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A Fragment of Russell

  1. 470 Posts.
    I thought this was significant enough to post. I hope Mr Russell won't mind my violating his copyright just a little. Perhaps if he thought of it as an advertisement for his excellent newsletter...

    September 4, 2002 -- This morning's Investor's Business Daily asks, "How much fear will it take to turn this market around once and for all? It's hard to know. No bear market has plagued Wall Street like this one since 1929-32."

    Is that true? Well, not quite. True, this bear market started in September 1999 and it's already three years old. "Three years old," but valuations are still sky-high, so my thought is that this bear market still has a long way to go on the downside.

    Sure, the last three years of losses were painful, but unfortunately, this bear market is far from over. In comparison, the bear market that started in September 1929 was OVER by July of 1932.

    As far as downside intensity, the current bear market hasn't seen anything up to now. Flash-- yesterday was our first true 90% downside day. Does one 90% downside day end the decline? Hardly, history suggests that downside days come in series, with each 90% downside day separated by days or even weeks in between.

    You want to know what real pain looks like? The bear market year 1973 produced four 90% downside days. And the following year, 1974, gave us no less than NINE 90% downside days (Gad, do I remember that little series!).

    Going back even further, 1960 saw eight 90% downside days. And 1970 gave us five 90% downside days. The year 1978 produced five 90% downside days, and 1981 generated five 90% downside days.

    The fact is that there were two 90% downside days in 2001 and there has been only one since -- and that one occurred yesterday.

    My guess is yesterday probably marked the beginning of a series of 90% downside days, a series that could extend right through to the end of the year. In other words, yesterday probably marked the beginning of an extended panic decline phase.

    I look at the situation this way -- we're three years into this bear market and stock valuations are still absurdly high.

    Since we're three years into this bear market and valuation are still sky-high, I feel that the bear has some important "catching up" to do on the downside. In other words, stocks have remained overvalued for TOO LONG.

    Therefore, it would not surprise me if this bear isn't about to make up for lost time. One way the bear can to this is by producing a series of 90% downside days, a series that "should" take the major averages well below their July 23 lows.

    One phenomenon I note is that almost all media sources seem to blame this bear market action on piecemeal evidence. By that I mean each time the market declines, some current news event or some adverse statistic is blamed for the decline. And the implication is that "as soon as this problem is out of the way, the bull market will resume."

    What this tells me is that people just don't understand how bear markets work. They don't understand that once a great bull market dies in exhaustion, once the primary trend of the market turns down -- the bear market that follows will run to conclusion.

    The conclusion is characterized by an exhaustion of selling and the return of GREAT VALUES in stocks. Let me put it gently to you, dear subscribers -- sellers today are far from exhausted -- and stocks are NOT at great values today.

    Let me put it gently to members of the media -- this bear market is not based on any of today's current (adverse) news events. This bear market is in the process of correcting the excesses of a 20-year bull market.

    My secret suspicion is that what we're experiencing could well be the early part of the "Daddy" of all bear markets. This bear market could be one gathering disaster. I hope I'm wrong, but they way this baby is going, nothing would surprise me.

    This bear market is truly international in scope. The seriousness of the world situation is seen in yesterday's action on the Japanese stock market. After 13 years of bear market, Japan's Nikkei stock average yesterday broke to a new bear market low, actually it's lowest level in 19 years. Japan and particularly Japan's banking situation is an impending disaster.

    Growth in Europe's leading economies is grinding to a halt. Unemployment is rising in both Germany and France. South America's largest economy, Brazil, is in trouble.

    In the good old USA it was just announced that the number of millionaires fell 11% to 3.3 million -- this from last year's 3.7 million.

    How did that happen? One way is via losses in stocks. As an example, here's the latest list of Merrill favorites, the stocks most widely held by Merrill Lynch's clients. Stock performance so far this year --

    AOL Time down 62.3%.
    AT&T down 38.3%.
    ATT Wrls down 68.2%
    AgereB down 68.0%
    Avaya down 82.8%.
    Cisco down 27.8%
    Citigroup down 37.6%.
    Exxon/Mob down 14.5%
    Gen. Elect. down 29.0%
    Home Dep. down 37.5%.
    Intel down 49.6%
    IBM down 40.2%
    John&John down 10.9%
    Lucent down 65.1%.
    Merck down 18.8%
    Microsoft down 29.0%
    Oracle down 34.4%.
    Pfizer down 21.5%
    Verizon down 38.1%
    Wal-Mart down 9.9%

    A perfect record, every one of the above stocks down for the year. No wonder the number of US millionaires is shrinking. I mean, the sheer amount of wealth being wiped out by this bear market is phenomenal.

    A note on 90% downside days. I reviewed the nine 90% downside days which occurred in the God-awful year 1974. Each 90% downside day appeared in a different month -- only the single month of September produced two 90% downside days.

    Conclusion -- Downside days tend to appear spread apart by as far as a month each. But there are no rules -- for instance we had a 90% downside day on August 4, 1974 and another on August 12, 1974. Another example -- we had a 90% downside day on October 20, 1978, another on October 26, 1978 and a third on October 27, 1978. But most of the time, 90% downside days are spread much further apart.

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