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A ROSE BY ANY OTHER NAME would smell as sweet, Shakespeare wrote. But calling what my dogs leave on the lawn roses won't make it smell like flowers.
Neither is the stock market fooled by labels. The rah-rah crowd is calling this swoon a "correction," which by implication puts the market back on course to predestined encounter to ever-higher highs.
But some market veterans, who call a rose a rose and a spade a spade, aren't mincing words.
The primary bear market is resuming, writes Richard Russell, publisher of the Dow Theory Letters, in his daily note on his Web site to subscribers.
Though market veterans say the market makes the news, not that the news makes the market, there was plenty of bad news on which to pin the 4% plunge in the major equity averages Thursday.
To be sure, the European sovereign debt crisis shows no resolution despite the nearly-$1 trillion bailout package from the European Union and the International Monetary Fund. The euro remains under extreme pressure, falling through $1.2150 before rebounding sharply on unsubstantiated rumors of central-bank intervention during the afternoon in New York (by which time European markets were closed), to back above $1.25 by early Friday in Asia.
The European market fragility was only exacerbated by Germany's unilateral curbs on naked short sales, which included the purchase of credit default swaps. Deprived of that source of protection, traders only wanted out and to raise cash.
The curbs on CDS only served to fan the concerns about some European banks, which continue to plague the funding markets. The London interbank offered rate paid by different banks continues to vary widely, Zerohedge.com points out. French bank Societe Generale paid 0.72% for three-month money at the high end of the British Bankers Association Thursday poll, fully half again as much as 0.48% offered by UBS of Switzerland.
Meanwhile, the latest batch of U.S. economic data again was weaker than economists' forecasts, notably a 25,000 jump in new claims for unemployment insurance. That follows other indicators that point to renewed weakness along with falling inflation.
None of which came out of the blue Thursday. The steady parade of soft economic numbers and deflationary signs from the commodities market has been pushing Treasury yields sharply lower for more than a month now. The benchmark 10-year note finished in New York at 3.21%, a huge drop from just over 4% in early April.
The only new news was the Senate's passage of financial regulatory reform, which had been in the works for weeks but stalled until Thursday. Not surprisingly, financials led the market's retreat. But the losses extended across all sectors, with technology hit hard.
Thursday's drop took approximately $500 billion from the value of U.S. equities, according to the Wilshire 5000 Total Market Index. This measure, the broadest one of the U.S. market, has been down five of the past six days for a cumulative loss of about $1.3 trillion. Since the recent high of April 23, the losses total $1.8 trillion or 12.4%.
Whatever the explanations proffered for the market's action, Russell declares, "The curse, it is cast."
Writing before Thursday's close when the Dow Jones Industrial Average was off 245 points, he said a close of the Industrials and Transports below their May 7 closing lows means "that the primary bear market is resuming." But the time of the closing bell, the DJIA was down some 376 points, while the Transportation Average ended down 214 points, or nearly 5%, their lows of the session.
Beyond the Dow averages, Russell also points to the breakdown of breadth. The advance-decline line for the New York Stock Exchange traces a "fatal downward zig-zag, which seals off the upside, and tells us that the trend is down." The majority of Big Board stocks are heading lower, pulling down the averages. In other words, "The soldiers are finally taking the generals down with them."
"I've done my best to get my subscribers OUT of the stock market," writes the dean of the technical analysts who has been publishing his letter for more than a half century. "I don't know how many of my subscribers have moved, but if you haven't, it's never too late to do the right thing. Get out of stocks."
Comments: randall.forsyth@barrons.com
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