richard russell

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    October 27, 2003

    Sentiment -- I believe the conventional wisdom is that the stock market is safe right up to 2004 presidential election time. After all, the Fed is going to to, and is doing, everything in its power to insure that the economy is in good shape between now and election time.

    In other words, "we're home free and making money" between now and election time. This is the conventional thinking. But what everybody knows is worthless where the stock market is concerned. So the smart bunch will always jump the gun. Consequently, I have to ask myself, "Wouldn't it make sense to get out of the market before the crowd? If the crowd thinks it's all fun and profits until election time, then -- let me out now."

    Here's another thought. The funds are now loaded with stocks. There are times when one should be very heavily in cash. But the mutual funds can't do that -- many are committed to be almost 100% in common stocks.

    What happens to these funds if the primary bear trend now reasserts itself? The funds could be locked in with losses in no time at all.

    So as I see it, it's going to be a very interesting and dangerous time between now and the end of the year. Nobody, it seems, is ready for trouble in the market. Which is just what the bear wants.

    I've been talking about the "unexpected" strength in the long Treasury bond. Now why in the world with everyone talking about inflation should the 30 year T-bond be heading higher? The only thing I can think of is that the bond market sees a slowdown or even a reversal in business. The bond market is very sophisticated and nothing frightens the bond market more than expanding business along with rising interest rates.

    In view of that, again I ask, why are the bonds rallying? You do the math (and the thinking). By the way, as I write the long T-bond is up over a point.

    Richard Russell’s Dow Theory Letters

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