the dow~ richard russell comments

Posted this today for the goldbugs...



December 12, 2002 -- In all my dealings with the markets over half a century the most fascinating aspect has been the study of the primary trend. My mentor in this area was the great Dow Theorist, E. George Schaefer. Schaefer, in my opinion, possessed the best understanding of the primary trend of any analyst in history.

On June 13, 1949, the Dow sunk to a low of 161.60. That was the extreme low of the past World War II bear market. A week later, on June 18, 1949, George Schaefer wrote a masterpiece report in which he stated that the long bear market had ended, and a great bull market lay ahead. Schaefer based a large part of his seminal report on the fact that stocks were selling "at great values." Schaefer advised investors to load up on dividend-paying blue-chip stocks and ride the bull. The rest is stock market history.

At the time, of course, literally nobody believed Schaefer. The general sentiment was that "The war is over, and we now face a resumption of the Great Depression." In mid-1949 there was little or no interest in stocks or the stock market. Volume on the NYSE was running under 2 million shares a day. At the 1949 lows stocks were selling at give-away prices, high dividends, low price-earning ratios. Blue chip stocks were selling at great values. And Richard Russell was working for thirty-five bucks a week.

Fresh out of the Army Air Force, fresh out of college, those times were a work-shop and a revelation for me. I remember those days as if they were only yesterday.

One of the things I learned in my studies of the primary trend told me that the primary trend always seems to carry further than anyone thinks possible.

I guess I've written this a few hundred times, but for all my new subscribers I'm going to say it again. The primary trend always runs to conclusion. The primary trend can be temporarily manipulated, it can be held back, it can be talked back, but ultimately, as night follows day, the primary trend will fully express itself.

The latest example of the power of the primary trend was seen in the bull market that began in 1974 and ended in 1999. Actually, even though technically the bull market ended in 1999, the speculation was so intense that many stock groups carried over their frantic bullish actions into the year 2000.

Yet I remember well the situation in late-1974 as the bull market was starting. People were so bearish that when I called a bull market under Dow Theory I got angry letters from subscribers claiming that "I had lost my mind." Leading Wall Street analysts were predicting that the Dow would fall to 250. Newspapers and magazine were openly stating that capitalism as we know it was finished. Wall Street was despised, and the public was totally disgusted with the stock market.

What followed was a fabulous 24-year bull market. It lasted for two generations.

By 1999-2000, as the great bull market was dying, sentiment had totally changed. Prosperity forever was the generally accepted thesis. New books were coming out forecasting "Dow 36,000" and "a new era in stocks have arrived." Wall Street had banned the word "sell" from its vocabulary.

I have used two sets of moving averages as aid in identifying trends. I use the 50-day and 200-day MAs for short to medium trend identification. For a more definitive identification of the primary trend I use a 20-month and a 40-month moving average. It take a long time, and a persistent trend-direction before the 20-month MA can cross above of below the 40-month moving average.

The 20-month MA of the Dow turned down in December 2000. In January 2002 the 20-month MA broke below the 40-month MA. I took this bearish crossing as confirmation that the primary trend of the market had turned bearish. In May of 2002 the 40-month MA of the Dow finally turned down. The stage was set for a great bear market.

That leaves us in the current situation where the declining 40-month MA of the Dow stands at 10094, and the declining 20-month MA stands at 9504. The Dow is well below both MAs at 8537.

Since the bearish crossing of these two long-term moving averages occurred only 11 months ago, I'm thinking that this bear market has a long way to go on the downside before I receive a new bull signal based on the two long-term moving averages.

The last bullish crossing in which the 20-month MA broke above the 40-month MA of the Dow occurred in April of 1980. That was 22 years ago. Assuming that the recent bearish crossing could last for a third of the bullish 22 year span, I would guess that this bearish crossing could last at least 7 years before I receive a bullish signal. That could take us close to the end of this decade.

Now let's turn to gold. In January of 1997 the 20-month MA of gold crossed bearishly below the 40-month MA.

The declining 20-month MA of gold hit its low on November 2001. The 20-month MA then turned up. In May of 2002 the 20-month MA crossed bullishly above the 40-month MA. This was the confirmation I was looking for -- the confirmation that told me that the primary trend of gold has finally turned decisively bullish.

As I write today the rising 40-month MA of gold stands at 287 and the faster moving rising 20-month MA of gold stands at 296. Gold, in the meantime, has climbed to the 332 area.

The question -- where is gold going from here?

Obviously, there's no definitive answer to this question, only guesses. But it's a free country and I'm allowed to guess.

My un-specific guess is that gold is going higher than anyone at this time thinks possible. Gold rose to 850 back in 1980. Since then the Fed has created many trillions of intrinsically worthless fiat dollars.

My guess is that before the current bull market in gold is over, gold will be priced substantially above the 1980 peak price of 850. How much higher I don't know. At the recent New Orleans seminar I stated that as a guess I believed we'd see the price of the Dow and the price of gold cross. At what level? My guess was around 3,000.

To sum up, it's my belief that the bear market in stocks is still in its early stages. I believe that the bull market in gold is also in its early stages.

This, of course, it not a happy forecast. It's a forecast, based to a large extent, on my experience, knowledge and intuition regarding primary trends and how they work.

I might also add that in my experience the longer the primary trend is manipulated, held back, prevented from expressing itself, the greater the move when this "wound-up spring" is finally released.

Stocks have been touted to the heavens as the way to riches. "hold for the long-term," we are still told, "and you'll die rich."

Conversely, gold has been talked down, denigrated, despised, mocked, for over two decades. "Gold is an antiquated relic," we are told. "It's days are over."

I believe we'll see a drastic and total reversal of these two concepts over coming years. Stocks will be seen as the destroyer of wealth, and gold will be seen as the answer to economic freedom.

If I'm wrong, I apologize.

Gold Stocks -- I've talked myself blue in the face trying to get my subscribers into gold and gold shares. But what's the story with the gold stocks?

I just ran a ratio of gold against XAU. The ratio in favor of gold turned up in March of 2001, and it's been going up ever since. Today the ratio hit a new high. So since March of 2001 gold, the metal, has outperformed the gold shares.

Of course, earlier the gold share rose from ridiculously low prices as the discounted and reflected the coming rise in the metal. But at this time I believe the stocks are behind gold, the metal. What should subscriber who haven't bought any gold coins or gold shares do? Tough question. I told subscriber who were reluctant to at least by a few gold shares "just to get your feet wet."

If you haven't bought a share of gold all I can say is buy a few gold shares "just to get your feet wet." Gold shares I like are NEM, GG, AEM, KGC, DROOY, GLG, BGO, well, I like a lot more but as I said, you have to start somewhere. I believe that NEM will be considered the blue-chip of the gold industry, the gold stocks the funds will buy first, when they finally, eventually, decide to buy gold shares.

TODAY'S MARKET ACTION -- An indecisive market with buyers not eager to buy and sellers not eager to sell. It appears nobody can make up their minds. But remember, this is a period when all seasonals and all cyclicals are pointing higher. So far the market is ignoring both segment. Of course, the real news today was gold and commodities and the weak dollar.

My PTI was up 1 to 5256 with the moving average at 5243. PTI remains in its bullish mode.

The Dow was down 51.21 to 8527.93.

Jan. crude was up .61 to 28.01 (Iraq attack coming?). But what if the inspectors can't come up with any evidence of items of mass destruction? Bush will say that he's got the evidence and you don't, so there -- furthermore, the evidence is hidden in Cheney's wall safe -- so "ATTACK!"

Transports were down 11.60 to 2536.46.

Utilities were up 1.12 to 206.33 (if the tax on dividends is removed, the Utilities will be more attractive since a lot of utility stocks pay real dividends).

There were 1744 advances and 1515 declines. Up volume was 612 million and down volume was 581 million. Up volume was only 51% of up + down volume, another uninspiring day.

There were 40 new highs and 28 new lows. My High/Low Index was up 12 to minus 8155.

Total NYSE volume was 1.21 billion shares.

S&P was down 3.42 to 901.53.

Nasdaq was up 2.70 to 1399.29 on 1.76 billion shares.

My Big Money Breadth Index was down 8 to 714. This important gauge of big money action is not doing well.

Dec. Dollar Index was down .84 to 104.53 and is breaking to new lows. Dec. euro was up 110 to 101.88 and is breaking to new highs. Dec. yen was up .58 to 81.49.

Bonds were about unchanged. March long T-bond was up 1 tick to 110.29 to yield 4.87%. March 10 year T-note was down 1 ticks to 113.01 to yield 4.00%.

The big news of the day was gold, which broke out above a huge ascending triangle. Feb. gold was up 6.60 to finally close above 330.00 -- to close at 332.10. March silver was up a dime to 4.75. Jan. platinum was up 2.30 to 597.20. And March palladium was down 1.50 to 243.50.

Gold/Dollar Index ratio surged 8.80 to a new high of 317.70.

Gold advance-decline line was up 21 to a new high of 1131.

XAU up 4.82 to 75.40. HUI up 10.26 to 136.87.

Gold stocks were up sharply -- ABX up .63 even though hedged, AEM up 1.04, AU up 2.62, CDE up .28, DROOY up .47, GFI up 1.32, GG up .95, GLG up .77, HMY up 1.86, KGC up .25, MDG up 1.28, NEM up 1.11 to 28.11, PDG up .67, RGLD up 1.36, SIL up .82.

STOCKS -- My Most Active Stock Index was up 5 to 225.

The 15 most active stocks on the NYSE were -- BAX up .49, ALA down .50, PCS up .59, BMY down 1.92, HAL up .07, GE down .23, HD up .63, PFE down .31, AOL down .11, L up .15, MOT down .03, C up .43, EMC up .29, NOK up .35, HPQ up .77.

More -- GM up .61, EBAY up 1.14, CSCO up .24, INTC up .03, MER up .47, GS up .76, AIG down 1.53, D up .35, ED up .38, DTE up .28, SO up .19, AEP down .43, TE up .51, KSS up 11.0, WMT down .62, TGT down .17, MAY up .17, COST up 1.08, AMZN up .17, DELL down .32.

VIX down .59 at 30.81. Option-writers continue to protect themselves; they remain nervous.

McClellan Oscillator at plus 10, barely bullish.

CONCLUSION -- CRB Commodity Index broke out to a new high, dollar at a new low, Oil up. 61 and gold up 6.60. What happened? What happened was that people were swapping "junk" fiat paper for real money, better known as gold. They were also buying the producers of real money, better known as gold shares.

As for the stock market, all guns are loaded (with stocks) waiting for that "sure thing," the rally in December that will take stocks higher into January. So far it's not happening, but at the same time the market isn't falling apart either. I'm continuing to give the rally the benefit of the doubt. C'mon bulls, times a'wastin'.

Thanks for nice e-mails from many of my gold-bug subscribers. But don't be too thrilled with your gold profits. Rising gold means that our very own "junk" dollar is fading. Gold throughout history has tended to move towards the strongest nation. It means that today we're the military super-power. Tomorrow, well tomorrow who knows? So is rising gold really a cause for celebrating?

But let's face it -- gold is our only protection against a government that doesn't give a damn about its own glorious Constitution. "We gave you freedom," said our forefathers, "Keep it if you can."

More exciting comments and thrilling insights tomorrow from none other than --

The R man.


And as a bonus, this most interesting e-mail below.

But first some health news -- the sovereign state of Florida did it first. Florida's Supreme Court (bless 'em) ruled that doctors may give chelation treatment and may NOT be stopped. The Florida medical association fought to outlaw chelation for heart patients. For shame, Florida doctors, for shame.


And another e-mail below, sent by a loyal subscriber --

Wall Street Strategists Miss Market Drop in 2002: Taking Stock

New York, Dec. 12 (Bloomberg) -- Prudential Securities Inc.'s
chief investment strategist, Ed Yardeni, expects the Standard &
Poor's 500 Index to end the year at 900, near yesterday's close. A
year ago, his firm and his forecast were different.
Yardeni, who started 2002 at Deutsche Banc Alex. Brown,
projected the benchmark index for U.S. stocks would end the year
at 1260. After reducing his prediction four times, most recently
in September, he may hit the target.
Like all but one of 15 Wall Street strategists surveyed by
Bloomberg News, Yardeni failed to foresee a third straight year of
declines in U.S. stocks. Only Douglas Cliggott, who quit J.P.
Morgan Chase & Co. in February, forecast this year's drop.
``They have been unambiguously wrong for so long that you
wonder what the purpose is,'' said Ian Rogers, a money manager at
Strong Capital Management Inc., which handles $43 billion in
Menomonee Falls, Wisconsin. ``There's such enormous pressure to be
early on the turn because the guy who gets it first and right
wins. Everyone else loses.''
The average estimate at the start of the year was for a 12
percent gain in the S&P 500 to 1291 as most strategists predicted
the worst of the bear market had passed. The S&P 500 has lost 21
percent so far this year.
Three of the 15 strategists polled have made a 2003 year-end
forecast; they expect the S&P 500 to climb to an average 1041, a
15 percent rise from current levels.

No Forecasts

After underestimating the depth and duration of the slump,
six firms abandoned publishing year-end targets altogether and
switched to giving a 12-month forecast or a fair-value estimate.
Two of the most bullish strategists, Credit Suisse First Boston's
Tom Galvin and Lehman Brothers Inc.'s Jeffrey Applegate, were
fired amid a broader wave of job cuts at their firms.
Of the strategists tracked by Bloomberg News, UBS Warburg's
Ed Kerschner was the most bullish at the start of the year. His
initial target was for a 37 percent gain to 1570.
In July, he changed to providing a ``fair market'' estimate
for the index. The current level is 1032. He recommends investors
allocate 89 percent of their assets to stocks and 11 percent to
bonds.
``What strategist do you know of who's been right 70 percent
of the time? Or 50 percent?'' said Roy Papp, who manages $700
million at L. Roy Papp & Associates. ``I've never believed in
market timers. If you want to gamble and speculate, you do market
timing.''

Bearish

Cliggott, who correctly predicted a stock market decline in
early 2000, the benchmark index would fall 17 percent this year to
950. In his years at J.P. Morgan, Cliggott, 46, advised clients to
keep no more than 60 percent -- and as little as 50 percent -- of
their assets in equities.
He left J.P. Morgan for Brummer & Partners, a hedge-fund
group that oversees about $2 billion. Cliggott did not return
phone calls made to his office seeking comment.
His successor, Carlos Asilis, said the index may fall as low
as 800 by the end of next year.
``On the one hand, there's pressure to be bullish. On the
other, there's a pressure to get honest -- you have those two
forces at work '' said Richard Russell, editor of the Dow Theory
Letter in La Jolla, California. ``Ultimately, the public is going
to get disgusted with someone who's just touting the market.''

Taking the Long Way

As for Yardeni, he lowered his target the first time upon
moving to Prudential in April, cutting it to 1250.
After WorldCom Inc.'s disclosure it manipulated its
bookkeeping and the S&P 500's losses since January widened to 15
percent, Yardeni on June 26 cut his S&P forecast to 1150. He later
trimmed the estimate to 1100 on Aug. 19 and again to 900 on Sept.
17.
``This year was a little disappointing on economic growth,''
Yardeni told Bloomberg Television this week. Also, ``we had big
disappointments in technology, in energy and utility earnings.''
To some investors, ratcheting down the number in the wake of
corporate announcements and the market's slide is comparable to
analysts who cut their recommendation on a stock to ``sell'' in
response to a disappointing earnings announcement.
``I don't think the strategists have folded themselves in any
more glory than the analysts,'' said Uri Landesman, a principal at
Arlington Capital Management LP, a hedge fund in Greenwich,
Connecticut.

Changing Tack

Many strategists themselves have given up on making a year-
end forecast. Banc of America Securities Inc., CIBC World Markets
Inc., Goldman, Sachs & Co., Merrill Lynch & Co. and Morgan Stanley
all changed to 12-month forecasts. Their average consensus is for
the S&P 500 to rise to 1062.
J.P. Morgan's Asilis still says that the value of making year-
end price targets lies ``in the context of the overall model and
assumptions as opposed to the specific numbers.''
``People like to hear about that sort of thing -- it makes
good cocktail party chatter and it can sometimes move markets,''
said Kevin Johnson, who helps oversee $7.1 billion at Aronson &
Partners in Philadelphia. ``It'll almost surely continue because
there will be a new generation of investors and a new generation
of strategists.''


Dear Mr. Russell:

Below is a clearer follow-up to the email I sent to you earlier
today. Upon further reflection of the Chinese trade and monetary
stance, I want to refocus my query.

China has low inflation and a trade surplus (most strikingly with the
US). Chinese exports are responsible for approximately 25% of its
GDP. However, China's ability to improve exports may be limited by
their major trading partner's (Japan, US, Germany etc.) capacity to
to consume given their declining economies. Is China at a crossroads?

One of China's biggest economic concerns is the creation of a strong
domestic market. With average per capita earnings exceedingly low,
China could only benefit by improving its domestic market. According
to Mr. Raymond Foo, Regional Strategist for BNP Paribas Peregrine
Asia, "China's future lies in its ability to move up the value added
ladder." Can China improve its position?

If China were to exchange US dollars for gold, renminbi, euros etc,it
would surely hurt the US dollar and appreciate the renminbi. As China
has low inflation, the exchange may not only be worth the gamble but
may be necessary. It may hurt its lower value export growth, but on
the other hand it moves China further into an era of value-added
production. Most importantly, it leads to more domestic consumption
for its own populace. Yes, this approach may be inflationary, but is
it not to China's benefit?

I believe there is a twofold concern, which China will most probably
be able to overcome. Firstly, with the appreciating value of the
renminbi, China will have to export at least the same net renminbi
value of goods as before. Secondly, China will have to pay its labour
force higher wages. The second concern is academic- given the low
wage base to start, and the capital inflows that would accrue from
the appreciation of the renminbi. Do you see any concerns in this
regard?

In my opinion China is in a very dominant position. Depending on what
currency it decides to convert into, China can make other currencies
more or less competive. For example, if China wants to export more to
Japan it could convert the renminbi into Yen, driving up the Yen and
making Chinese exports cheaper for Japanese. The other affect, would
be do disuade the Japanese from producing lower cost goods, as their
appreciated currency would make Japanese products too expensive. Do
you concur with this scenario of the power of the renminbi?
Conversely, China can allow a lower-wage country such as Vietnam to
take over the production of cheaper products that it no longer wants
to manufacture.

As for gold, if China exchanges its currency for gold it can become
the lender of last resort,that is fill the shoes of the US (and UK
before it). Is China ready to become the world hegemon?

Your insights would be greatly appreciated.

Regards,
Brahm Eiley
The Convergence Consulting Group Ltd.