the dow~richard russell comments

October 24, 2003 -- China, India and Asia are changing the economy of the world. Let's check out some facts and statistics on China alone.

In this year alone, China's exports are up 32 percent, now passing France's total exports.

China's economic growth is somewhere between 8 and 11 percent.

China is becoming a big importer. And as prosperity hits China, imports are rising. This from today's Wall Street Journal -- "China Saps Commodity Supplies. From steak to iron ore to cotton to diamonds, China's rising urban incomes, exports are reshaping the world's commodity markets. The country's emergence as a major importer of raw materials is driving global prices higher and catching some suppliers flat-footed."

Scores of multinational firms are moving their production facilities to China. Since 1990, foreign investment in China has surged from $25 billion to more than $450 billion.

In 2002 the US accounted for $125 billion or about a third of China's export total. This veritable flood of cheap Chinese goods has put a ceiling on many prices in the US. Pricing power is dead.

All Asian nations look for trade surpluses with the US. In 2002 China's surplus with the US was $103 billion, Japan's was $70 billion, Taiwan's was $14 billion. But more and more, China is trading with other Asian nations.

The US has been putting pressure on China to revalue the renminbi, claiming that China is taking away millions of US jobs. But better than 60% of China's exports are from goods stemming from US and other nations' factories.

Will the Chinese give in to the pressure to revalue? China's Communist leaders naturally want to stay in power. To do that these leaders must create jobs. Check this out -- every year 22 MILLION Chinese come into the Chinese work force. Thus, China is faced with the unbelievable job of employing ever-growing millions of young Chinese. Will China give in to pressure to revalue the renminbi and thus make Chinese goods more expensive and less competitive? You be the judge.

Russell opinion -- in due time the renminbi will be made convertible. I believe it will have gold backing, making the renminbi one of the strongest of all currencies and directly competing with the fiat US dollar.

I'm not even going into the question of India, which shortly will have a greater population than China. Two items, however, stick in my mind. Unlike the Chinese however, most Indians speak English. And India has 200,000 engineers. Mull that over.

As I write, the Reuters CRB Commodity Index stands at its highest level since May of 1997. Gold is up over four dollars and pressing on 390, copper is near its highest level in three years, and the base metals such as aluminum and zinc have been surging.

Yet there is another war going on, and it's the war of the currencies. So far the winners have been the currencies of the "commodity countries," Australia, New Zealand, Canada. The major loser has been the currency of the world's greatest debtor nation, the US.

Yet the situation is unclear -- very much in flux. The world depends on US prosperity. The US is the world's economic engine. The driver of the US economic engine is the US consumer, who is responsible for 70% of the US Gross Domestic Product.

The latest figures show that the turnover of money in the US is declining -- we see that in the velocity of M-3, the broad money supply. Sure, there's plenty of money, plenty of liquidity, in the US. But the question is -- will people continue to use that money? Or is it just going into assets, inflating assets such as the stock market, commodities and the housing?

My take is that up to now, the stock market is rebounding from its brutal bear market decline of 2000 to 2002. Much of that rebound was automatic, simply corrective behavior.

I believe that we are now at the point where the stock market is beginning to get serious. The market is now deciding whether there's really an upturn in the economy or whether the economy, like the stock market, could merely have been enjoying what some call "a dead cat bounce."

I've said all along that I believe the 50% Principle becomes critically important here in indicating how much strength is in the market. If the Dow can hold above 9504 it will be impressive, because that will mean that the Dow has been able to retain half or more of its bear market losses.

However, if the Dow breaks below 9504 and holds below that level, I think we can begin to look for a resumption of the bear market forces. The "fun," in other words, will be over.

The Nasdaq took the worst beating during the initial phase of the bear market, and in reaction the Nasdaq did best on the rebound from its 2002 low. As I write the Nasdaq is almost sitting on its 50-day moving average, which stands today at 1853.

The Nasdaq broke below its 50-day MA for three days during last August. But so far, the Nasdaq has held above its 50-day MA since March of 2003. Thus, the juxtaposition of the Nasdaq and its 50-day MA will be extremely helpful in gauging the strength of this highly speculative Index.

In the battle of competitive currency devaluations, it's not clear who the ultimate winner will be. My own guess is that almost ALL paper currencies will eventually lose to real money -- gold. But this will take time, maybe time in terms of years.

Today we see December gold attacking the 390 level, and in fact it's been above it intra-day. I'd like to see Dec. gold close at 390, but as I've so often said, "they don't run the markets for Richard Russell."

I also must add that I don't want gold to surge and make the headlines. I'd much rather watch gold struggle higher one dollar at a time. The higher gold rises with struggling-type action, the more bullish, since this is typical early bull market action.

Remember, advances with the primary bull trend always look difficult and somewhat tedious -- at least until the third phase of a bull market, at which time the action speeds up. Conversely, corrections in bull markets tend to be sudden and rapid, often violent. The idea here is to frighten the "unbelievers" out of their holdings.

I believe the gold bull market will end like all bull markets -- and that is with frantic, emotional and explosive action to the upside. I'll remind subscribers that gold bull markets are different than other bull markets in that in their third phase, stock bull markets are spurred by GREED while in their third phase, gold bull markets are propelled by FEAR (and fear is the strongest of all emotions).

Below we see the P&F chart of the bellwether of the gold stocks, Newmont (NEM is the only gold stock which is included in the S&P 500). Thus, NEM would be the institutional choice.

Note that NEM became extended and thus overbought as the vertical column of X's reached the 42 box. From there NEM dropped to the 38 box. As of today, NEM has climbed back to the 42 box, and an upside breakout would occur if NEM can touch the 43 box.

As with gold, the metal, I'm in no hurry to see NEM hit 43 and maybe climb up from there. Let the stock consolidate, let it "stew in its juices," the more backing and filling we see, the stronger the platform. This is a gold bull market, and like all bull markets it will make progress in its own good time.


Turning to the stock market, the picture here is one that can best described as "uncertain." There doesn't seem to be a whole lot of conviction regarding either the upside or the downside (of course I'm writing this hours before the close.)

As I write, the Dow is down 102 points to 9511, and I have to ask myself (as usual), will they rally the market during the last hour -- or will they throw them in and close the Dow below 9504.


As a point of interest, the chart below show the most recent column of X's in the Dow, and then the current declining column of 0's.

What we see here is known as a "high pole." This occurs when an extended vertical row of X's as we see here is followed by a corrective row of 0's in which the 0's decline past the halfway market of the preceding row of X's. This has now occurred, and it's a bearish indication. Based on the "high pole" thesis, we can now expect the Dow to be under pressure and under distribution.

The definitive breakdown in the Dow would be if the Dow sinks to the 9200 box.



TODAY'S MARKET ACTION -- A lot of activity, but not much in the way of results. My PTI was down 4 to 5364, Moving average was 5325, so my PTI is still in its bullish mode.

The Dow, after being below 9500 earlier, closed down 30.67 to 9582,46. For new subscribers, under Dow Theory we use only the closing figures. What the averages do intra-day may be interesting, but where they close when all the boys and girls settle their trades is what we post.

Only one mover in the Dow today, MSFT down 2.30 to 26.51.

Dec. crude was down .14 to 30.16.

Transports were down 1.27 to 2827,25.

Utilities were up .11 to 252.74.

There were 1366 advances and 1829 declines. Down volume was 66.1% of up + down volume, a mild down-day.

There were 107 new highs and 10 new lows. My High-Low Index was up 97 to 18589.

Total NYSE volume was 1.42 billion shares.

S&P was down 4.86 to 1028.91.

Nasdaq was down 19.92 to 1865.59 on 1.94 billion shares, another "distribution day."

My Big Money Breadth Index was down 2 to 725.

Dec. Dollar Index was down .22 to a new low of to 91.46. Dec. euro was up .37 to a new high of 118.04. Dec. yen was up .30 to 91.66.

German DAX was down 44 ti 3452, Dec. Nikkei was down 100 to 10,350.

Bonds were sharply higher. You want to make money, the Fed has forced you to speculate. You want income, the Fed has forced you to buy bonds. Dec. long T-bonds were up 109 ticks to 109.09 to yield 5.10%. Dec. 10 year T-note was up 29 ticks to 112.31 to yield 4.21%. Will foreigners continue to hold US bonds denominated in sinking dollars? Guess we'll find out.

For you and me, of course, there are always those closed-end foreign bond funds such as FCO and GIM, both paying over 5% and both also a play on non-dollar currencies.

Dec. gold up 4.20 to a new high of 389.20. Dec. silver down .07 to 5.16. Jan. platinum was down 8.10 to 737.60. Dec. palladium was down 4.40 to 198.05.

Gold/Dollar Index ratio was up 5.40 to a new high of 425,30.

One share of the Dow buys 24.62 ounces of gold.

Gold advance-decline line was up 14 to a new high of 1348.

XAU was up 1.84 to 97.90. HUI was up 4.25 to a new high of 218.21.

ASA up 1.03, AEM up .62, AU up 1.08, BGO up .04, DROOY down .18, GSS up .30, KGC up .13, NEM up .75, RANGY up .43, RGLD down .01.

Gold acting well, and the gold stocks also tending to follow gold, despite being overbought and probably needing a "rest."

STOCKS -- My Most Active Stock Index was down 5 to 284.

The 15 most active stocks on the NYSE were -- LU down .16, NT down .28, AWE down .11, CE down .50, PCS down .16, EMC down .15, FDC down .14, GE down .20, TWX up .21, SBC up .57, PFE down .22, TXN up .02, EP up .10, CVC down 2.10, GTW down 1.48.

VIX was up .02 to 17.70.

McClellan Oscillator down 7 to minus 38, and I don't like the looks of the Oscillator. It's staying in negative territory while the dots on the Summation Index are breaking away to the downside, not a good sign. The longer the Oscillator remains in negative territory, the more damage to the stock market.

CONCLUSION -- Good week for gold, Not a great week for stocks. But the story hasn't been told for either yet.

I might write a bit tomorrow, or maybe I'll take a rest. Check in over the weekend. Aw, I probably should take a rest.

Russell

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The internet strikes again!
Financial Times 23 Oct

Google is considering holding a massive online auction of shares early next year in an initial public offering that investment bankers predict could value the internet search-engine company at more than $15bn.
An electronic auction would be designed to prevent a recurrence of the sort of financial scandals that have engulfed Wall Street since the collapse of the dotcom bubble, according to a person close to the company.
It could also slash the underwriting fees paid to investment banks, the person added, and in the process help to break Wall Street's hold on the lucrative IPO business.