Richard Russell, author of the famous Dow Theory Letters, is insisting, demanding, begging his subscribers to get out of stocks.
In his latest letter, published last night, he says the stockmarket has lost its mind. Finally its happening. The poor thing is falling apart. Russell is referring to the fact that the market is falling in the face of persistent optimism about the US economy. He says you should believe the market, not the economists.
Its been hard, and its hard to tell my subscribers that this market is topping out and that you should be out of stocks. So, if you are still in the market, sell your common stocks (not the golds) and get out. I dont care how good or how blue-chip your stocks are, when the bear takes over, he sinks his claws into the throats of all the boys and girls. Declining price/earnings in the bear market alone will cost you, and P/E ratios are now dangerously over 20.
He says the breakdown in the Google, Apple and Berkshire Hathaway share prices on heavy volume, as well as the downward slope of commodity prices, shows that the market does not believe the positive economic news in the US.
Richard Russell has been publishing his Dow Theory Letters for 52 years. Early on, he called the top of the 49-66 bull market, and the bottom of the 72-74 bear market almost to the day.
The 'Dow Theory' is a form of technical analysis that was developed by Charles H Dow in editorials he wrote for the Wall Street Journal in the late 19th century. After Dows death in 1902, the editorials were collected and organised as 'Dow Theory', even though he never used that term or presented it as a coherent theory.
The theory asserts that market trends have three phases accumulation phase, when smarties get in; the participation phase, when everyone else gets in and rampant speculation occurs; and the distribution phase, when the astute investors 'distribute' their holdings to the market. Other tenets of the theory are that the Dow Jones average and the Transportation Average must confirm each other, that trends are confirmed by volume, that the stockmarket discounts all news (a bit like the efficient markets hypothesis), and that trends exist until definitive signals prove they have ended.
In this mornings letter, Richard Russell says he has only once before seen the stockmarket ignored the way its being ignored now in 1958.
The nation was in a deep recession, and investors were black-bearish on business and the economy. Many talked about 'a return of the Great Depression.' Others swore theyd 'never buy a stock again.' The Dow hit a low in late-October at 419.79 (Ill never forget that number)..." At that point the 'Rails' (the railway average) kept falling. It was a 'non-confirmation'.
I turned very bullish, and I loaded up with stocks, using every single dollar I owned.
The stock market turned up in early-1958, and it just kept climbing in the face of the deep recession. People actually got angry at the stock market. Investors were calling Wall Street out of its bloody mind, and that this was the time to put out shorts. As the year 1958 moved along business started to improve, and by 1959 business was booming.
Of the current market, Russell says: In 50 years, this is the most decisive top I can ever remember... the damage and the cost of this reversal will run into the trillions of dollars.
Its true that the official line in the US is that the economy is continuing its robust recovery and that a double-dip recession is not in prospect.
Last night, for example, the President of the Federal Reserve Bank of St Louis, and voting member of the Fed Board of Governors, James Bullard, said the problems in Europe are unlikely to send the world back into recession, and might even benefit the US.
There is nothing intrinsic about such crises that they need to become important shocks to the broader, global macroeconomy. Countries do default or restructure their debt from time to time, and the world goes on.
Richard Russell says: I trust the stock market more. If I read the stock market correctly, its telling me that there is a surprise ahead. And that surprise will be a reversal to the downside for the economy, plus a collection of other troubles ahead.
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