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Richard Russell Comments

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    Reality time folks....
    Chuck

    April 29, 2002 -- It's close to a sure thing. Each day the market opens higher while gold opens lower.

    Why is this? My guess -- investors remain steadfastly bullish. If the market closed the preceding day on the upside, investors are convinced that the advance will continue. If the market closed the preceding day on the downside, investors are convinced that the market is oversold and ready to "resume its advance."

    By the same token if gold closed the preceding day on the upside, investors are convinced that the gold "pop" was a mistake and that gold should be sold. If gold closed the preceding day on the downside, investors are convinced that the weakness will continue.

    The big picture is fast turning on the results of the hugely negative US current account balance. The problem -- to support the US's spending habits, it's taking a foreign inflow of better than $1.5 billion a DAY.

    The great problem is that foreign investors don't have to actually sell US assets for the dollar to fail -- ALL THEY HAVE TO DO IS CUT BACK ON THEIR BUYING.

    So far, the US thirst for foreign investments has not been a great problem. But the current account deficits are CUMULATIVE. At this point the current account deficit amounts to around 4.1% of the entire US Gross Domestic Product. But by next year it will climb to almost 5%.

    Writes the April 27 London Economist, "Few countries have supported a current account at that level for long. It is even harder for the world's largest economy, sucking in more than $500 billion or close to 10% of the global gross savings every year.

    If the US attracted any less than this at the prevailing exchange rate, the dollar would fall automatically. Investors, therefore, need to be super-confident in the US as a location for their assets. Currently, they have reason for caution.

    US equity returns this year have performed worse than those in other industrial countries' markets. This sorry performance has not been mitigated by a rising dollar: fears regarding the fragility of US corporate profits in spite of high productivity growth have been realized. And US equities remain highly valued against all the usual benchmarks.

    If sufficient capital flows are not forthcoming, any dollar decline will be far from limited or orderly. Portfolio investment flows pushed the dollar ever higher. These can reverse just as quickly. If they did, dollar investments would perform considerably worse than equivalent assets elsewhere, redoubling any flight from the greenback.

    Russell Comment: Only the two British publications, the Economist and the Financial Times, appear ready and willing to deal with the US's trade and current account problems and how those problems will affect the dollar. Either the problems are beyond the ken of most US publications or they prefer simply to ignore them.

    Foreigner, our creditors, tend to buy and hold the largest and most liquid US stocks. These stocks are represented by the Dow and the S&P. Which is why I watch these two so carefully. The Nasdaq has already done its part for the bear -- it's collapsed. I think the Nasdaq will ultimately go much lower but I'm currently more interested in the action of the Dow and the S&P.

    The Dow, at least this morning, has been flirting with its 200-day moving average, which today stands at 9931. The 50-day MA of the Dow stands at 10273, and it is just now beginning to turn down

    The 50-day MA of the Dow is still well above the 200-day MA, which means that I currently classify the Dow as neutral-weak. If or when the 50-day MA of the Dow drops below the 200-day I will classify the Dow as outright bearish.

    The S&P is outright bearish since its below its 50-day MA (1127) and its 50-day in turn is below its 200-day MA (1129). Both MAs are bearishly trending lower.

    Interestingly, the S&P is trading right at major "support." I put this support at 1075.

    I continue to be awed by the action of two of my studies. My Index of the 15 Most Active Stocks on the NYSE is plunging, having reached at new bear market low of 424 at today's close. This is far below its level of 612 recorded on September 21.

    My Big Money Breadth Index broke down badly last week -- and today sinking to a new low for the year. This Index is an advance-decline line of the 10 largest-cap stocks in the S&P 500 and its action is ominously bearish.

    The two indexes confirm my opinion that while the majority of investors have been buying the secondary issues, the big money (the important, seasoned money) has been unloading the big-cap and blue-chip stocks. In fact, the big money has been unloading the blue-chip type stocks ever since mid-December (based on my charts).

    I use the word support with care, because in a primary bear market support levels tend to be violated with ease. In fact, in primary bear markets support levels act pretty much like a bar of butter supporting a hot knife.

    In put it succinctly, a bear market support is an of oxymoron.

    Turning to today's market action, I notice one item that is different than what we've seen recently. I guess you've observed that day after day while the Dow was down, the advance-decline ratio was up. But today that situation was reversed for most of the day, and despite the Dow being up a most of the day, the advance-decline ratio was down much of the day. And I'm wondering if this does represent the beginning of the end for the secondary stocks, the stocks that have been rising even as the big-cap stocks have been under steady distribution.

    I read a good many advisories (often daily advisories) that remain bullish. These people often refer to indices, studies and ratio which have worked well over the years. And at this juncture, many of these advisories are frustrated, almost angry, because the market is not responding to their "bullish" studies.

    I think the problem can be expressed in one sentence. In a bear market your techniques and methods are not going to work they way they did in a bull market -- in fact, they are very apt to malfunction.

    The reason they will malfunction, and I've written about this before, is that in a bear market the bears are right. For instance, in a bear market I ignore the short interest figures. In a bull market there's nothing more bullish than a steadily building short interest. The increasing short interest is bullish because the short-sellers are aligned AGAINST the primary trend of the market. They're wrong, and in due time they'll pay for their mistaken positions.

    But a large short interest in a bear market is different because here the short-sellers are aligned in harmony with the primary trend. Therefore, the best that a large short interest in a bear market can do it add violence to any upside action. But as major a plus, or as an indication of a new bull market, the short interest has little value under today's bear market conditions.

    GOLD -- Probably because gold has been so relentless on the upside, today we saw a mild correction. This is calculated to cool the ardor of the public. At early stages of bull markets, the rise can be rocky, erratic and even frightening. This is part of the bull's wish to advance while taking as few investors as possible along for the ride.

    A steadily rising item or market attracts "too many" late visitors. The subsequent little jiggles and shakeouts are meant to discourage the public. It's the market's way (in this case, gold's way) of saying, "Cool it, brother, take it somewhere else. Buying gold shares isn't the road to riches, you can lose money as easy as you can make it. In other words, stay out."

    TODAY'S MARKET ACTION -- In a word -- dreadful.

    My PTI was down 8 today to 5296 while the moving average was 5327. The head-and-shoulders top in the PTI is complete, and the PTI is definitely bearish.

    The Dow, after being up (as usual) in the morning, sold off later in the day and ended down 90.85 at 9819.87. Only one mover in the Dow today, BA up 2.12 to 46.63.

    June crude was up .46 to 27.57.

    Transports were down 27.79 to 2694.84.

    Utilities were down .29 to 302.55.

    There were 1401 advances and 1743 declines. I consider the unusually high number of advances in the face of the sinking Dow to be bearish, since I believe this indicates "investors" still buying secondary stocks while the Big Stuff heads down.

    There were 105 new highs and 84 new lows, largest number of new lows since early February.

    NYSE volume was 1.26 billion shares -- volume still on the low side, indicating that the public is not worried yet, despite the horrendous drop in prices.

    S&P was down 10.88 to 1065.18.

    Nasdaq was down 8.96 to 1656.93 on 1.80 billion shares.

    My Big Money Breadth Index was down 6 to 818, lowest figure since last October.

    June Dollar Index was down .08 to 115.15. June euro was up .22 to 90.18. June yen down .15 to 78.26.

    June Nikkei was down 30 to 11,470.

    Bonds lower -- the June 30 year T-bond was down 8 ticks to 101.31 to yields 61%. June 10 year T-note was down 8 ticks to 105.14 to yield 5.09%. June muni futures were down 3 ticks to 104.01.

    June gold, after being down 1.80, closed down .60 to 311.50. May silver was down 1 to 3.62. June platinum was down .90 to 538.90. June palladium was down 4.00 to 362.80.

    XAU was down .63 to 76.87. ABX was down .04, AU down .10, PDG down .25, NEM down .24, AEM down a dime. I thought gold and gold shares acted very well, giving up a little and giving it up grudgingly.
    McClellan Osc. negative at minus 87

    STOCKS My Most Active Index was down to a new bear market low of 424.

    Today's 15 most active on the NYSE were TYC down 2.90, AOL down .68 to 18.04 (sick), Q down .79, GE down .65, LU down .21, EMC down .01, RAD down .35, HIB down .09, L down .01, GLW up .28, C down .17, BVF down 9.65 to 36.80, DYN down 1.05, PFE down .49, T down .44.

    More -- HD down 1 .13, AMZN down .73, DIS down 1.08, GM down 1.33, MER down 1.27, D up .99, SO up .29, FNM down .25, MRK up .20, HDI down .71, SBC down 1.25, DELL down .31, MMM down 1.78, AA down .74, CAT down 1.26, QCOM down 1.43 to 29.22!!

    CONCLUSION: What we're seeing, to my mind, is the worst kind of action. Public is still bullish and reading about the "great first quarter." The market is bearish and looking ahead. The analysts seem to be in a daze. Stocks are marching to a different drummer, and the drummer is not smiling.

    The housing picture is KEY here, it's the last island of strength in the economy. I'm watching FNM (Fannie Mae) which is now below 80 again, and I'm waiting to see whether this very important "government sponsored stock" along with Freddie Mac -- can hold up. Most of the home building stocks have been spurting, which is a dangerous act in the face of what the rest of the market is doing.

    Wall Street never fails to amaze me, but this is really "one of those times."

    And that all, except for my ranting below.

    Russell
 
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