the dow: richard russell comments

  1. 12,849 Posts.
    lightbulb Created with Sketch. 69
    April 1, 2008 -- This may be "No Country for Old Men," but sometimes the old guys see what few other people see -- and sometimes the old guys get it right. I'm talking about that iconic analyst and economist, Peter Bernstein, who's latest report I just received. Mr. B. notes that unlike the situation at the start of most previous recessions, business is in pretty good shape today. He writes --

    Business cycle peaks share a number of features with a high degree of regularity. In particular, they are preceded by inventory build-ups, spurts in construction of new capacity, and increased in the rate of debt creation. At the same time, signs of strain throughout the economy begin to make an appearance. On all of these scores, the pictures are favorable.

    Mr Bernstein adds, but the household sector is in deep trouble and will remain in trouble for an extended period of time. This will . . . tend to restrain spending by the largest and most important sector of the economy.

    So this is the secret that has been driving the analysts up the wall. Corporations in general are in good shape, while it's America's consumers who having the troubles. Call it "the big split," which brings to mind another big split, the division between the 5% to 10% of Americans who are wealthy or in good shape vs. the great mass of Americans who are dealing with what I call "the big squeeze." The big squeeze comes from rising food prices, rising rents, rising medical, rising college costs, rising almost everything along with rising unemployment.

    Ironically, we've also had a number of splits or discrepancies in the stock market, and I believe my subscribers are well acquainted with them. We had the Transport which have bullishly refused to confirm the weaker Industrials, we had the new lows on the NYSE that bullishly refused to expand, we had the dismal sentiment on the part of a great many analysts in the face of a stock market that refused to go down. We have the bearish Lowry's statistics in the face of a market that refuses to fall apart, and we have a record high short position on the NYSE, a short position that now appears to be squeezed unmercifully.

    In the end, it is well to remember that we make (or lose) our money with price action and nothing else. This, of course, is the very basis of Point&Figure charting, which deals with price and nothing but price. The theory being that price takes into account all other phenomena from volume to sentiment to economic fundamentals. But what of the old argument of volume vs. price?

    It reminds me of the story of the broker who calls his client, Mr. Charlie.

    Broker -- "Charlie, I've got good news and I've got bad news."

    Charlie -- "Oh Lord, so give me the bad news first."

    Broker -- "I'm calling about that stock, Popdrop -- you bought 500 shares last month at 125. Well it just closed at 3 today."

    Charlie -- "So quick, what's the good news?"

    Broker -- "The stock went down on very low volume."

    OK, let's go back to basics, which means basic Dow Theory. Below you see the daily D-J Industrial Average, which has rallied above it's March 10 low of 11740.15. The Dow has been the weaker Average, but it is still well above its support, which is the blue horizontal line.



    The strength of the market has resided in the remarkable performance of the D-J Transportation Average. Below we see the Transport rallying to a February 26 peak, dropping to a March 10 low, and the rallying to a March 25 high. The Industrials were unable to confirm the Transport strength, which gave us an upside non-confirmation.

    From a Dow Theory standpoint, this leaves us in "no man's land" or in limbo. The two Averages must now either break out to new highs or break down below their support levels. It's clear when you study the two charts that the real work must be done by the Industrial Average.

    The KEY upside target for the Industrials is the February 1 peak of 12743.19. If the Dow can better its February 1 peak with Transports confirming the move, then the whole market picture will start to appear bullish.



    Gold started out the year at a price of 855. By March 17 gold had surged to 1071, a rise of 25% in less than three months. That apparently was too much excitement and "explosive action" for gold. Too many late-arrivals had climbed on the bandwagon. Suddenly, my mail box was filled with promotional literature telling me how I can make a fortune by buying gold leaps, gold futures, gold ETFs, gold bullion, gold coins, gold stocks.

    The new-comers, the get-rich crowd, entered the market just in time to get caught in a severe correction. The correction is illustrated on the P&F chart below -- GLD, which I use as a proxy for the metal. The first bearish signal occurred when GLD hit the 94 box. The second bearish signal occurred when GLD hit the 89 box today.

    How far down is gold fated to correct? As the old song goes, "How deep is the ocean, how blue is the sky?" We obviously don't know. Wife Faye says gold will come down to test support at the 840 box. I won't argue with the Fay-zer because she's a demon when it comes to the charts. Let's just wait and see. Oh, in case you were wondering, the bull market in gold is not over. This is a correction. Corrections in bull markets tend to be sudden and violent. Declines in bear markets tend to be plodding and dragged out as the item dribbles lower.


    For new subscribers, please note the following -- I don't think of gold as an investment, as though it was a stock. I think of gold as a life-long holding, as an asset like my home. I don't get quotes on my home very day, and I'm almost sorry that I can get quotes on gold every day -- once a year would be enough. The main reason that older American's have shown paper profits on their homes is that they never got quotes on their homes. These people held their homes over the years, they never thought of "trading" them, and they let inflation take its course.

    I suggest you do the same thing with your gold. Just think of gold in terms of how many ounces you hold, and ignore the price. You hold your gold into your old age -- then you sell it, or if you want you pass it on to your kids. Warren Buffett bought his house in 1956, and he still lives in that same house. Treat your gold the same way. Buy it and sit on it.

    TODAY'S MARKET ACTION -- A monster day. My PTI was up 6 to 5935. Moving average was 5940, so my PTI remains bearish by 5 points.

    The Dow was up by a huge 391.47 to 12654.36. Seven movers (higher) in the Industrials today -- a mover is a stock that changes price by 2 points or more.

    May crude was down .60 to 100.98.

    Transports were up a Watusi 191.41 to 4975.29.

    Utilities were up a big 14.13 to 493.12.

    There were 2805 advances on the NYSE and 534 declines. UP volume was 90% of up + down volume, and this could have been a 90% up-day. If so, that would be icing on the cake.

    There were 22 new highs and 10 new lows. My 5-day high-low differentials improved from minus 100 to minus 92.

    NYSE volume was 4.74 billion shares.

    S&P was up 47.47 to 137017.

    NASDAQ was up 83.65 to 2362.75.

    My Big Money Breadth Index was up 10 to 832.

    Dollar Index was up .78 to 72.94. Euro was down 1.778 to 155.52. Yen was down 2.19 to 98.50.

    Bonds were lower. Yield on the bellwether 10 year T-note was 3.54%. Yield on the long T-bond was 4.38%. Yield on the 91 day T-bill was 1.35%.

    CRB Commodity Index was down 3.32 to 513.06.

    Out of gold and into stocks. Apr. gold was down 33.70 to 887.80. Mar. silver was down 42 to 16.89. Apr. platinum was down 10.56 to 1937.60.

    GDX was down 1.31 to 46.39. HUI down 12.51 to 425.91.

    ABX down 1.53, AEM down 3.16, ASA down 2.80, NEM down .50.

    The correction we were all waiting for. Faye thinks 850. Could she be right? She's been right before.

    STOCKS -- My Most Active Stocks Index was up 11 to 331.

    The five most active stocks on the NYSE were -- C up 2.42, LEH up 6.70, SGP up .34, MO down .03, MU up .03.

    The VIX was down 2.93 to 22.68.

    CONCLUSION -- On the closing figures, this might have been a 90% up-day, but I won't know until tomorrow afternoon when I check with Lowry's. At any rate, this was a HUGE up day with both the D-J Industrials and Transports bettering their preceding peaks! Could this be an important turn to the upside. It could, but I want to see more.

    I added DD and WFC today to the accounts that I handle. Importantly, most of the financial stocks surged higher today. XHB, the homebuilder ETF gapped higher today.

    Short sellers got killed today, absolutely killed.

    All in all, I call it one hell of a day. If the market is higher tomorrow after today's rocket-shoot, that would be remarkable, and I'd have to see it to believe it.

    Hang on to your gold. Gold will be wealth when the D-J Average is a memory, but right now the Dow is hot, hot, hot.

    See you tomorrow with an abbreviated (Wednesday) site. Remember, Wednesday is the day when I rest just a bit.

    Russell

    ......................................................................................................................................................

    Ever since I first started writing Dow Theory Letters, I've received letters, notes, e-mails from subscribers telling me to dump the Transports (formerly the Rails), since this was a archaic industry that had little or nothing to do with the modern US economy. I never agreed and I still don't agree. Two days ago the piece below appeared in the Wall Street Journal. I was surprised and amazed, since I can't remember seeing anything written in praise of the poor old Transportation Average (which happens to be the hero of the market this year). At any rate, please read it -- I think you'll find it interesting.
    _____________

    Transport Stocks Keep Moving

    Despite Market Slowdown, Truckers and Railroads Defy Conventional Wisdom by Posting Solid Gains
    by David Gaffen
    _________

    If conventional wisdom - and a mountain of economic data - suggest that the U.S. economy is falling into, if not already in, a recession, why are the transportation stocks doing so well?

    Investors often look at transportation stocks as a bellwether for the economic outlook. Transportation, in one way or another, is an integral part of many major industries; if manufacturers are seeing slack demand, they will ship fewer goods.

    However, through Friday, the Dow Jones Transportation Average has gained 4% on the year, hardly an indication of a dire economic situation, while the Dow Jones Industrial Average is down 7.9% and the broader Standard & Poor's 500-stock index is off by 10%.

    "It's a very interesting contradiction, because here we are in what most people think is going to be an extended economic slowdown and yet we have much better action, certainly among the truckers and railroads, than one would expect," said Kenneth Tower, chief market strategist at Covered Bridge Tactical, an investment advisory in Yardley, Pa.

    Since the stock market is a predictor - not always correctly - of growth, the rally in transportation stocks reflects expectations of a rebound in economic growth later in the year, just as it fore-shadowed the decline in late 2007. The DJTA's closing high in 2007 was 5243.60 in late April, several months before the Dow's apex in mid-October.

    What strikes some as odd about the rally is that transportation companies still face significant head winds, particularly from energy costs. The prices of crude oil traded on the Nymex hit an intraday peak of $111 a barrel on March 13, and settled at $105.62 Friday. High fuel costs cut into the profitability of airlines and shippers such as FedEx and UPS.

    But perhaps this has been factored in, both by shippers and investors. The American Trucking Associations' truck-tonnage index was up 3.5% in February from a year earlier, suggesting a rebound from economic weakness.

    A number of companies in the sector have caught the eye of notable value investors, including Berkshire Hathaway Inc.'s Warren Buffett. Berkshires has been steadily buying shares of companies such as Burlington Northern Santa Fe Corp., and now holds an 18% stake in that railway.

    "Usually when he buys, it leads a lot of the value guys to look at the stuff," says Bill Stone, chief Investment strategist at PNC Wealth Management.


 
arrow-down-2 Created with Sketch. arrow-down-2 Created with Sketch.