April 18, 2008 -- I consider this site probably the most...

April 18, 2008 -- I consider this site probably the most important of any site that I've written this year.

The following is the major market picture as I see it. I want to start by discussing the 50% Principle. I learned about the 50% Principle from E. George Schaefer, the great Dow Theorist who wrote his reports during the late-1940s to the 1970s. Schaefer had made a careful study of all of Charles Dow's writings. After studying Dow's work carefully, Schaefer concluded that Dow always took note of what the market did at the halfway level of major advances or declines. As a matter of fact, Schaefer referred to what he had learned from Dow's writing as Dow's 50% Principle.

Schaefer emphasized that the 50% Principle should only be used in reference to major market movements, not to short moves of say a few hundred points over a few months duration. Schaefer used the 50% Principle repeatedly during the great bull market of 1949 to 1966 in order to differentiate the many deceptive secondary reactions from the great primary movements. Schaefer always used the Dow in his studies of the 50% Principle.

I have studied the 50% Principle and its use over many decades. I used the 50% Principle during the great rise from the 1980 low of Dow 759.13 to the 2000 high of Dow 11722.98. The halfway or 50% level of that huge advance came in at Dow 6241.

In January 2000, the Dow headed down in what everybody accepted as a "bear market." The decline halted on October 9, 2002 at Dow 7286.27. But the 7286.27 level was 1045 Dow points ABOVE 6241, which was the 50% or the midpoint of the 1980 to 2000 advance.

Because the Dow halted its advance above the halfway level, I took the 50% Principle to be saying that the great primary trend of the market remained intact and bullish. Had the Dow broken below the 6241 halfway level, it would have been a different and very bearish story.

The chart below shows the advance from the 1980 Dow low to the 2000 Dow high. The blue horizontal line identifies that halfway level of the advance, which was 6241.



Interestingly, at the 2002 low, the Dow was selling at around 20 times earnings while providing a mini-dividend yield of only 2%. For that reason and because the Dow had halted its decline above the halfway level, I believed that the bull market was still in its "expensive" and speculative third phase. Because the bull market was still intact, it was logical to think that there would be a major recovery -- with probable new highs ahead for the Dow.

From its 2002 low of 7286.27, the Dow headed higher. On October 9, 2007, the Dow reached a new record high of 14164.53. From that new high, I again calculated the 50% level. The 50% or halfway level of the advance from 2002 to 2007 came in at 10725.

From the market top in October 2007, the Dow headed down to a March 10, 2008 low of 11740.15. But that was far above the 50% level of Dow 10725. Again, the 50% Principle had come into play.

The chart below follows the Dow's advance from 2002 to 2007. The horizontal blue line again identifies the 50% level of the 2002 to 2007 advance. The decline from the 2007 high never came close to the 50% level.



As I write, the 50% Principle is saying that the great bull market that began in 1980 is still in force. The implications are fascinating. Because if the bull market is still alive (and I believe it is), then by definition the Dow is fated to rise to new record highs somewhere during the period ahead.

Wait, what about my thesis that the stock market established an important low on January 22, 2008? First, we should note that at the January 22 low of 2008 there were 1,114 new lows registered on the NYSE. Since January 22 new lows have contracted sharply. The most new lows that have appeared since January 22 were 764 on March 7. Since then, new lows have contracted even more dramatically. The absence of new lows means that on days of decline, stocks are simply pulling back rather than breaking support. There's a big difference between a stock backing off and a stock violating its support level. The contraction of new lows since January 22 has bullish implications.

The Dow Theory has also made a valuable contribution to the current bullish case. On January 22, 2008, both the D-J Industrials and Transportation Average recorded lows. A rally ensued, followed by a new decline. On the new decline, the Industrials broke to a further low, but this new Dow low was unconfirmed by the much stronger Transportation Average. From there the Transportation Average headed higher, literally dragging the Dow along with it.

What's so interesting is that the market apparently bottomed on January 22. Since then the market has been working higher in the face of what many analysts describe as "the worst economic conditions since World War II." However, market students have learned that what's important in this business is not so much the news -- but the market's reaction to the news. So far, the stock market's reaction to the terrible news of 2008 is to ignore it and to continue to climb higher.

The Transports have advanced above all previous peaks short of their record high recorded in July of 2007. The Industrials are still attempting to advance above their February 1 peak of 12743.19. An advance by Industrials above 12743.19 would be a very bullish accomplishment and would be a partial but dramatic upside confirmation of Transportation strength (note -- I think Industrials will close above 12742.19 today).

I might also note here that the short interest on the NYSE has now climbed above 16 million shares -- this is the highest recorded short interest ever. In order for the shorts to make money, they need a declining market, preferably a market declining on rising volume. So far, the shorts have not received that kind of a market. That means that we have a record short interest locked into a market that refuses to fall apart. A rising short interest in a market that refuses to head down is a potentially explosive market. My guess is that in due time the current huge short interest will be driven out by way of a rising market.

The big picture, as I have outlined it above, is for the Dow to advance to new highs in the months ahead (and it may take a year or so). If the Dow is fated to rise to new highs, the Dow will take a large number of stocks with it. The further implications of this will be that the US economy will be due to improve, and very possibly to boom in the period ahead. In fact, I expect this bull market to end with an unexpected bullish explosion in both stocks and the US economy.

I have no idea what might cause such a boom. The stock market has its secrets and its remarkable intuitive and discounting powers. The stock market can tell us what, but it never tells us how or when.

What about the primary bear market that will inevitably follow when this greatest of all bull markets finally tops out? Ah, that's another story, and it will not be a pleasant one. At this point I associate the next bear market with the US dollar's loss of its reserve status.

For my subscribers, I'll repeat that the easiest and perhaps safest way to play this bull market is with Diamonds (DIA), which are a proxy for the Dow, and with IOO (these are letters, not numbers) which includes the one hundred largest corporations in the world.

A thought -- if the stock market continues to rise, the big economic shocker could be the price of housing bottoming out and turning UP much sooner than anyone expects. And if this happy event materializes, watch out -- gang busters on the upside.

What would the weekend be without a chart. Below we see a chart of the Diamonds (DIA) which I recommended weeks ago and which I said that I have bought. The trendlines speak for themselves. Note that today the Diamonds gapped up to reach their 200-day moving average. The Dow and the market is looking better and better.




TODAY'S MARKET ACTION -- My PTI was up 7 today to 5949. Moving average was 5939, so my PTI remains bullish by 10 points.

The Dow was up 228.87 to 12849.38. Three movers today -- AIG, CAT, MMM.

May crude was up 1.83 to a new record 116.69 (oooph).

Transports, ignoring oil, were up a fat 13.11 to 5100.08.

Utilities were up 1.83 to 515.96.

There were 2586 advances on the NYSE and 743 declines. UP volume was 77.2% of up + down volume.

There were 117 new highs and 13 new lows. My 5-day high-low differentials improved from minus 29 to PLUS 104.

Total NYSE volume was 4.12 billion shares.

S&P was up 24.77 to 1390.33.

NASDAQ was up 61.14 to 2402.97.

My Big Money Breadth Index was up 4 to 848.

Dollar Index was up .27 to 72.20. Euro was down .77 to 157.72. Yen was down .1.19 to 9673.

Bonds were mixed. Yield on the 10 year T-note was 3.75%. Yield on the 30 year T-bond was 4.52%. Yield on the 91 day T-bill was a rising 1.32%.

CRB Commodity Index was down 3.58 to 550.01.

June gold was down a whopping 2.70 to 915.20. May silver down 48 to 17.82. July platinum up 9.80 to 2071.30.

GDX down 1.51 to 49.30. HUI down 12.87 to 456.17.

ABX down 1.40, AEM down 3.62, ASA down 1.53, NEM down 1.25.

Precious metals continue to correct, but gold still above 900. The correction will wear out all the traders, and the bull won't start up again until he's shaken all the late-comers off his back.

STOCKS -- My Most Active Stocks Index was up 13 to 332.

The five most active stocks on the NYSE were -- C up 1.08, F up .19, GE up .67, WM up .23, and PFE up .07. Also on the 15 most active list and all higher were the following financials -- BAC, WFC, JPM, CFC, LEH, MER.

The VIX was down .30 to 19.99, a low for the year.

CONCLUSION -- So far, so good -- no, very good. I'm most interested to see whether Lowry's Selling Pressure breaks down and whether their Buying Power moves up. A lot of the market's upside progress has been a result of declining supply, but that's not enough -- demand must pick up if this rise is to continue.

But as subscribers know, I like the market's action. PTI rising, new highs increasing while new lows are contracting, short interest is high and rising, and there's a lot of disbelief in the market's being able to move higher. As you know, the more skepticism, the better. The whole market situation looks good to me.

Have a great weekend, don't do anything stupid, and hey, what ever happened to "have a nice day"? What, everybody got tired of it? It was kind of stupid, but it had a nice sound to it, so what the heck -- have a nice day.

Russell

LATE FLASH AFTER THE CLOSE OF THE MARKET -- LOWRY'S ISSUES AN INTERMEDIATE-TERM BUY SIGNAL!

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They say bread is the staff of life. But more people depend on rice than wheat, probably over half the world's population. Trouble -- a year ago rice cost about ten dollars a hundred weight. Up and up it went, now rice costs $23.50 a hundred weight. This is setting off riots around the world. Prices have surged among major producers such as Egypt, India and Vietnam; all have curbed their exports to ensure adequate domestic supplies. This has left the US as one of the last remaining reliable producers of rice in the world.
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Some analysts who haven't been around very long are equating the current situation with the Great Depression of the 1930s, the economy I grew up in. Ridiculous.

In the current situation the Dow was down 12% from its high at the worst; during the Depression the Dow lost 89% of its peak value. Today unemployment is maybe 5%, during the Depression it was 25%. Today maybe 2% of homes are in foreclosure. During the Depression it was like 20% or more. Today one big bank has gone under. During the Depression (1931) 1400 banks went under. During the Depression in NYC men were living in tin and cardboard home-made hovels. Today it costs you $2200 a month for a small studio in Manhattan. During the Depression you could buy a loaf of bread for a dime, assuming you had a dime. Today a loaf of bread will cost you $2.50 to $5.00 depending on the quality.

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Could Bill Clinton be secretly, even unconsciously, sabotaging Hillary? Writes Caroline Baum, "As much as Bill respects his wife's intelligence, hard work, and drive and wants to see her achieve her dream, he may derive more stature as ex-president than presidential consort. . . Conservatives' worst nightmare is the image of Bill Clinton shuffling around the West Wing for four or eight years with nothing to do. It looks like Bill may be struggling with the same vision as well."

Russell Comment -- I think Caroline might have got it exactly right. On another notes, I sense that Hillary is coming across as a shrill and even angry person as opposed to Obama's more mature presence and poise.