richard russell on the market and hui

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    Russell On the Market & HUI

    September 16, 2003 -- What's interesting today? Well, the yield differential between the 10 year T-note and the 10 year TIPS has declined from a recent 2.22 to today's 2.09. So the bond market is starting to factor in less inflation. Surprise? No, it simply goes along with yesterday's chart of the declining commodity index.

    Today's levitating stock market is defying a number of studies. For instance, Investor's Intelligence shows that for the week ended Sept. 8 there were 262 "buying climaxes," 120 on the NYSE, 128 on the Nasdaq and 13 on the Amex. A "buying climax" results when a stock hits a 52-week high, then closes down on the week. Buying climaxes are indicative of distribution.

    According to Investor's Intelligence, "insider selling jumped again to a new record for the last seventeen years. Insiders are now selling 4.5 shares for every one they are buying. Heavy insider selling implies distribution and is bearish.

    On top of the above, investment advisors have been heavily bullish for months while bears have been scarcer. Latest reading show 54.1% advisors bullish and 19.4% bearish. Too much bullishness should be taken contrarily.

    On top of all the above, we have today's absurdly optimistic valuations or I should say "over-valuations." But so far, the market has "given the finger" to all this negative "evidence" and has gone merrily on its way. The way, so far, has been to the north -- higher, baby, higher.

    All of which means that in the end the most trustworthy evidence in the market is price action. A few subscribers have written to ask why I include point&figure charts in these reports. P&F charts deal exclusively with price action on the theory that price takes in everything, even including volume and time. And of course we make or lose money in the investment business, not on insider trading statistics or odds lot ratios or percentage of bulls, we make or lose money on price action.

    All right, enough theory and guesses and philosophy, let's just get hard-nosed. Forget everything else, how do we make money in the markets? Maybe this chart says it all. One way of making money is to be where the action is -- to be in the right place at the right time.

    The P&F figure below tells a story. Here we see HUI, the Amex "gold-bugs" unhedged gold index vs. the S&P 500 Composite. This ratio has risen irregularly and jaggedly higher ever since October of 2000. This month the ratio broke out again to the upside, and the ratio number, as you can see, is now at 198. The story is as clear as a bell. The gold stocks have been outperforming the S&P. This is the "dreaded secret" that no analyst or money manager wants to talk about. I guess we can call it "the stealth ratio" or the "third rail" ratio. As a broker, talk about gold stocks out-performing the S&P -- and you're dead. I've talked at length about the Dow at the 50% or halfway level of the entire bear market decline. The 50% level stands at 9504, and that number is acting almost like a magnet for the Dow. The Dow rallied above 9504 for six days -- then turned around and dropped below 9504.

    This morning as I write an hour after the opening of today's session the Dow is up 46 points for 9495 and only 9 points below that critical 9504 level. Of course, this is a very erratic market, so I have no idea how it will close. It's a market dominated by hedge funds and professional traders and institutional money, and it's a market that can open down 20 points and close up 100 points -- or it can do the reverse.

    Margins on the Nasdaq are up 25% in recent months, meaning that traders and speculators are in the market "with both feet" and are heavily into margins. In other words, they are borrowing money big-time in order to speculate. These are always dangerous markets, markets driven by greed and the desire to make a quick buck, rather than a market guided by a careful weighing of values.

    In all my years dealing with markets and the people who live in the markets, I've met only two or three people who have made a consistent living trading stocks.

    Writing at 11AM Eastern time I note that the Dec. Dollar Index is up .64 to 97.01. Facing massive deficits, how can the dollar be up? My answer is that the dollar is up via Asian buying. In their desperate efforts to keep their own currencies down, Asians are buying billions of dollars and in doing so loading up their reserves at the rate of increase of 20% a year.

    At the same time I note the Dec. 30 year T-bond is down 22 ticks, and in the face of the higher dollar Dec. gold is down 2.40 to 372.50. Looking over the whole picture, I get a feeling of frantic activity -- the US government spending two trillion dollars a year and running up ever-higher deficits, Asian governments buying dollars by the tens of billions, the world's stock markets boosted by huge liquidity and artificial interest rates. And gold, held back by an artificially levitated dollar but in a rising trend based on the mass creation of currencies the world over.

    The major, overriding pictures, as I see them, are as follows:

    Global overproduction that is generating deflationary pressures the world over.

    The US's obsession with growth at any cost and no matter where it takes us.

    Rising unemployment in the US due to the transfer of jobs to cheaper overseas destinations. The loss of jobs is politically unacceptable, and this intensifies the hope that expanding growth will somehow "take care" of unemployment. Therefore, the US government continues on its wild spending spree, particularly in the defense area.

    All these trends must, as I see it, result in depreciation of paper currencies, probably all paper currencies. Yet there's no hint that governments will cease creating more of their own currencies, if for no other reason than to buy dollars and thus keep their own respective currencies "cheap."

    Gold is, to some extent, a mirror to the dollar. Since mid-June the Dollar has been in a rising trend, due to dollar-buying by Asian central banks. The big picture for gold is the specter of a collapsing dollar, a dollar that will decline in the face of unsustainable US deficits. That's the longer-term or very big picture for gold.

    The near-term picture for gold is simply gold as a mirror to the dollar. The dollar rises, gold declines. The dollar declines, gold rises.

    Nevertheless, the big picture for gold is so enormous and so compelling that gold remains well above its rising 50-day moving average, which stands today at 362.20,

    Note -- following up on yesterday's commodity notes, today the Commodity Indices were plunging again, while October crude dropped .64, breaking below 28 to 27.58. Today Oct. crude broke below its 200-day moving average (27.92) for the first time since May. The market may consider the breaking down of crude oil to be bullish since is lessens the gas "tax" on consumers.

    CONCLUSION -- It seems to me that the one thing that unites all the items that I've written about above is the perception that the US economy is on the path of growth. Sure, the growth may be at the cost of huge deficits, sure the growth may be at the cost of great pain for future generations, but it's GROWTH nevertheless. And as I've emphasized, it's "growth at any cost, no matter what the cost."

    Richard Russell
    Editor-in-chief - DOW THEORY LETTERS

    September 18, 2003

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