Reading Richard Russell’s daily notes are like reading a real-time history book. Like any investor, he is often wrong, but his knowledge of the history of the market is truly unmatched. He is one of the few men who is still around to tell us about the Great Depression and how similar today’s economy feels. Russell has become increasingly bearish since early April. He says the market is crumbling and believes the internals are so bad that the market is very vulnerable to substantial downside. He even goes so far as to say the we won’t recognize the country by the end of this year. “There’s a hard rain coming”. Yikes:
“The market is crumbling, in the face of rosy news this is the worst kind of action. The market is severely oversold now, and if we don’t get a bounce next week, it’s “Katie, bar the door.” My PTI was down 6 to 6116. MA was 6075, so my PTI remains bullish by a shrinking 41, lowest in weeks. June gold gave up less than two bucks today, which is great relative strength action. GDX closed higher today, which is bullish for gold. This market action is catching investors by complete surprise, and as such it is proving very costly. Billions in paper values are being lost.
Finally, it’s happening. The stock market has “lost its mind.” The poor thing is falling apart, when every sane investor knows that the market “should be” going up as it discounts the almost certain better economy that lies ahead. Then I remember that the stock market reflects what everybody knows about everything and anything that pertains to business and the forthcoming economy. So alas, the stock market has finally gone insane. It’s not telling us what we already know.
I search Saturday’s Wall Street Journal and right on the front page I read, “The recovery is beating expectations as data show consumer and manufacturing strength.”
Then I look at the latest issue of Barron’s and right on the cover I read, “STRONGER THAN EVER – America’s biggest companies are sitting on loads of cash and ready to earn higher profits than ever before. What it means for the economy, dividends and your investments.”
And I ask myself, “Am I seeing things? The April 26 high for the Dow was 11205.03. The Dow is selling as write at 10557 down 648 points from its April high. If business is even better than expected, then why is the Dow down over 600 points? And why, if there were 674 new highs on the NYSE on April 26, were there only 20 new highs on Friday, May 14? And if my PTI was 6133 on April 26, why is it down 17 points since its April high?
The fact is that I’ve been seeing deterioration in the stock market ever since early-April, and this in the face of improving business news. The D-J Industrial Average is composed of 30 internationally known top-quality blue-chip stocks. These are 30 of “America’s biggest companies.” If Barron’s is so bullish on the future of America’s biggest companies, then why isn’t the Dow advancing to new highs?
Clearly something is wrong. But what could it be? Much as I love Barron’s, but I trust the stock market more. If I read the stock market correctly, it’s telling me that there is a surprise ahead. And that surprise will be a reversal to the downside for the economy, plus a collection of other troubles ahead.
Do your friends a favor. Tell them to “batten down the hatches” because there’s a HARD RAIN coming. Tell them to get out of debt and sell anything they can sell (and don’t need) in order to get liquid. Tell them that Richard Russell says that by the end of this year they won’t recognize the country. They’ll retort, “How the dickens does Russell know — who told him?” Tell them the stock market told him.”
Source: Dow Theory Letters
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So what are your thoughts on Russell’s comments?
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TPC Reply:May 18th, 2010 at 12:47 PM
Russell is a little dramatic for my taste, but he’s lived thru A LOT more market cycles than I have so he has a better feel for the markets.
The deterioration we are seeing around the world right now frightens me, however. Markets are very oversold right now and who knows what will happen with the Summer doldrums, but I am having an increasingly difficult time seeing a good way out of this. The deck appears almost perfectly stacked against us now:
1) Stimulus ending 2) Sovereign debt fears return 3) Consumer debt too high til at least 2012 4) Housing market rolling over again 5) China rolling over 6) Copper prices in bear market for first time since 2008 7) Earnings estimates are VERY high for H2 2010 8 The small investor has zero confidence 9) Global fiscal austerity 10) Leaders don’t understand the problems 11) “Recovery is here!” 12) Deflation returning 13) Market just 7% from its highs 14) EUR fair value $1.15 15) EUR problems are totally unresolved
I could go on and on. I know I am missing some huge macro themes, but aside from the potential for a near-term oversold bounce I am having a hard time seeing how we get thru the back half of this year without a major market dislocation.
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Octopus Reply:May 18th, 2010 at 12:59 PM
I think the really oversold mkt is Eur against almost everything, US and Europe eqty mkts are not terribly oversold anymore…that said the rebound could last but risk reward is against a lng position
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TPC Reply:May 18th, 2010 at 1:03 PM
What makes it impossible to get long here is that fact that the EUR is broken in my opinion and the market now knows it. How can anyone justify a EUR above $1.15? They can’t.
I might consider a net long into earnings season, but this environment is changing. As I said a few weeks ago, there is pre-Greek data and post-Greek data.
I would remain very cautious despite the oversold conditions.
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ChickenLittle Reply:May 18th, 2010 at 4:36 PM
Head and shoulder pattern resolution would be at $.85
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I can’t see the US looking too much different at the end of the year, but the recent actions in copper, chinese markets, and the AUD have been interesting. The AUD has been a favoriote short of mine for the past few months; b/c of it’s close ties to China it seems to be a fairly decent leading indicator. With all of these markets rolling over pretty hard, it seems as though they are telling us the global economy might be ready to take a turn for the worse. They keep finding a bid at support levels, if these are given we could see a part of Russels scenario play out.
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I feel dumber having read this.
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TPC Reply:May 18th, 2010 at 12:51 PM
That implies a certain level of dumbness prior to reading. How much did Mr. Russell’s commentary contribute to your now elevated levels of dumbness?
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B Ferro Reply:May 18th, 2010 at 4:04 PM
Funny as hell.
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A technician talks without a chart. It is all personal opinion. Russell should know that we may not even get primary trend change signal by the year end.
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fletcher Reply:May 18th, 2010 at 1:25 PM
I subscribe to Richard Russell, and what he wrote yesterday, was backed up with charts and a long long history of looking at and analysing the market internals (advances / declines, up vol / down vol etc) and he has been describing the deteriorating picture on a daily basis for some time.
Ignore him at your peril.
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LZ Reply:May 18th, 2010 at 1:44 PM
My question is, did we see a dow theory sell signal yet?
If the answer is no, Russell should not go too far to advise people take extreme bearish position and predict events in longer term time frame. Because the this deterioration could well be a short term retracement. The statement “by the end of this year they won't recognize the country” is not backed by any fact. That is all I want to say.
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but TPC – the list of headwinds you mentioned above isn’t what Russell was talking about – he was talking about indicators from the market itself… stocks rally nearly 100% over 15 months, and then decline 5%, and he’s saying it’s a warning sign? it’s LONG overdue! (note: i’m bearish too! but not because the market is 5% off its high in the face of what Russell calls improving economic news)
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