Market Comments

By: Richard Russell | Mon, Mar 24, 2003
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Quite a week! Following two 90% down-days, on March 17 we got a 90% upside day. Prior to that we saw an important non-confirmation with the Dow refusing to confirm the downside penetration of the Transports. On March 17 my PTI turned bullish. On the basis of all that technical evidence, I suggested that subscribers, who wanted to get in the game, buy the QQQs with a stop. I picked the QQQs based on the fact that the Nasdaq had advanced above both its 50-day and 200-day MAs.

But hold it -- where are we? Here's where I believe we are. I believe we are still in a primary bear market, and I believe that stocks are still chronically overvalued. The very basis of Dow Theory is values. At a bull market top, stocks become highly speculative and overvalued. As far as I'm concerned, we're still there. Stocks are speculative and stock values continue at an extreme of overvaluation. When this primary bear market finally hits its low area, I'm firmly convinced that we'll see stock values comparable to what we saw in 1949 or 1974 or 1982. Right now, we're not even close.

As of last Friday, we were in what I call the "war rally." It looks, so far, as though the war will be "a piece of cake." All, except for the expenses, which promise to be huge. On top of that, we have the "after-war expenses," and nobody knows what those will be.

But the war rally has lifted the S&P 9%, the Dow up 9.6%, and the Nasdaq up 10%. Furthermore, oil prices have dropped 20%, the yield on the 30-year T-bond has risen 40 basis points, taking the long bond yield to over 5%, and the dollar rallied against gold, the euro and the yen.

For the year the Dow is now up 2.16%, the S&P is up 1.82%, and the Nasdaq is up 6.46%. The Russell 2000 average of lower priced stocks is still down 1.79%.

The secondary trend of the market was confirmed as up (by my reckoning) on March 17 when my PTI turned bullish.

The question is -- what do we do or should we do NOW?

Here's where you've got to make your own decision. Nobody on the face of this earth knows how far this secondary bull trend may carry. Remember, "the market can do anything." Yeah, I know very well that there are huge problems in the US economy that have not been solved. The debt and deficit situation is so bad it's ridiculous. Mr. Bush has not explained to us how all his plans and tax cuts are going to be financed. I could write a book about the problems we face. But "the market can do anything."

Right now, it seems to me that the market wants to go up. It's conceivable that we could have a 1967-68 situation where the Dow (within the context of an ongoing bear market) actually runs up to new highs.

So you've got to make a choice. Will you be willing to sit and smile if that happens now? Or will you kick yourself because you were "too damn conservative" back in March to make a move? I have a lot of subscribers who want to play it safe, and they're willing to sit with cash and a 10% gold position, and they don't care where the market goes. I have other subscribers who are more aggressive and are will to take a position and are willing to take a limited loss if they are wrong.

I have subscribers who can sleep through anything, and I have subscribers who "toss and turn" if they are down 3% in their assets. Nobody knows you better than you do, and nothing I write can apply to everybody. It just can't be done.

The market is now heavily overbought. Chances are that there will be a correction, maybe just a minor correction, coming up soon. That will give you an opportunity to make your move, assuming that you want to make any kind of a move. The move I suggest is buying Diamonds (DIAs) which are a proxy for the Dow and Spyders (SPY) which are a proxy for the S&P.

This is an interesting decision. It's a decision that may have to do with how much you have in assets. What do I mean by that? For a subscriber with $10 million, he might want to skip the whole thing. After all, who needs it? It's just a play on a secondary advance in a bear market.

For a subscriber with say $100,000 in assets, such a play might be worth it. After all, if he can pick up five or ten grand, fine, every dollar helps.

Well, that's one way of looking at it, and a lot depends on your ability to take pressure, and what I term your "greed quotient," and your "patience quotient."

A lot of people wonder why I write on the Internet six times a week. I do it because I like to write, and I do it because I have ideas every day, and I like to express them. And I do it because the market is there every day.

Speaking of the market being there every day reminds me of Warren Buffett's concept that investing in the market is like a player in a baseball game. If he doesn't like the pitch he skips it and waits for the next pitch. And if he finally strikes out he knows he'll be up again on the rotation, and he'll have another go at the ball.

The market will always be here, and if you don't like this situation, well, skip the damn thing because there'll be something else in a month or six months or a year.

Some investors, and I'm one of them, believe that the secret of investing is "risk management." That means never taking the BIG HIT, and always knowing what your potential loss is in every move you make. The real disasters in this business come from taking huge risks -- and losing.

I used to work for a boss who always concentrated on what could go wrong. One day I asked him (and he was a multi-millionaire, he made his money in the Depression), "Mr Weiss, why are you always so negative about a deal, even though in the end you do the deal?"

I never forgot his answer -- "I'm not negative, I'm just figuring what happens if I'm wrong. The good things take care of themselves, it's the bad moves that can sink you."

The week ended with the S&P selling at a still sky-high 31.99 times earnings while yielding a minuscule 1.82%.

The Confidence Index rose from last week's low 64.5 to this week's better, but still-low 66.8.

The true (common stocks only) advance-decline line for last week was March 17 minus 4.40; March 18 minus 4.28; March 19 minus 4.15; March 20 minus 4.01; March 21 minus 3.57. Breadth was up every day last week.

For those who hold gold and are wondering what's going on, an interview with Ray Dalio who founded Bridgewater Associate ends up this way.

Question -- "What's your approach to gold?"

Answer -- "We approach it two ways. We approach it as a proxy for global liquidity, so the more monetization there is, the more we would be inclined to own gold. We also approach it simply from a supply-demand basis. Who are the producers? Who are the sellers? We believe that China will increase their gold reserves, which represent about 2% of their total reserves. The central banks which has been selling will be doing less selling."

Russell Comment -- Monetization, count on it, there will be a LOT of monetization just to handle the gigantic deficit that the US is running. And Europe will be next as they seek to stimulate their sagging economies. The world will be flooded with paper.


Richard Russell

Author: Richard Russell

Richard Russell
Dow Theory Letters Inc.

Richrd Russell began publishing Dow Theory Letters in 1958, and he has been writing the Letters ever since (never once having skipped a Letter). Dow Theory Letters is the oldest service continuously written by one person in the business.

Russell gained wide recognition via a series of over 30 Dow Theory and technical articles that he wrote for Barron's during the late-'50s through the '90s. Through Barron's and via word of mouth, he gained a wide following. Russell was the first (in 1960) to recommend gold stocks. He called the top of the 1949-'66 bull market. And almost to the day he called the bottom of the great 1972-'74 bear market, and the beginning of the great bull market which started in December 1974.

The Letters, published every three weeks, cover the US stock market, foreign markets, bonds, precious metals, commodities, economics --plus Russell's widely-followed comments and observations and stock market philosophy.

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