the dow: richard russell comments

May 18, 2009 -- "Less bad" is the new "good." And "Green shoots" are the new potential economic miracles.

The most difficult and puzzling study of the stock market is that which deals with secondary reactions against the primary trend.. Because we're in a bear market, I'm going to limit the following discussion to (upward) reactions in bear markets.

Over the weekend I pulled out my volume of Robert Rhea's "The Dow Theory." I went over some of Rhea's comments on secondary reaction in bear market.
"For the purpose of this discussion, a secondary reaction is considered to be an important advance in a bear market, usually lasting three weeks to as many months, during which interval the price movement generally retraces from 33% to 66% of the primary price change since the last preceding secondary reaction.

"Those who try to place exact limits on secondary reactions are doomed to failure, just as surely as would be the weather man who forecasted a snowfall of exactly three and one half inches within a specified time.

"In a bear market steady liquidation of securities by those who prefer or need cash reduces quotations day after day, with professionals, realizing there is more room on the bottom than on the top, hastening the decline with short sales. Eventually, the market is forced to a lower level than is warranted by conditions. The short interest is perhaps too extended, with wise traders sensing the fact the liquidation has, for the time, at least, run its course.

"Quiet, weak spots in bear markets are generally good ones to short, as they generally develop into serious declines.

"In a primary bear market the rallies are apt to be violent and erratic, and always occupy less time than the decline, which they partially recovery. Often the primary movement of several weeks is retracted in a few days.

"Rallies in a bar market are sharp, but experienced traders wisely put out their shorts again when the market becomes dull after a recovery.

"In bear markets, primary movement has an average duration of 95.6 days, whereas the secondary movement averages 66.5 days or 69.6% of the time consumed in the preceding primary movements."

All the above pertains to the price action during rallies in bear markets. But what about business conditions during bear market rallies? My studies show that bear market rallies are technical phenomenons which do not necessarily reflect on business. I'm looking at a chart of the great 1929 to 1930 rally which occurred after the 1929 crash. The Federal Reserve Index turned down in late-1929, and despite the great bear market rally, the Fed Index continued lower into early 1932.

But what of all the "green shoots" talk that is no so prevalent today? I believe these are mostly hopes and wishes. The government and some economists are so anxious to be bullish, that they attach the green shoots level to any area where matters are becoming "less bad." Green shoots and "less bad" are part of the current desperate government propaganda program. It's the same in the stock market. Any rally in the Dow is a sign that the market is in a marvelous recovery of it disastrous losses on 2008-09.

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On another subject, The US national debt was $9.364 a year ago. Today it is $11.256 trillion. That means that over the last 12 months we've added $1.89 trillion to the national debt. I figure that over the next two fiscal years the US national debt should rise by $3 trillion from the current $11.256 trillion to around $14 to 15 trillion. I figures the average interest on the national debt is around 4%. Well, 4% of $14 trillion is over half a trillion dollars a year. How in God's name is the US going to attract over half a trillion dollars every year to carry our national debt? My answer -- higher taxes and inflation. When you think about it, this is one major reason why the government doesn't want gold to sky-rocket. An exploding price for gold tells the world that the US and its financing is backed against the wall, and that inflation plus higher taxes are the only ways out.

Of course, there is one other area that can help.-- cutting government expenses to the bone. The US has over one hundred military and air force bases around the planet. My guess -- within a decade they'll be gone -- we can't afford them. The world's greatest creditor can not be the world's dominant military power. Rome tried it; they failed. "Britannia rules the waves," while the sun never set on the British Empire. What part of the earth does England rule today?

I just finished a long article in the New York Times Magazine section on the symbiotic relationship between the US and China. We buy their goods, and they buy our bonds. The problem is that China owns over a trillion dollars worth of US Treasuries, and as the bonds sink here, China grows more worried. In fact, China is cutting back on its purchases of US Treasuries. China is spending its money on assets such as land in Africa and South American, rare earth metals, other nation's bonds and gold. China is thinking in terms of future decades while the US continues to over-consume. Not only is the US still over-consuming, the US government is trying to figure out how its people can borrow more and consume more.

In time, the US standard of living will decline while the Chinese standard of living will improve. The US/China relationship will be on of the most important events of the next few years. Note how the US has halted its criticism of China's money policy and even its human rights policy. China with its huge monetary resources now holds the winning hand, and the US is acting accordingly.

China thinks in terms of decades. China knows that within decades it will have the greatest monetary reserves, the greatest collection of natural resources, perhaps the greatest military and perhaps the largest hoard of gold and maybe the strongest currency. The US will continue to be the world's greatest debtor, struggling mightily to pay the interest on its mind-boggling mountain of debt.

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From The Kiplinger Letter, April--

"So...A tremendous debt to be serviced. Uncle Sam already owes a sum that equals 4.15% of GDP. By 2019, the national IOU could amount to twice that percentage, a expenses of Medicare, Social Security and other programs pile up quickly with the huge bubble of baby boomers retiring. . . Interest will claim much more of the budget. Payment already account for 4.2% of federal outlays. By 2013, they'll be about 11% and headed higher."

Russell Comment -- The US is eating itself up alive with compounding debt. The situation is unsustainable.

Question -- Russell you paint a bleak picture. How do you justify your predictions?

Answer -- Subscribers pay for my honest convictions, not my hopes. I tell 'em as I see 'em. I have five kids, and I have every reason to hope for a better world for the US and its people. But the way we're going, I don't think it's going to happen.

I depend on the stock market to confirm my visions. I think we're in a long-term secular bear market. The market got severely oversold, and we've been experiencing a rally in a bear market. If I'm correct on the picture, then in due time the Averages will violate their March 9 lows ( I hope that never happens).

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According to Dow Theory the primary trend remains in force until countermanded by a legitimate Dow Theory reversal signal. The last information we received from the Dow Theory was that the primary trend continues down -- it told us that when the Industrials and Transports both broke to new lows on March 9. That was the Dow Theory telling us that the primary trend remains bearish. At any rate, that's the way I read the picture. When the Dow Theory presents a changing picture, I'll change my stance. In the meantime (and I've been saying this for the last few years), I see a "hard rain a'comin."

The Lowry's statistics are very instructive here. On March 9 Lowry's Buying Power Index stood at 96 while their Selling Pressure Index was at 899. At last Friday's close, Lowry's Buying Power Index stood at 158, up 62 points from its March 9 close. But at last Friday's close, Lowry's Selling Pressure Index stood at 880 --only 19 points below its March 9 level. This means that while Buying Power increased from the March 9 low, Selling Pressure has barely declined since March 9. This makes me suspicious of the stock market rally from March 9. Normally, at the start of a new bull market Selling Pressure will decline at an equal rate with Buying Power's advance.

Important -- If in the future Lowry's Selling Pressure index advances above it March 9 figure of 899, this will be a very bearish indication, meaning that Selling Pressure would be higher than it was at the March 9 "bottom." I'll be watching these developments carefully.

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Gold -- June gold has now advanced 9 out of 11 trading sessions, which makes gold overbought and ready to correct. Gold is now working on the right shoulder of a huge inverted "head-and-shoulders" (bottoming) pattern as seen below. The next upside target for June gold is 960. If June gold can close above 960 that would be a huge technical achievement and should send gold higher to test the 1003 level.



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From a Subscriber-

RR:

The article in 5/15/2008 informed us of China's monopoly on the above resource...say 90 %. There is a company in Australia called Lynas that owns and is trying to develop the Mount Weld deposit of rare earth minerals....largest/richest of deposit outside of China.

They have run out of money to further develop and build a mine and, given the lending situation world wide, were not able to debt finance proceed. Who do you think rode to the rescue with a 360 million purchase of shares? For which they will get a 60% ownership position or control.

They now control 95% or greater of world resources of Rare Earth Metals. ..and the low cost producer!

The West needs to wake up, Have Australia cancel the deal, and provide the funding or invest.

Dr. J.Z.

Russell comment -- Gosh, I doubt that the Aussies will cancel the deal. In fact, they're probably happy to be receiving Chinese capital.

TODAY'S MARKET ACTION:

My PTI was up 6 to 5890. The moving average is 5868, so my PTI is bullish by 22 points.
The Dow was up 235.44 to 8504.08.

Transports were up 92.99 to 3146.00.

Utilities were up .44 to 330.24.

July crude was up 2.59 to 59.59.

Total Volume on the NYSE and associated exchanges was 6.59 bn.

There were 2722 advances and 361 declines on the NYSE.

There were 13 new highs and 7 new lows.

S&P was up 19.70 to 902.70.

NASDAQ was up 43.80 to 1732.30.

My Big Money Breadth Index was up 8 to 679.

Dollar Index was down .40 to 82.76. Euro was up .41 to 135.23. Yen was down 1.49 to 103.71. Currency prices as of 1 PM Pacific Time.

June gold was down 9.60 to 921.70. July silver was down .18 to 13.83.

GDX was down .16 to 37.49.

HUI was down 1.47 to 340.45.

Bonds: Yield on the 10 year T-note was 3.22%. Yield on the long T-bond was 4.18%. Yield of the 91 day T-bill was .16%.

CRB Commodity Index was up 5.19 to 398.62.

My Most Active Stocks Index was up 13 to 146.

The VIX was down 3.06 to 30.06.


Late Notes-- The market continues on its erratic wave. Today may have been a 90% up day. The Dow closed up over 200 points, leaving it only 70 points below its May 8 peak. The big question-- whether the Transports can confirm a new high in the Dow. At today's close the Transports are a large 206 points below the May 8 high. This isn't a time for guessing. Its time to monitor the price action carefully.

My PTI was up 6 today. The market appears to be propelled higher based on the "green shoots" which appear to be popping out of the ground in all directions.

The two figures to watch are 8574.65 on the Dow confirmed by 3351.17 on the Transports. With a 90% up-day today, and my PTI 6 points higher and still in bullish territory the odds seem to favor a new high in the Dow.

Since I think of myself as a patriot, I'd love to see both Averages close above their May 8 peaks.

So much for an impressive Monday.