But my question is, in view of the current indecisive or even negative action of this market, what is the your current preferred investment position?

Answer -- It's the same basic position that I've advocated all along. That is a position of mostly cash and gold. I took a speculative position in the DIA exchange traded fund, but at this point with the Dow breaking its rising trendline (see P&F chart) above I'm selling my DIA. I also have small speculative positions in EEB and IOO. I'll hold these until or unless they shows signs of breaking down. At which point I'll then be basically in cash and gold.

I note that many, if not most, traders and position-traders have been losing money so far in 2008 so far. This not surprising since 2008 has been a very deceptive and puzzling year. Again, it's good to remember that the months from May to October have tended to be the difficult six months of the year, while the best six months have tended to be November through April. We might also remember the years ending in the digit "8" have without exception seen the S&P establish its low during the first quarter of the year.

The latest report notes that the short interest on the NYSE has reached a new record high of 5.995 billion shares sold short as of May 15. The story here concerns whether the primary trend of the market is now bullish or bearish. If the primary trend is bearish, then this record number of shorts are correctly positioned in harmony with the primary bear trend. However, if the primary trend remains bullish, then these shorts will, in time, be forced to cover.

At present, there is, as you will know, an ongoing debate as to whether the primary trend of the market is bullish or bearish. If the trend is bearish, then before this year is out, we should see most of the major stock averages at new lows. If the trend is bullish, as I continue to believe it is, the market should become oversold this side of the lows, and be starting up again well before the end of the year.

One area that deserves close attention is the banking area, and below I show the Bank ETF. What we see here is a pattern that I don't like. This is a descending triangle, which is a distribution pattern. This is a pattern of descending tops and horizontal bottoms. As a rule, the bottoms give way to lower prices, I'm hoping that's not what we're seeing, but reality is reality. It would be a bearish indication if the Bank ETF breaks down.



Confirming the Bank chart, below we see an ETF for the Financial sector. The financial sector includes the S&Ls, brokers, small loan companies, anything dealing with finance. Here we see what looks like a complex head-and-shoulders top pattern with the price sitting right on the horizontal line of support. Not good.



And what of the US dollar? The "underpriced" dollar rallied to the 73.5 level, which acted like a ceiling. Then it sank back below its 50-day moving average again. The question now is whether the dollar will break to a new low below 71.3, which has been a line of support since mid-March. MACD suggests that the dollar will at least retest its lows.



The Lows -- My expectation has been that the stock market would establish an important low and an outstanding "buy spot" either during July or more likely during the October-November period. It now looks more likely that the lows will occur during October-November, but as usual I'll let the market tell me -- I'm certainly not going to tell the market.

The really crucial consideration is where the lows come in. Hopefully, they'll arrive with one or both of the D-J Averages (Industrials and Transports) holding above their 2008 lows.

TODAY'S MARKET ACTION -- My PTI was up 4 to 5946. Moving average was 5942, so my PTI remains bullish by 4 points.

The Dow was up 68.72 to 12548.35. One Dow mover today -- IBM up 3.13.

July crude was down 3.34 to 128.85, and could be topping.

Transports were up whopping 114.74, probably based on the drop in crude.

Utilities were up 2.96 to 517.57.

There were 2075 advances on the NYSE and 1277 declines. UP volume was 57.8% of up + down volume.

There were 30 new highs and 68 new lows. My 5-day high-low differentials declined from plus 227 to today's plus 68.

Total NYSE volume was 3.92 billion shares.

S&P was up 9.42 to 1385.35.

NASDAQ was up 36.57 to 2481.24.

My Big Money Breadth Index was up 2 to 821.

Dollar Index was up .33 to 72.45. Euro was down .74 to 156.7. Yen was down .70 to 96.00.

Bonds were sharply lower. Yield on the 10 year T-note was 3.92%. Yield on the long T-bond was 4.64%. Yield on the 91 day T-bill was 1.85%.

CRB Commodity Index was down 6.61 to 544.40.

June gold was down 17.90 to 907.90 as the options expire. May silver down .82 to 17.46. July platinum was down 48.20 to 2128.10. How about rhodium at $12,000 an ounce?

GDX down 1.31 to 46.44. HUI down 15.64 to 425.56.

ABX down 1.28, AEM down 2.56, ASA down 2.71, NEM down 1.07.

They usually knock gold down on option expiration day so those long options don't make any money (the option sellers keep he premium).

STOCKS -- My Most Active Stocks Index was down 3 to 296.

The five most active stocks on the NYSE were -- C up .54, F down .07, GE down .03, PFE down .20, and GM down .18 to a multi-year low.

The VIX was up .09 to 19.64 -- volatility still on the high side.

CONCLUSION -- Stock market is still not putting in a strong performance on the upside. Up volume was only 57% of up + down volume, new highs were only 30. VIX not coming down. My PTI was up only 4 and seems unable to pull away from its moving average.

It appears this market will have to go to fully oversold before we can get some impressive, powerful upside action. So far, the two most impressive things about this market are (1) the bottom formations in most of the averages as seen in the P&F charts, and (2) the sturdy action of the D-J Transports, even in the face of record oil prices.

I continue to think that the real oversold lows for this market lie ahead.

And that concludes Tuesday's rather blah action. On to Wednesday --

Russell

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Probably the "hottest" country in the world today is Brazil, and I'm not referring to climate. With a booming population, extraordinary natural resources and ideal climate, Brazil has become the world's pantry. Brazil is now the global leader in exporting of soy, sugar, orange juice, coffee, beef and poultry -- and it's a growing producer of corn and rice.

This has created a boom in Brazil, including a massive housing explosion. On top of everything else, there appears to be giant pools of oil located off the coast of Brazil. This oil begins to be available by 2010.

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May 23 (Bloomberg) -- Along a dusty two-lane highway in California's Mojave Desert, 550,000 mirrors point skyward to make steam for electricity. Google Inc., Chevron Corp. and Goldman Sachs Group Inc. are betting this energy will become cheaper than coal.
The 1,000-acre plant uses concentrated sunlight to generate power for as many as 112,500 homes in Southern California. Rising natural gas prices and emissions limits may make solar thermal the fastest-growing energy source during the next decade, say backers including Vinod Khosla, the founder of computer maker Sun Microsystems Inc.

Russell Comment -- Close friends of ours were paying $700 a month in northern California for gas and electricity. They installed solo panels in their home. Their gas and electric bill dropped to $20 a month (this was a result of selling electricity to the utility company during peak hours and pulling electricity off the grid during slow hours).
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Hilllary again showed here almost unbelievable lack of class. Asked why she was continuing to run, she brought up (twice) the case of her husband, Bill, who did not clinch the 1992 nomination until June of that year. And then she added, "We all remember that Bobby Kennedy was assassinated in June in California." Implication, Obama who is black (remember Martin King) could be assassinated too, so why shouldn't I continue to run.
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From the New York Times News Service, May 26: Beijing -- Russian President Mededev and Chinese President Hu Jintao met yesterday to conclude a deal on nuclear cooperation and together condemn the US proposal for a missile shield in Europe. Both countries called the US plan a setback in international trust that was likely to upset the balance of power.

Russell Comment -- The US is forcing Russia and China to join in a military alliance to offset US military power. My personal hope is that this will result in a stalemate among the major world powers. And I emphasize the word "hope." Hmm, how would we like a Russian-Chinese missile shield to be built in Mexico, say thirty miles from the US border?
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Mr. Russell,
I know to keep this brief, but I must express my pleasure obtained from reading your daily site. I enjoy the personal musing as much as I profit from the analysis and advice given. My wife and I feel as if your part of the family. Thanks!

Now for my question: You have been very clear on the double index aspect of the Dow Theory. I too have been very amazed at the resiliency of the Transports. Do you have any opinion as to how this sector, the one that should be impacted negatively the most from $135.00 a barrel oil, is thriving in the current market? Obviously the airlines are in the tank, so this must be predominantly Rail. Trains run on diesel which has been rising at the same or higher rate as gasoline. How are they weathering the high prices and actually thriving in the process?

I know not to expect a reply. Hope to see some response in your remarks soon. If not, thanks anyway I know you are very busy.

Thanks so much for your fine site,

James P. Sr.

Russell Comment -- The cheapest and most efficient way for moving large cargoes is via rail. I've seen rail trains made of almost 100 railroad cars. How can any trucking outfit compete with that?
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George Soros: "We’re in a Period of Wealth Destruction"

Famed billionaire George Soros doesn’t mince words when it comes to the credit crisis. Read the following interview --

The U.S. has weathered the "acute phase” of the crisis, which he calls the worst since the 1930s, the chairman of Soros Fund Management and founder of the Quantum Fund said in several interviews recently. "The days of rapid financial wealth creation are over. We’re now in a period of wealth destruction. It’s going to be very hard to preserve your wealth in these circumstances,” he told Moneymagazine.

The Fed’s rate cuts, down to 2 percent from 5.25 percent eight months ago, ultimately won’t prove enough, Soros says. "The Fed’s first duty is to prevent the financial system from collapsing. It’s shown it can do that, and the markets are breathing a sigh of relief. But we can’t avoid the fallout in the real economy,” Soros says.

Recession is ahead, as is inflation and a flight from the U.S. dollar. But the Fed cannot simply increase the money supply as it might in normal circumstances to fight the recession. At least not without serious inflationary consequences, Soros warns.

"That’s why I think this crisis is so serious. The Fed’s power to intervene is limited,” Soros says. Soros anticipates further sharp declines in housing prices. "Americans ultimately won’t escape this episode without suffering a noticeable decline in their standard of living,” he warns in an interview with USA Today.

Soros says the Fed’s efforts to pump cash into the banking system to ease liquidity and the government’s $168 billion economic stimulus package, including millions of tax rebate checks, will not be enough to ignite a recovery. What’s more, he adds, even as the clean-up continues, new bubbles are already forming in commodities markets and perhaps in China. The Asian giant faces serious domestic inflation and export weakness if the U.S. downturn spreads abroad, Soros warns. "China is not immune to the worldwide dislocation that started here,” he says.

As for his own money, Soros has put most of it in the hands of other managers in the form of an endowment fund. But he’s back in the game in this market, he tells Money. "I came out of retirement and set up an account to hedge their positions,” he says. The strategy then was to short the dollar and U.S. and European markets and to go long in emerging markets. "That worked last year, but this year bonds kept going up and emerging markets down, so I’m about even,” Soros says.

As for how we got here, Soros turns toward the philosophical side of economics. He sees the subprime crisis as the event that pricked both the housing bubble and what he calls a 25-year-long "super bubble,” one he contends originated in the "debt-laden policies of the Reagan administration.

Russell Comment -- Amazingly, Soros did not trust his own money-managers. He went so far as to set up a fund that hedged what he though might be the mistakes of the people who managed his money!