russell: the bull is on

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    April 7, 2008 -- I'm calling today's site -- A SHOCKING REVELATION. THE BULL NEVER LEFT.

    Bloomberg -- For the first time since December, the bond market is closing the credibility gap with Ben S. Bernanke and signaling its agreement with the Federal Reserve chairman that an economic collapse has been averted and that interest rates are bottoming. The Fed's unprecedented support for JPMorgan Chase & Co.'s takeover of New York-based Bear Stearns Cos. on March 16 is restoring confidence in Bernanke, who told Congress last week that "monetary and fiscal policies are in train that should support a return to growth.''

    Russell Comment -- Bernanke went all out against deflation and guess what -- he's winning.

    Question -- Russell, please answer this, at the January 2008 lows, stock values never came close to what we expect at a primary bear market bottom. What do you make of that?

    Answer -- I've thought about this situation, just as I thought about this same situation at the October 2002 lows. My answer is the following -- neither October 2002 nor January 2008 represented a major or primary bear market bottom. Both, I believe, were important secondary or cyclical correction-bottoms within a continuing primary bull market. I see no other explanation. Remember, one of the most important Dow Theory concepts is that bear markets end with stocks at great values. Stocks were not great values in the classic sense at October 2002 or January 2008.

    Question -- Wait, Russell, whoa -- are you telling me that we've been in a primary bull market ever since the early 1980s, and that we're still in that same primary bull market?

    Answer -- That's correct. That's what I'm saying. Somewhere ahead we're finally going to enter a true primary bear market, maybe one of the greatest and most tragic in history. That future bear market will end with something we haven't seen since the 1980 to 1982 period, and I'm talking about great values in stocks. And when I say great values I'm talking about blue-chip stocks selling in single-digit price/earning ratios while at the same time providing dividend yields of 6-7-8%, the kind of yields we last saw at the lows of the early 1980s.

    Question -- What do you think could bring stocks down to those levels? What might the market be discounting?

    Answer -- Here I'm only guessing, but I think it could be the dollar losing its reserve currency status. If that happens, the US would no longer possess the incredible and singular privilege of printing the same money in which it is indebted. In other words, the dollar would no longer be accepted by the rest of the world as the reserve currency. And the US could no longer print itself into solvency.

    Question -- Russell, to get back to your previous statement, you said that we are still in a primary bull market -- the same one that started from the lows of the early 1980s. If that's correct, if we're still in a bull market, then almost by definition shouldn't we see new highs in the major stock averages somewhere ahead?

    Answer -- Strange, almost impossible as that may seem, yes I think there's a definite chance that somewhere between 2008 and 2010 we will see new highs in the major Averages. The stock market occasionally does the totally unexpected, and you can put "new highs" in the major stock averages on that list.

    Consider the following -- pessimism has now enveloped almost the entire nation. Estimates of home foreclosures are running into the millions of units. The American consumer is buried in debt and stranded with little or no savings. Manufacturing is slowing down in the US. Leading analysts are competing with each other with bearish forecasts. People are calling the Fed impotent or even helpless in the face of the enormity of the problems we face. On top of everything else, the unfunded liabilities in Medicare and Social Security are running into the multi-trillions of dollars. The presidential candidates do not even want to talk about the nation's potential liabilities. And on top of everything else, we're mired in one of the longest and most expensive wars in US history.

    Yet slowly, almost imperceptibly, the major stock averages have been building huge bases. Since January 22, the majority of stocks have stopped going down -- in fact, they've been rising.

    In the face of these improving market conditions, the short interest on the NYSE continues to build. The latest statistics, covering the latest two-week period to March 31, show that the short interest on the NYSE has risen to an all-time record high of 16.142 million shares sold short. If I'm correct, if we have concluded a correction in an ongoing bull market, then this is an explosive situation with a record number of shorts locked in on the wrong side of the market. As the market slowly builds strength, these shorts will be forced to cover.

    I've posted a few daily charts below that are well worth studying. The first chart shows the Dow going back three years. Note that the Dow has already broken above its steep declining trendline. The steepness of the downtrend is typical of a correction in a bull market. Bull market corrections tend to be sharp, violent and short-lived. They are characterized by a rapid rise in pessimism, and they are often accompanied by a recession.



    The second chart shows the D-J Transportation Average, which has been a leader in this market since last July. The Transports are now back just above 5000 and within shooting distance of their record high of 5446.49 recorded in July 2007.



    Next in line is the D-J Utility Average. Here we see the Utilities breaking up from a steep declining trendline. Note how they held support at their April level. It looks to me as though the worst is over for the Utilities.



    Below we see a KEY chart of the Dow (monthly) going back to 1980. The Dow broke by a slight margin below its long-term trendline, but I was most interested to see RSI (the momentum index) actually turning up after hitting the 50 level. At the bottom of the chart we see MACD dropping below zero with the histograms actually at their lowest level of the entire period going back to 1980 (the histograms are below the lowest level of the massive correction of 2000-2002). On this basis, we can say that the Dow is now more oversold than at any time in the last quarter century!




    Question -- Russell, what kind of fundamentals would you expect to accompany a resumption of the primary bull market?

    Answer -- An incredible amount of fiat paper (currencies) is being injected into the world markets. There's also a mind-numbing amount of currency on the sidelines. There is more than $3.5 trillion parked in money market funds in the US. Trillions of dollars are now lodged in the so-called sovereign wealth funds. Arab coffers are bulging with dollars waiting to be spent. I've yet to see a figure covering all the currencies that are parked in banks, equity funds, mutual funds, pension funds, and in private hands. The sum total must be almost beyond belief.

    Ironically, the longer this recession or whatever you want to call it lasts, the more money will be pumped into both the US and the world economies. Here in the US it now requires over five dollars in debt to generate one dollar of GDP. The creation of new money is massive, with the Fed and world central banks running the printing presses overtime as they seek to ward off recession and bring back prosperity.

    Once it is recognized that we are in a bull market and that the market is headed considerably higher, a goodly percentage of this money is going to pour into the various stock markets of the world. The result should be a bull market speculative phase of epic proportions.

    Question -- What is the best way for the average person to participate in this situation, assuming, of course, that you are correct?

    Answer -- The easiest way would be to buy the Dow (Diamonds or DIA) -- and IOO which contains the hundred biggest international stocks. I'd buy equal dollar amounts of each (subscribers know that I've already bought the Diamonds). If you buy either, use stop losses placed 6% below your purchase price.

    TODAY'S MARKET ACTION -- My PTI was up 4 today to 5940. Moving average was 5940, so my PTI is neutral.

    The Dow was up 3.01 to 12612.43. No movers in the Dow today.

    May crude was up 2.86 to 1090.09.

    Transports were up 11.68 to 4988.07.

    Utilities were up .12 to 498.41.

    There were 1879 advances on the NYSE and 1465 declines. UP volume was 64.6% of up + down volume.

    There were 78 new highs and only 9 new lows. My 5-day high-low differentials improved from plus 78 to plus 114 today.

    Total NYSE volume was 3.69 billion shares.

    S&P was up 2.14 to 1372.54.

    NASDAQ was down 6.15 to 2364.85.

    My Big Money Breadth Index was up 2 to 830.

    Dollar Index was up .15 to 72.51. Euro was down .14 to 156.59. Yen was down .70 to 97.97.

    Bonds were lower. Yield on the 10 year T-note was 3.56%. Yield on the 30 year T-bond was 4.38%. Yield on the short T-bill was 1.37% and slowly rising, very slowly.

    CRB Commodity Index was up 7.40 to 534.62.

    June gold was up 13.0 to 926.89. May silver up 36 to 18.12. July platinum was up 16.40 to 2046.90.

    GDX was up .24 to 49.15. HUI up 1.23 to 451.79.

    ABX up .39, AEM down .44, AU up .65, GG up .03, NEM down .28.

    Gold acting well, holding above 900 and pushing north. Sit tight, correction is still on.

    STOCKS --My Most Active Stock Index was up a surprisingly strong 11 to 339.

    The five most active stocks on the NYSE were -- WM up 2.98, C up .52, F up .24, Q up .21, GE down .30.

    The VIX was down .18 to 22.27.

    CONCLUSION -- A rather strange day. Dow was up over 100 earlier, but it sold off -- however, it did close UP even though it was only by 3 points. New lows shrinking to only 9, and my PTI now neutral. Market appears to be creeping slowly higher, not that there's anything wrong with that. Volatility should be coming down, VIX closed below both its 50-day and 200-day moving averages. Not bad action all around.

    And that does it for moody Monday.

    Russell


 
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