Category Archives: Richard Russell

Investment Observation: Simmons First National Corp (SFNC) at $26.65

Posted on April 11, 2011 by NLObserver Team | Leave a comment

For better or worse, we expect that regional financial crises will emerge as the dominant investment theme going forward. After having devastated our economy on a national basis, with the use of derivatives and residential real estate, the time has come for the old-fashion regional boom and busts of old.

With the secular trend towards inflation, as reflected in the rise in gold, silver and all other commodities, we should expect that farmland in the U.S. will ultimately take a parabolic trajectory. The gradual rise in prices of farmland by large investors will attract retail buyers. Unlike large investors, retail buyers of farmland will need to borrower heavily to participate in the speculation. Unfortunately, it will be because of the retail buyers that the boom will go to extremes. The chart below demonstrates the last farmland boom during a secular bull market in commodities.

Source: Richard Russell's Dow Theory Letters, http://www.dowtheoryletters.com/

On the way to a speculative surge and inevitable bust of the farmland boom, financial institutions will likely have to play a more significant role in financing it. To that end, we present a former Dividend Achiever that is currently on our Dividend watchlist, Simmons First National Corp (SFNC). Simmons First National is likely to become one of the many lending institutions that will play a role in financing the coming boom in commodities. From farmland to farm equipment, SFNC will definitely be in the mix. Unlike the banking institutions that will eventually arrive at the party, as an Arkansas bank, Simmons First National is already situated to play a contributing role.

Simmons has all the qualitative elements that a true value investor would want like falling only 20% in the period from 2007 to 2009 as compared to other regional banks as a group which fell over 70% as indicated by Standard & Poor’s Quantitative Stock Report dated April 8, 2011. SFNC has managed to keep the dividend at the same level since 2008 which is no small feat. Book value has increased 6.5% over the last 5 years.

Value Line Investment Survey dated March 11, 2011 indicates that SFNC has a high predictability in their earnings which have gained 3% in the last 5 years and while the last year of earnings have declined –9%. Investors should not confuse falling earnings with no earnings at all. Over emphasis of a companies declining earnings is often what creates value in the price of a stock for those unable to make this distinction.

Because SFNC has traded in a range between $20 and $30 since 2004, there is an implied element of value that has accrued in the shares. If nothing else, the management of SFNC has managed to dodge the banking crisis bullet and is now poised to participate in the coming boom in farmland as part of the bull market in commodities.

Please revisit New Low Observer for edits and revisions to this post. Email us.

Leave a comment

Posted in Richard Russell, SFNC, Simmons First National

Tagged members

Richard Russell’s Miscue

Posted on April 6, 2011 by NLObserver Team | Leave a comment

On the Dow Theory Letters (http://www.dowtheoryletters.com/) site yesterday, there was an interesting admission by Richard Russell. Russell said:

“I mistakenly took the vicious decline of 2007 to 2009 as a turn in the tide and a bear market.”

This comes as a shock since most market veterans would say that when almost every market, foreign and domestic, declines by 30% or more then it would be sufficient to label it as a bear market. When the gold stock index (XAU) declines 62% along with almost all other commodity indexes then a reasonable person, lacking any other term for it, would call that a bear market.

Instead of being a bear market, according to Russell, the decline from 2007 to 2009 was simply a “…correction in an ongoing bull market.” As I attempted to process this thought, I only wonder what Russell would re-characterize the stock market decline in Japan (from the 38,000 to 8,000 level) as. Dow theorists like Hamilton, Rhea and many others are very clear on what constitutes a bear market. Russell’s assertion that 2007 to 2009 was simply a “correction” was in complete contradiction to his prescient call of an eminent bear market in Barron’s in November 2007. Nor does Russell’s latest missive add credibility to his prior claims that the rise in the market from the 2003 low was a bear market rally.

To top off Richard Russell’s wild claim that a year and a half decline of over 40% in global equity price was only a “correction” is the fact that he omitted any reference to Dow Theory having any role in his sudden realization that he was wrong about his belief that we were only in a correction rather than a bear market. Russell credited his not so secret Primary Trend Indicator, Lowry’s Selling Pressure Index and Lowry’s Buying Power Index. Apparently, Dow Theory plays a small or non-existent role in a publication that is titled The Dow Theory Letters.

By inference, not crediting Dow Theory for his change in thinking suggests that Dow Theory doesn’t work. However, the NLO team has been adamant that up to this point, Dow Theory has indicated that we’re in a bull market and that a bear market has not been signaled since the July 23, 2009 bull market indication. This is in stark contrast to Russell’s back and forth calls of a bull and bear market as early as January 2009.

So what is Russell’s remedy for his error in judgment for the last 2 years? In today’s note (April 6, 2011) Russell says, “If this market is going to turn primary bearish, I would want to see an orthodox Dow Theory bear signal.” Wait a minute, as the market was rising Russell arbitrarily misapplied his version of Dow Theory and now he thinks that he’ll turn bearish when he receives “…an orthodox Dow Theory bear signal.”

As an attempt to salvage some sort of credibility Russell says, “In the meantime, all is not lost. Gold is at new highs as are the gold ETFs, and silver is at a 31-year high.” This comes after Russell said on March 1, 2011 that if the Dow Industrials fall below 11,800 then investors should sell all stocks “including gold stocks." Well, on March 16, 2011, the Dow fell to 11,600 leaving anyone who believed Russell’s commentary on March 1, 2011 in the lurch.

The NLO team is disappointed since Richard Russell has been the primary inspiration for our work in Dow Theory and critically analyzing financial markets. In addition, we’d rather have Russell retire as a legend with a legacy that will continue to inspire. However, Russell’s latest work comes off as sloppy and requires significant willingness to view his work as entertainment, at best.

Please revisit New Low Observer for edits and revisions to this post. Email us.

Leave a comment

Posted in Dow Theory, gold, Richard Russell, Silver

Tagged members

Market Review and Analysis

Posted on January 28, 2011 by NLObserver Team | Leave a comment

As the Dow Jones Industrial Average (DIA) approaches the 12,000 level, we believe it is necessary to review our analysis leading up to this point. There have been indications that the market would knock on the door of 12,000. And we’ve been at the forefront of this analysis very early on.

Starting as early as February 12, 2009 (article here), we warned that despite the declining trend in the markets, history has proven that declines of 40% or more tend to retrace 60% to 100% of the previous decline.

In September 2009, after reviewing the Coppock Curve (article here), we pointed out that if the market held up in October 2009 that 12,000 on the Dow would not be an unrealistic price target.

In January 2010, we mistakenly thought that the Dow had a good chance to reach 12,000 by February 2010 (article here). Although we were woefully inaccurate in the timing of our estimate, we were convinced that 12,000 as an upside target was not unreasonable.

On March 23, 2010, we came out with an article that highlighted what we thought was confirmation of a cycle low in the market on February 8th (article here). In retrospect, although it was a major low for the year 2010, it was not as significant as the July 2010 low. However, we reiterated 12,000 as the target for the Dow.

Our eyes are now trained on the next target for the market. This is where our “analysis” is put to the test. All along we’ve thought that a rise from 6,400 to 12,000 would not be very unusual. However, getting back to even, or 14,164, will be very challenging. There are many who feel that external forces have falsified the markets rise.

As far as we’re concerned, we’ve accomplished the target that was long since projected and is now upon us. As we’ve indicated in a recent article, the Dow Industrials’ upward trend has less to do with the actions of the Federal Reserve and more to do with the corrective nature of markets after a significant plunge like in the period from October 2007 to March 2009 (article here).

We’ve noted in the article titled “Diversification Doesn’t Matter” that declines in the Dow will be amplified in the S&P 500 and Nasdaq Composite Index (article here). Exposure to these diversified indexes through the use of index funds and ETFs will result in surprising losses that defy the theory of diversification as was the case in 2008.

We believe that as long as the price of gold keeps moving higher in conjunction with the Philadelphia Gold and Silver Index (XAU) and Dow Theory confirmations of the bullish trend continue, there is a good chance that the market will retrace 100% of the previous decline from 2007 to 2009. At times like these, the rise and fall of the price of gold may be a leading indicator for where the market might be headed. Our numerous articles on the correlation between gold and the stock market have proven to be correct for those willing to accept the data from an unemotional standpoint (article link).

Although it is not unusual for markets to retrace 100% of a prior decline of 40% or more, we’re more than willing to figuratively step aside and watch what happens next. However, we cannot help taking another stab at when, and not at what exact level, the Dow Industrials will peak. Two prior articles on the topic are the basis for our thoughts on the prospects for where the top may occur.

On June 14, 2010, we wrote an article titled, “A Market Cycle Worth Observing” (article here). In that article, we reminded readers of the consistency of 4-year cycles to provide key markers for tops and bottoms in the market. We included referenced from Charles H. Dow’s era, founder of the Wall Street Journal, from 1901 and prior. We gave examples as provide by Richard Russell from 1953 to 1979. We were even able to provide examples from the period between 1987 and 2009.

If there really are 4-year cycles, as we contend, then October 2007 would stand as the marker for the last peak in the cycle. In theory, the mid-point for the peak would be some point in 2009. For us, March 9, 2009 represents the low or mid-point for the 4-year cycle. Our estimate is that the full 4-year cycle should be completed with the Dow Jones Industrial Average peaking at some point in 2011.

According to Dow Theory, the downside target is set at 9,273.50. If this level is breached in conjunction with the Dow Transports, then we could consider a bear market has been initiated.

The second article that we derived our view of the market is dated April 11, 2010 on the topic of Dow Theory (located here). In that market analysis, we proposed, in addition to the fact that the Dow Industrials “…could go to 11,574.59 with no problem,” we outlined three hypothetical scenarios under which the Dow Industrials would reach 14,164.

In retrospect, and upon further analysis, we realized that those projections were really indications for when the market would top irrespective of the exact level that the top would occur. It seems to us that the period from January 31, 2011 to June 18, 2011 is the timeframe for when the completion of the cycle should take place.

Despite our concerns for an eminent top in the market, we will continue to buy and sell individual stocks. From our experience in 2008, gains can be obtained from individual stocks within the context of a declining trend in the market. In fact, during 2008 there were only three months where losses were registered which were June, October and November. Although these months incurred substantial losses, 2008 ended with overall gains of 14% in our portfolio (article link).

Please revisit New Low Observer for edits and revisions to this post. Email us.

Leave a comment

Posted in 4 1/2 year, 4 year, Coppock Curve, Dow Theory, gold, Richard Russell

Tagged members

Dow Theory Q&A

Posted on November 8, 2010 by NLObserver Team | Leave a comment

A reader comments on a prior thought:

1. Part of the confusion might be that Mr. Schannep gave a SELL signal on 30 Jun 10 -- that articlle of yours seems to have been published that very day, while the 2nd sentence implies that it was written the previous day. Therefore, the next signal would have to be BUY, which came 27 Sep 10.

Is it possible you missed the 30 Jun 10 signal?

Also, your 7 Nov 10 article implies a "bull market indication" on 24 Jun 09 -- I'm not sure what that means, but as a historical note, Schannep gave a BUY signal on 9 Apr 09.

2. Regarding Dow Theory analysis: At its simplest, my understanding is that a market move must meet rather basic criteria for time and distance, as noted on page 18 (examples follow) of the book, with caveats.

A secondary reaction move, after a primary market high or low must be about 3% -- enough to allow ONE index to recover at least 3%; ONE index -- but not both -- may exceed the previous high or low. It must take at least two weeks to reach that point, which sets a "mark" (peak or trough). After which, when BOTH indicies exceeds their "mark", there is a Dow Theory Signal -- a change in trend, turn of the tide, etc.

So, the market picture for 2010 was:

DJI: High on 26 Apr, reaction mark on 7 Jun, bounce on 18 Jun, SELL signal on 30 Jun.

DJT: High on 3 May, reaction mark on 7 Jun, bounce on 15 Jun, SELL signal 30 Jun.

I've omitted SPX, since you folks seem to be somewhat "purist". However, I might suggest a review of the Dow Theory section of "Technical Analysis of Stock Trends (9th Edition)", page 24 in particular. As the basis for Dow's Theory is market movement, it should be reflected in -- or at least agree with -- movement in such a large index. In addition, merely because it did not exist when Dow, Nelson, Hamilton or Rhea were alive does not merit exclusion from consideration. Deliberately ignoring it, as Russell and Moroney do, may be akin to using Ptolemy to critique Copernicus.

The previous caveats mentioned are threefold:

1. Schannep rigorously defines Bull and Bear markets as a 19% rise/16% drop from low/high (those are reciprocal) on page 86. Therefore, they serve as a "trailing stop", should Dow Theory not give a signal.

2. Schannep also defines "capitulation" on page 90 (10% drop below 10 week average) as a drop significant enough to warrant shortening the two-week timeframe to one week, for a BUY signal.

3. The bounce after a reaction must occur over more than one day; thus the 27 May 10 bounce was not valid.

Hope that is helpful.

Our Response:

It is definitely possible that we could have missed the June 30 sell signal. However, Let us try to prove that our understanding of Dow Theory is correct.

First, there is the issue of the primary trend. No primary trend stops and then re-starts only two months apart. This goes back to the issue that you’ve mentioned about the timing of a call. Such a short period of time between bull or bear market calls is a tip-off that a false signal had to have been triggered on June 30, 2010. A review of the primary trend from Rhea, Hamilton, Nelson, Russell and Schaefer is in order on that point.

Second, Dow Theory is all about confirmations. No matter which source that is used, there was not a confirmation of the decline to the same supports levels in the Transportation and Industrial Averages for the Feb. 5th and Feb. 7th. This is very significant because the exact same confirmation of both the Industrials and Transports was used to re-issue a buy indication on November 3 by Mr. Schannep. Although it should be said that Mr. Schannep used the S&P and the Industrials which gave a “buy” only a couple days ahead of the standard Transports and Industrials signal. Was it worth the extra days advance notice? Absolutely, if you’re already out of the market. However, Hamilton, Rhea and Russell are very clear on the risk of jumping the gun on bull and bear market signals without accurate confirmation.

In our November 4th “analysis” we were specific in indicating that we chose to opt for the sure fire call instead of the earlier call on September 27th when the markets broke above the line. Again, if the call for a “buy” signal can wait 4.73% for the sure-fire confirmation of the bull market or “buy” signal then we’ll opt for the most conservative route.

The whole premise of Dow Theory is about following the steps as outlined by Nelson and further elaborated on by Hamilton and Rhea. When E. George Schaefer proposed the 50% principal, he didn’t create something that wasn’t already a part of Dow Theory. Schaefer only highlighted an aspect that others may have taken for granted or overlooked. Adding elements that didn’t exist may seem to bring the concept of Dow Theory out of the dark ages. However, there are specific aspects that Schannep has introduced that are not consistent with Dow Theory.

Third, the introduction of the S&P 500 as a valid index to track is erroneous in that it assumes that there is an advantage by introducing the index. Since the S&P 500 was created in 1957, all data prior to 1957 is modeled on a 100% correlation to the Dow Jones Industrial Average. This means that movement in the index would have mirrored the Dow industrials which is impossible now and therefore could not possibly happen before 1957. This means that all insightful examination of price movements of the S&P 500 before 1957 is useless.

There is evidence to suggest that in the period from 1929-1932, data from the Barron’s 50 index actually declined by only 78% instead of the Dow Industrials’ 89% reflecting that human judgment related to changed in the index impacted the outcome of the decline. Without the S&P 500 being in existence at the time there is no way to test this theory. We covered the topic of changes Dow Industrial Average and their impact from 1929 to 1932 in our article titled “Dow Jones’ Decline Largely Impacted by Index Changes” and “After the Crash of 1929, Recovery was Quick.”

In addition, the current beta on the movement between the Dow Industrials and S&P 500 is only occasionally at 1 or 99.9% correlated. In any instance that there isn’t a correlation it is in the favor of the Industrials. This defies logic since any index of stocks with only 30 companies should fall by a greater magnitude and rise by a greater magnitude than an index of 500 companies. If you use the Yahoo!Finance interactive charting, you will find that during almost any period since 1970, the Dow Industrials fell less than, and rose more than, the S&P 500. Although this isn’t true for every period it is true for the majority (80/20) of periods selected especially if you pick periods further out in time to the present. This means that signals gained by one index will not be the same with another index.

We’ve already shown that there is a problem with the belief that a broader index provides more accuracy and stability in the markets in our article titled “Diversification Doesn’t Matter.” In fact, we’ve done a recent update on this data and have found that the Dow Industrials have exceed the performance of the S&P 500 in the 5-year, 3-year, 1-year, and YTD categories. In addition, the 2008 performance of the Dow Industrials fell less than the S&P 500 which defies the point of having a diversified index.

The net result of sticking to an index that existed over an extended period of time is that people of today can test the validity of the claims made by Dow Theorists in the past. If we cannot test the theory on a continuous index then we would not be able to prove or disprove the accuracy of the claims. Being able to prove the claims of people in far flung eras allow for us to give credence to the facts.

Our next issue is the introduction of Edwards and McGee’s classic book Technical Analysis of Stock Trends (9th edition). The use of such a source is unfortunate since it is not the source. The source for Dow Theory is from books published by Russell, Schaefer, Greiner, Shumate, Fritz, Dow, Nelson, Hamilton, Rhea, Olmerod, Collins and Raeder. All of the aforementioned are Dow Theorists first. Although a great book, Technical Analysis of Stock Trends is not an authoritative source for considered understanding on Dow Theory even though they correctly say that "...Dow Theory is the granddaddy of all technical market studies."

Schannep’s definitions of a bull and bear market and the parameters that are set around such definitions are probably useful and profitable. However, it is probable that we’re talking about Schannep’s theory instead of Dow’s theory. I don’t mind that Schannep has his own way of accounting for bull and bear markets. However, Dow Theory is usually much more simplified than what has been proposed by Schannep.

As mentioned before, your understanding of Schannep’s work is far greater than ours. This gives you the benefit of knowing, in our opinion, one more approach on the topic than we have. We couldn’t claim to be Dow purists since we’ve only opted for the method that seems the simplest.

We hope our response has added food for thought and thank you for your contribution to Schannep’s work. As a subscriber to Schannep’s service, you are a credit to his efforts and thank you for your time spent explaining his philosophy.

Please revisit New Low Observer for edits and revisions to this post. Email us.

Leave a comment

Posted in Dow Theory, E. George Schaefer, Richard Russell, Schannep

Tagged members

A Lesson in Dow Theory

Posted on November 7, 2010 by NLObserver Team | 2 comments

In a September 20, 2010 article titled “Dow Theorist Believes Buy Signal is Imminent” on MarketWatch.com, there are views from three different well known Dow Theorists with different conclusions from each one of them. This is an instance where the author, Mark Hulbert, should at least know something about the topic on which he writes. Instead, the author clouds the picture on Dow Theory, which few people really understand or write about. Since Mark Hulbert rates the performance of stock market newsletter, he should probably stick to the performance numbers rather than muddy the interpretation on Dow Theory by writers who aren’t following the clearly defined rules of the theory.

Now it is the job of the New Low Observer team to clean up the confusion created by Mr. Mark Hulbert, on the inaccuracies of the Dow Theorists.

First, in all instances, none of the theorists mentioned (Russell, Schannep, Moroney) could possibly be interpreting Dow Theory accurately if they are somehow about to generate a “buy” signal. This would mean that prior to a buy signal there would have been a sell signal indicated. According to our work on Dow Theory, which is well documented and freely available (check here), there hasn’t been a single sell signal since the July 24, 2009 bull market indication which was selected by the New Low Observer team as the initiation date of our website. This is further evidenced by the simple fact that the Industrials and Transports have continued to climb higher since March 2009 to the present.

Not to be outdone is the great Dow Theorist Richard Russell. Mr. Russell is referred to in the article as a “traditionalist” when it comes to Dow Theory. Mr. Russell says that he cannot “…say that even a short term buy signal has been generated. That’s because the Dow Transports as of mid-day trading in New York remain about 1% below their early August high (which came in at 4,516.35).” To his credit, Mr. Russell sticks with the use of the Dow Transportation Average for an indication of a Dow Theory “buy” signal.

Unfortunately, on the very first day that the Transports exceeded the 4,516.35 level on September 28, 2010, Russell never gave any indication that a short-term buy was at hand. The very next day, still no indication of a short-term buy indication. September 30th, still no indication of a “short-term” buy signal. As the Transportation Average continued to climb to the current level of 4,923.40, Mr. Russell has made no reference to Dow Theory based on the numbers or the technicals. Instead, Mr. Russell has talked about the major premise behind Dow Theory is values. While this is true, some consideration of current market action is what Dow Theory is all about. The pattern created by the “short-term” buy signal is exactly the same one that Russell used when he called the market bottom in January of 1975. We’re not certain why he doesn’t recognize this pattern today.

Next, as a Dow Theorist of sorts (we’re not really sure), Mr. Schannep has several issues that require addressing. Among our concerns, Mr. Schannep never needed to replace the Dow Jones Transportation Average for the S&P 500 Index in order to get a Dow Theory signal. We understand the goal of Mr. Schannep in this strategy, reduce the period of time to garner a signal so that more upside is obtain. If, in fact, the goal of Mr. Schannep was to get an earlier signal by using the S&P 500, then he probably got it by three days at best.

It is important to note that if Mr. Schannep was applying anything like Dow’s theory, then he would have to wait for the last of the two indicators to confirm a signal. This means that although the S&P 500 signal came almost two weeks ahead of the Transportation index, the Industrials’ confirmation came within three days of the Transports’ confirmation. The chart below demonstrates how Mr. Schannep could have utilized the Transportation index and gotten the same signal in the same period of time.

The matter of timing the signal is a concern that plagues every Dow Theorist. However, resorting to the tactics of Mr. Schannep only undermines the point of Dow Theory as outlined by Robert Rhea in his book The Dow Theory. Instead of changing Dow’s theory into our own, in order to generate earlier signals, we have decided to use Dow’s Theory as an asset allocation tool instead. More funds in stocks that are undervalued during bull market indications and fewer funds in stocks that are undervalued during bear market indications. This way, we’re not beholden to issues of late signals requiring modifications of Dow’s theory.

The article suggested that on September 20, 2010 a buy signal was about to be registered according Jack Schennep’s website. Mr. Schannep manages to mix the usage of the Dow Industrials, Dow Transports and the S&P 500 index to garner a “Dow Theory” buy or sell signal. It appears that, according to Mr. Schannep, if you cannot get clarity from the standard indicators, the Dow Industrials and Dow Transports, then you replace any one of the two indexes with the S&P 500 index. Mr. Schannep indicates that this approach is a more modern strategy for determining Dow Theory buy and sell indications. We don’t like Mr. Schannep’s modification to the Dow Theory but if it works profitably for his subscribers then more power to him. However, it should be said that Mr. Schannep isn’t practicing Dow Theory.

Another problem we have with Mr. Schannep is that he advocates buying at a point just short of a full confirmation. A reasonable market technician would agree that if there is only 4.73% before a clear indication is given (new high), why try to capture so little with the prospect that the market could reverse direction? Instead, wait for the clear signal and decide how much you want invested in the next move. This idea is driven home in the following chart and excerpt from a 1939 series of articles in Barron’s that later became the book “Making the Dow Theory Work” by Sparta Fritz Jr. and A.M. Shumate.

“Point 9 represents the upward penetration of the minor high, with encouragement from the volume of trading. The averages are still at levels to suggest buying.

“All rules of sound practice would forbid buying at point 10. Possible losses, figured against recent lows, are unattractively large. At the same time, a bullish forecast still lacks the authority which the averages could give by bettering the old highs. If the speculator has missed the good chances that have been left behind, surely he out not buy here. It will be far wiser to wait and pay a little more, when and if the averages jump the hurdle of their former highs.

“Aside from other considerations that enter into forecasting, the market position at point 10 actually suggests to the speculator a tactical sell-out of some of his stock. Suppose it turned out that the bull market was over. Important savings could be made by sales here. The speculator can step aside, and re-enter the market at a slight concession, if the highs are bettered.

“The bull market is demonstrated to be still in progress at point 11. Stocks can be bought here, but it cannot be considered a first-class risk. It is simply the last reasonable buying level as the primary trend moves on. Stocks bought here will sometimes show a loss on the next reaction.”

Sparta Fritz Jr; Shumate A.M. “Making the Dow Theory Work.” Barron’s (September 11, 1939). page 9.

Basically, Mr. Schannep recommends buying the market at the equivalent of point 10 when he could have more certainty in the call at point 11. In our view, this isn’t a responsible approach to calling the market, let alone a mangled version of Dow Theory.

The MarketWatch.com article makes reference to Richard Moroney of the Dow Theory Forecasts newsletter. Mark Hulbert says that Mr. Moroney has an interpretation of Dow Theory that is “different than that of both Schannep and Russell, the two Dow averages must surpass their mid April highs to trigger a buy signal. Those levels, which remain some way off, are 11,205.03 for the Industrials and 4,806.01 for the Transports.” Based on his commentary, Mr. Moroney is the only one who is actually practicing Dow Theory. The numbers that Mr. Moroney indicated as being required for a Dow Theory buy signal were exactly the same numbers that the New Low Observer team was looking for as a continuation of the bull market.

Unfortunately, there is a distinction between a “buy” signal and continuation of the trend. As mentioned before, a buy indication means that a sell had to be given previously. A continuation of the trend indicates that a prior signal is being confirmed and nothing has changed. This nuance is very importance since anyone who considers buying at this point should understand that “…it cannot be considered a first-class risk…” as described by Fritz and Shumate.

The handling of such a topic as Dow Theory should not be left to chance when the material on the topic is so accessible. Unfortunately, Mark Hulbert isn’t aware of the discrepancies mentioned above. Such a lack of knowledge on Mr. Hulbert’s part only feeds the misunderstanding about Dow’s Theory. This is reflected in the comment section that follows the article where readers justifiably deride the theory and it’s practitioners.

Note:

Any and all bull market indications are within the context of a secular bear market. The secular bear market is deem over when the Dow Industrials and Dow Transports exceed the previous highs set in 2007. Therefore, the current market is considered to be a "bear market rally" or a cyclical bull market.

Please revisit New Low Observer for edits and revisions to this post. Email us.

2 Comments

Posted in Dow Theory, Richard Russell

Yearning for the Richard Russell of Yore

Posted on November 4, 2010 by NLObserver Team | Leave a comment

As Dow Theorists, it is required that we read the information that is put out by Richard Russell. So it perturbed us to find that there has been nary a peep on Russell’s site about Dow Theory based on the recent movement of the Dow Jones Industrial Average and the Dow Jones Transportation Average. As noted on our site today, Dow Theory has given a reiteration of the bullish trend that has been in place since the July 2009 bull market confirmation.

In the last two days we have feverently scoured Russell’s website for any confirmation of our perspective on Dow Theory. We’ve found nothing. Even more alarming is the vague reference to Dow Theory as it pertains to value. This reference in passing was circumspect at best and puts into question any attempt to demonstrate any understanding of the topic. On November 3, 2010, Richard Russell said:

“My own opinion regarding the markets is that the test of values trumps all other considerations.”

Russell goes on to conclude that based on historical values of the market, stocks and bonds are in a bubble. After concluding that stocks and bonds are in a bubble, Russell says that he doesn’t want his subscribers to buy stocks or bonds. Finally, in his November 3, 2010 posting, Russell laments the period of 1997 to 1999 and states, to our disbelief:

“Who were those geniuses who piled into AMZN [Amazon.com] when it was selling for under five clams?”

Along with the preceding quote, Russell included only a chart of AMZN and a description on how much he buys almost everything from the Amazon.com.

We’re not so sure that Russell was pining for AMZN back in July 1, 1998 when Amazon.com was selling for $19.02 [adjusted for splits]. At that time, in his letter published on the same date, Russell said:

“Bookseller Amazon.com is priced at over 81 [ $81 unadjusted/$19.02 adjusted] now, but it won’t be making a nickel of profit for at least two years.”

There was no indication that Amazon.com was at a value at the time.

On November 4, 2010, Russell ties the concept of Dow Theory to values. This was the first reference to Dow Theory after the bull market confirmation on November 3rd. In this excerpt, Russell gives an idea as to what exactly he looks for to determine values, namely dividend yield and P/E ratios. Then Russell goes on to say:

“In the business of investing, money is made in the buying (see Amazon study on yesterday’s site). Buy right and you’ll end up with profits. Buy wrong, and you’ll end up with tears.”

We were perplexed that Russell would connect Amazon.com with buying values at a time when, back in 1998, there were no dividends to generate a dividend yield and no earnings to generate a P/E ratio. This attempt to demonstrate the importance of values was further distorted when Russell starts discussing buying gold in the November 4th article. Russell said:

“Buy gold at the highs, buy gold on a correction, buy gold when its in a confusing consolidation, and within five years you’ll thank the day when you bought it.”

To say “Buy gold at the highs…” counters all the efforts to educate investors on the importance of values. In addition, there was no reference to the fact that Dow Theory had giving a bull market confirmation. It is troubling that Russell further tarnishes his reputation as a keen observer of markets [regardless of being right or wrong] by not addressing the validity of the signal on a theory that is the title of the newsletter.

Although we generally agree with Russell’s perspective on gold, for different reasons, we hope his subscribers aren’t being led astray by his blatant contradictions simply because he is bullish on gold at a time that the gold market happens to be moving higher.

Sources:

Russell, Richard, Dow Theory Letters, (San Diego, California), July 1, 1998, page 6. Letter 1255. http://www.dowtheoryletters.com/
Russell, Richard, Dow Theory Letters, (San Diego, California), March 2, 2005, page 6. Letter 1384. http://www.dowtheoryletters.com/
Russell, Richard, Dow Theory Letters, (San Diego, California), November 4, 2010, Daily Commentary. http://www.dowtheoryletters.com/
Russell, Richard, Dow Theory Letters, (San Diego, California), November 3, 2010, Daily Commentary. http://www.dowtheoryletters.com/

Please revisit New Low Observer for edits and revisions to this post. Email us.

Leave a comment

Posted in Amazon.com, AMZN, Dow Theory, Richard Russell

Tagged members

On the Brink of a Secular Bull Market in Precious Metals

Posted on September 27, 2010 by NLObserver Team | 2 comments

In our “Commentary on Gold” dated November 11, 2008, we made some outlandish claims about the lack of performance by three undisputed experts on gold. One claim that we made was that “…when the price of stocks fall so too does the price of gold, and to a greater degree, gold & silver stocks.” This was said after the precious metals and the XAU and HUI indexes had already hit their final lows on October 24, 2008 and October 27, 2008 respectively. We demonstrated our claim through research performed by David Marantette which showed that from 1975 to 2001, declines of 10% or more in the Dow Jones Industrial Average resulted in larger declines in the gold stock indexes and the price of gold. We completed the research by providing the data from 2001 to 2007.

The point of our December 9, 2008 article was best summed up in our closing paragraph:

“The long term trend in gold and silver stocks as demonstrated by the Philadelphia Gold Stock Index (XAU), which was initiated in November 2000, will eventually head permanently higher. The continuation of that trend will be among the key indicators that the bear market in stocks is at or near an end.”

Our overall assertion was, and is, if precious metals and their stocks continue heading higher so will the general stock market. If the stock market starts to collapse then so too will the price of gold and silver and to a greater degree gold and silver stocks.

When we wrote our earlier pieces on precious metals, gold enthusiasts argued that the physical metal and the gold stock indexes are completely unrelated and therefore it doesn’t make sense to compare the two, not realizing that we weren’t comparing them at all. Other gold enthusiasts countered that with the price of gold falling only -29% from the March 2008 high investment in that area was justified considering that the Dow and S&P 500 had fallen over -35% in 2008, not realizing that losing less money isn’t the reason why people invest. Not liking the outcome of the data, because it only covered the period from 1975 to 2007, some said that it didn’t go back far enough.To respond to the critics about our data, we gathered prices of gold and silver stocks from 1924 to 1933. That data demonstrated that gold and silver stocks got hammered during that period. Below we have included a previously unpublished Gold Stock Average of the 13 precious metal stocks (out of 21) with complete price history from 1924 to 1933.

As you can plainly see, when you exclude the performance of Homestake Mining, the value of the gold stocks fell 76.47% from their peak in 1925 to the bottom in 1932. This performance is in line with the decline of the Amex Gold Bug Index (HUI) from March 14, 2008 to October 27, 2008; which has 16 precious metal stocks in it. In the chart below, you can see that the HUI index and the Philadelphia Gold and Silver Index (XAU) fell 70.56% and 68.15% respectively, within the 8-month period.

Few people will readily agree that all the deflating of the financial system has been expunged from the markets. However, when compared to the deflation that took place from 1924 to 1932, first reflected in the gold stocks and later the entire stock market, it becomes very clear that the general stock market decline of over 50% and the eight month decline of the gold stock index on such a large scale signaled the end of the deflationary period. For investors, one area we think that holds the most promise is in silver.

On September 9, 2009 we wrote an article titled “Silver Should be the Focus.” We indicated that if there were a need to participate in the run in precious metals, silver would be the best investment/speculative choice. At the time, silver closed at $16.36 an ounce. On Friday September 24, 2010, silver closed at $21.46 with an increase of 31.17%. During the same period of time, the price of gold increased 30.61%. So far, the precious metals appear to be in lock step with each other since our last article on the topic. However, since the bottom in the market on October 24, 2008, the price of gold is up 82% with the price of silver is up 142%. Although these are considerably large increases in value in a very short period of time, compared to past price increases the current moves are in their infancy.

The most pressing matter for the precious metals market right now is confirmation. So far, the price of gold and silver has exceeded their respective 2008 highs. However, the corresponding stock indexes, the XAU and the HUI, have not yet confirmed the trend. If the trend is confirmed then we will have received the indication of the beginning of a secular bull market in gold and silver. In our Richard Russell Review posted on July 4, 2010, we outlined Russell’s significant detail on the importance of confirmations. Although our analysis shows how Russell got the interpretation incorrect, it is well worth re-examining this article since it outlines exactly how to utilize both indicators (price of gold and gold stock index) for confirmation of the trend.

Below is the HUI index with what appears to be the third attempt at the 514.89 level.

Although not likely, failure to breach the 2008 peaks for the XAU and the HUI index could mean very hard economic times ahead. Alternatively, going above the previous peak, which seems much more likelier, may mean that we’re entering the early stages of higher interest rates and inflation. It is necessary to keep in mind that higher inflation and higher interest rates won’t initially wreck havoc on the economy.

Most investors have the tendency to remember only the periods at the extremes, the real estate bust, the real estate bubble, the dot com bust, the dot com bubble, the gold bubble and the gold bust, skyrocketing interest rate, the current zero interest rate environment. In every instance, the recollection of such periods is rooted in the final stage. However, what is more important is the slow transition that takes place from trough to the next peak.

In the case of inflation, the slow transition was the innocuous period, saved for a world war, from 1932 to 1966. Unfortunately, most investor over concentrate on the period from 1973 to 1980 due to the exaggerated moves upward. The transitional period brought many cyclical and one secular bull market in the Dow Jones Industrial Average. It is possible that as our inflation rate climbs the Dow Jones Industrial Average could experience a bull market similar to the period form 1949 to 1966.

According to the chart below, periods of inflation coincided or preceded extremely large moves in the stock market. The period from 1940 to 1947 had a 74% increase in the CPI while at the same time the stock market doubled in value. Naturally the argument is that the stock market only managed to beat inflation by a small amount over that period. The reality is that the response by the Dow Industrials was to go from the 100 level in 1941 to the 1000 level in 1966.

Looking at the chart above, it is hard to believe that the CPI increase of 200% in the 1970's would follow the pattern of previous high inflation periods with stocks increasing 10 times in each instance.

While we watch and wait for the confirmation of the new high in the price of gold and silver with the XAU and HUI indexes by breaking above their 2008 highs, our overall assertion still is that if precious metals and their stocks continue heading higher so will the general stock market.

2 Comments

Posted in gold, gold bugs, Homestak Mining, HUI, Richard Russell, Silver, XAU

Tagged members

Beckman Coulter (BEC): Pondering the Imponderable

Posted on September 13, 2010 by NLObserver Team | Leave a comment

A reader asks:

Will Beckman Coulter (BEC) stock bounce back to $70 in a few months?

Our Response:

To attempt to respond to this question, for the sheer joy of pondering the thought, we first need to define the parameters. First, we need to refine the question by asking, “Will Beckman Coulter (BEC) get to $70 by December 13, 2010?”

Addressing the issue of whether Beckman Coulter (BEC) will get to $70 by December 13th requires an acceptance of the probability this will occur. The last time BEC was at a similar stock price of $45.24 (prior to reaching the $70 level) was on March 17, 2009. From that time, it took 125 trading days to reach $70.03 by September 11, 2009. This means that the stock of Beckman Coulter could reach $70 by March 9, 2011. If the stock were to match the previous trajectory from March 17, 2009 to September 11, 2009, by December 13, 2010, BEC would be at the $57.51 level in the stock price.

However, to put Beckman Coulter’s 2009 rise in perspective, we must remember that the period from March 17, 2009 to September 11, 2009 was the most rampant stock market reaction to the prior 2007 to 2009 collapse. This means that extraordinary forces that were behind the rise in all stocks. It is highly unlikely we’ll have the same forces at play this time around for both the stock market in general and BEC in particular.

According to Dow Theory, BEC is considered to be at fair value when the price is at $56.99. The upside targets are as follows:

$52.64
$61.33
$70.03

At each indicated level, the price of Beckman Coulter would experience major resistance to the upside. This means that the price could just as easily revert to the prior support level.

The great Dow Theorist Richard Russell has indicated on many occasions that a stock’s decline typically lasts 1/3 of the rise. Being selective in our analysis, the peak in BEC on August 18, 2008 at $75 was reconciled on December 12, 2008 when the stock closed at $39.44. This transition from $75 to $39.44 took 83 days. The subsequent peak in BEC took place on or near September 14, 2009; which was a full 270 days from the previous peak on August 18, 2008. In this example, selective as it is, the decline lasted 31%, or 1/3, of the complete cycle.

Now, if we apply the same flawed logic to Beckman Coulter (BEC) going forward, we arrive at a date of September 13, 2011 for the time when the stock reaches the next peak. This does not necessarily mean that the price will be at the same level it once was. In fact, it could be much lower or much higher. The point is, the next peak in the price, whatever it may be, would occur somewhere around September 13, 2011. We’ll throw in the possibility that BEC revisits $70 at the same time next year.

As shareholders of Beckman Coulter (BEC), we expect that the stock should fall at least 50% from the level the stock was purchased at. Naturally, we have the expectation that the stock price will fall between now and December 13, 2010. If the stock price rises to $52.64 then we would be pleasantly surprise. If the stock price rises to $56.99 by the proposed date then we’d be shocked beyond belief. The mere suggestion that the stock could reach $70 in such a short period of time is almost out of our capacity to fathom. We don’t think BEC will reach $70 by December 13, 2010.

Our Summary on Beckman Coulter reaching $70:

$70 by March 11, 2011 based on previous $45-$70 cycle(rosy scenario)
$57 by December 13, 2010 using $45-$70 trajectory (rosy scenario)
Price accomplishes $70 by September 13, 2011 (plausible scenario)
Price falls further (likely scenario)

Leave a comment

Posted in BEC, Beckman Coulter, cycle analysis, Market cycles, Richard Russell

Tagged members

Richard Russell Review: China in the ’60s

Posted on August 17, 2010 by NLObserver Team | Leave a comment

The genius of Richard Russell can be found in his ability to observe. At least 30 years before China was on the lips of yet to be born hedge fund managers and venture capitalists, Richard Russell was providing clarity on the future of China while it was in the throes of Communist power. The following are excerpts of Russell's commentary on China during the 1960's. Russell himself never touts his record on his prescient views specifically on China, consider this among the first.

July 25, 1962. Issue Number 188. page 4.

In this issue, Russell compares the conventional wisdom with what ultimately became the outcome which tended to be counter, or opposite, to the prevailing view. One comparison that was made was from the period of 1958-1961. Russell said: “Russia [was] way ahead of U.S. in space. Communists taking over the world and apparently unstoppable. Everything [was] going Russia’s way.” The final reality was that by 1962 “Russian space progress greatly exaggerated. Russia runs into economic trouble. The rise of China as the possible great threat.”

May 25, 1965. Issue Number 289. page 4.

“A fascinating aside on the gold picture is the news that Red China has now joined Russia as an interested accumulator of gold. According to the New York Times, China has recently purchased over $60 million of gold through the London Gold pool.”

December 21, 1965. Issue Number 309. page 2.

“A strong, competitive, aggressive country tend to accumulate gold, while a country which is plagued by inflation, rising costs, ineffective budget control and political ineptitudes tends to lose gold.”

December 21, 1965. Issue Number 309. page 4.

“China obviously wants to prolong the war [with Viet Nam], and it is this writer’s opinion that China sees the war as part of her economic battle with the U.S. China knows that continuation of the war will have the effect of bleeding this nation dry.”

January 11, 1966. Issue Number 311. page 2.

“As I see it, China is very much afraid of war with the U.S. (see Sundry Comments), and the fact is that China has backed away from real confrontation with the U.S. whenever that possibility has arisen. On the other hand, I believe Russia would like the keep the war expanding in the hopes that the U.S. will ultimately turn her nuclear capabilities against China (note the reports of new giant Russian-made mortars in the hands of Vietcong). If Russia can bring this off, she will have rid herself of the Chinese nuclear and population explosion threat, and she will have emerged as the second or greatest power on earth.”

February 1, 1966, Issue Number 313. page 2.

“It is well to remember that the Communists (ironically) view capitalism from an orthodox (pre-Keynesian) standpoint, and the Chinese in particular have always been fiscal conservatives.”

“An interesting aside is that renewed gold buying has come in from Red China (in the London Market). This prompted the London Economist to note ‘The buying represents not a switch out of sterlings, but out of Swiss francs. China has apparently been accumulating them in greater quantity than was generally suspected.’ This gold buying fits in with the writer’s thesis that China is fighting an economic war with the U.S., and that she wants ultimately to compete with capitalism in the marketplace. China’s unannounced motto might be, ‘Keep buying gold while the U.S. loses her own gold.’”

September 21, 1966, Issue Number 335. page 3.

“The Third World force is to be China, the looming giant of the East. In time, thinks DeGaulle, the buffer force will be ‘cemented’ and grow powerful, in time China will be a superpower to be reckoned with…”

“Russia and China are fully aware of the power of the yellow metal, and both are making every effort to bolster their holdings. The scene is set for drama over Africa. But in this writer’s opinion, history will favor those who understand the old adage, ‘Gold will win.’”

February 17, 1967, Issue Number 349. page 2.

“…Russia wants the war to continue, since it keep the U.S. ‘aimed’ continually at Russia’s real enemy, China.”

As with the first entry on July 25, 1962, it may be necessary to reflect on the conventional wisdom to determine if things going forward may not turn out as many analysts expect.

Citation Note:

Russell, Richard. Dow Theory Letters. San Diego, CA. www.dowtheoryletters.com. Accessed August 17, 2010.

Leave a comment

Posted in China, Richard Russell, Richard Russell Review

Tagged members

Dow Theory, Stock Markets and Economic Forecasting

Posted on August 5, 2010 by NLObserver Team | Leave a comment

A reader writes:

In a recent Time Magazine article dated July 27, 2010, David Rosenberg said the following:

"…But the market gets it wrong as often as it gets it right – it was wrong to forecast a recession in the fall of 1987, again in the summer of 1998 and again in the winter of 2003. It was wrong to forecast sustained growth in the summer of 2000, a recovery in the winter of 2002, an avoidance of recession in the fall of 2007 and the end of the downturn in the spring of 2008. It may be a discounting mechanism, but the stock market has a spotty record – let's remind ourselves of that."

Does this mean that the Dow Theory was not giving the right signals for the stock market during all the periods Rosenberg mentions above? Can you tell me what was Russell saying with regards to the stock market's and the economy's trend as forecasted by the Dow Theory during those periods?

To put it another way, there are two separate issues involved here:

First, does the Dow Theory correctly forecast the bull/bear trend reversals in the stock market? (Answer seems yes, though with a considerable lag.)
Second, does the stock market correctly forecast recoveries/recessions in the economy? (Some say No!)

Our Response:

To address the preceding questions, we’ll first cover the role of Dow Theory from our perspective. Then we’ll address the aspect of modern usage of Dow Theory from the leading proponents with the widest following. Then we’ll circle round to address Dow Theory and how to make it useful regardless of its obvious shortcomings. We’ll address Richard Russell’s take on Dow Theory and what he was saying about the market using Dow Theory. We’ll make comments on David Rosenberg’s assessment that the stock market “…gets it wrong as often as it gets it right” by comparing the periods of recession with the Dow Jones Industrial Average.

When thinking in terms of Dow Theory, the New Low Observer team doesn’t take the conventional view on how it should be used. To us, Dow Theory isn’t a market forecasting tool as much as it is an allocation indicator. When there is a bull market indication then we have a target allocation of 33% or more for a single stock. When there is a bear market indication then we have a target allocation of 25% or less for an individual stock.

Some take Dow Theory too seriously and extrapolate far beyond even the most rudimentary use and allow it to become a make or break approach for buying or selling stocks. The most useful, but least understood, element of Dow Theory is Charles Dow’s discussion of values. Subsequent writing on the topic of values, in the context of Dow Theory, by Nelson, Hamilton, Rhea, Collins, Shumate, Schaefer, Russell and Schennep are worth heaps more than any successful market call of a top or bottom. In fact, the Dow Theory understanding of values trumps all market signals since great values can exist in both bull and bear markets.

Aside from ignoring the emphasis on values, the two most common mistakes that are made when thinking about Dow Theory are misinterpretation and misapplication. Accurate interpretation is the primary goal of every Dow Theorist. However, it becomes easy to get overwhelmed with current market conditions. This makes the acceptance of what the indicator is saying very challenging. Front load a few personal experiences from the “Great” Depression and WWII and it become impossible to see the market from the trees. Renowned Dow Theorist Robert Rhea once cautioned those trying to interpret the markets (especially Dow Theory) that, “the wish must not father the thought.” In many cases, it becomes too easy for the wish to supercede the judgment of markets.

The linked article written on June 16, 2010 on MarketWatch.com titled “Avoiding a Death Sentence” by Mark Hulbert provides a perfect example of misinterpretation and misapplication when trying to use Dow Theory. We get misapplication by trying to recommend selling stocks based on the misinterpretation of a potential bear market indication.

In the article, Hulbert highlights opinions on Dow Theory from the most prominent Dow Theorists today starting with Richard Russell, Jack Schannep and Richard Moroney. The basic view in the article was that the stock market was grasping at the last straws of a bull market and it was only a matter of time before a sell signal would to be given.

Richard Russell was the only one of the three Dow Theorists who was unwavering in his view that a sell signal had already been registered. The article quotes Russell as saying that, “the curse is cast. …[The breaking of the May lows] means that the primary bear market is resuming. The monster is creeping towards Bethlehem.”

Schannep and Moroney seemed to be in agreement that a violation of the June 7th low would be what they needed to see in order for them to officially declare that a sell signal had been indicated, according to Dow Theory. As it happens, the June 7th lows were violated for both the Dow Industrials and Dow Transports (on a closing basis) which means that both Dow Theorists would have given sell recommendations to their newsletter subscribers.

The misinterpretation of Dow Theory that was executed by these three theorists was a function of two distinct issues. First, there wasn’t a focus on prior action as suggest by Charles H. Dow. Our May 13th article on Dow Theory outlined the specific action that should be watched for prior to the occurrence based on the Dow Industrials movement from January 19th to February 5th. The next item that was misinterpreted was the May 6th “flash crash.” The fact that the Dow Industrials and Dow Transports had similar closing lows of May 6th made the otherwise technically significant closing price unimportant in comparison to the intra-day low. The intra-day low reflected either the psychological influence needed to fall as much as it did or the psychological influence needed to recover from such a low.

These are the factors that I think contributed to the misinterpretation of the signals given. Some Dow Theorists have said that because they take an arms length approach to the market (i.e. not invested personally in stocks) that their interpretation is not clouded by the desires for financial gain. However, those same Dow Theorists manage to get it wrong just as often as anybody else.

Next is the issue of the misapplication of Dow Theory. William Peter Hamilton was correct in titling his book on Dow Theory The Stock Market Barometer. Like a weather barometer, Dow Theory was intended to be a guide to the direction of the market on a short-term basis. The readings from a weather barometer tell you to either bring an umbrella or leave it at home. The barometer never tells you to stay at home if it is going to rain. Telling investors that a bear market has been signaled and therefore you need to sell all or some of your stocks is the equivalent of saying, “its going to rain today, you’d better stay home.”

Again, Dow Theory wasn’t intended to generate a buy or sell indication. Instead, it was created to tell investors what the current conditions of the market are with a 3-month, 6-month, or 9-month peek at what might lay ahead. If the indication is that we’re in a bear market then we could expect that the market will decline further. If the indication is that we’re in a bull market then we could expect that the market will rise. What an investor does with this information is something else altogether. In many respects, buy and sell reactions based on Dow Theory bull and bear market indications are misapplications of the theory.

Throughout the writings by Rhea and Hamilton, it has been noted that Dow Theory is not a “get rich quick” way to make money in the stock market. Neither is the theory infallible. Because misinterpretation of Dow Theory is so easy to accomplish, the New Low Observer team attempts to focus more attention on values and the application of Dow Theory as an asset allocation tool rather than being right about the big picture or primary trend.

When you combine the effects of misinterpretation with misapplication by some of the most renowned Dow Theorists, it is no wonder that critics complain that Dow Theory is archaic. However, put in its proper context, observations in Dow Theory can provide better judgment in selecting individual stocks at appropriate times with proper allocations. Although Dow Theory generally gets it right about the stock market direction on a short term basis, I personally wouldn’t rely on the market calls as much as I do with Dow’s writings on values.

Like most market participants, we don’t necessarily know values in the way that someone as smart as Warren Buffett might. However, everyone is clear on the fact that well established companies with consistent dividend increasing histories near a new 52-week low are most likely to be closer to “real” value propositions instead of stocks in a well established rising trend or at a new high. Charles Dow was very clear that values, above all else, determine the direction of the market. This includes the values that can be found within a bull or bear market.

In regards to Richard Russell’s commentary on Dow Theory, it is necessary to take Russell’s bias into account when determining whether he was wrong or right about the markets in 1987, 2000, 2002, 2003, 2007, and 2008. Russell’s bias is infinitely and always to the downside and this bias has grown as time has passed. This is what makes his late 1974, early 1975 call of a market bottom so amazing and worth studying.

Despite being right at the time, it is next to impossible to say whether Russell truly called the tops of 1987, 2000, 2007, and 2008 or was continuing with his downside bias (false positives). However, what we can gather from each call of a market top are the nuances that are very distinct from the other times that Russell was bearish. You’d have to read all of his letters from the beginning of a rising market to the peak to know the distinctions.

How biased against the upside is Richard Russell, despite what Dow Theory and his proprietary Primary Trend Indicator says? The following quote should summarize Russell’s attitude.

“In his latest mailing, Steve [Leuthold] talks about secular bear markets. What’s a secular bear market? They are the really big ones. Steve tells us that the dictionary defines secular as ‘coming once in an age.’ Steve Leuthold says that in 46 years in this business, he has only seen two secular bear markets, the bear market of 1969 to 1974, and the bear market of 1999 to 2002. Fair enough. But I disagree. Writing at the time, I called the bear market as starting in 1966, not 1969, but Steve and I both agree that the secular bear market ended with the crushing market collapse of 1973-1974. We both agree that another secular bear market began in 1999. Steve believes that bear market ended in 2002. But I believe the bear market that started in 1999 is still in force, although it’s been extended due to the manipulations of the Federal Reserve under Alan Greenspan.”

Richard Russell. http://www.dowtheoryletters.com, staff2@dowtheoryletters.com, Letter 1378, November 17, 2004, Page 3

Even though the market bottomed in October 2002 and Dow Theory signaled a bull market in June 2003, Russell stuck to his bearish view. In his July 19, 2006 letter, Russell said, “The Big, Big Picture is this-the bear market that began in January 2000 never ended.” Russell did not indicate that we were in a bull market until January 2009. Russell managed to ignore the Dow Theory signal that was given in June 2003 at around the 9000 level for the Dow Industrials all the way to the peak in 2007 at 14,100. A span of 4 years and 55% wasn’t enough to convince Russell that the last bear market had ended. As I mentioned before, out of the blue we got the January 2009 bull market call by Russell, which seemed, at the time, to defy all available data and logic.

The comment posed by David Rosenberg, in the July 27th issue of Time Magazine, “that the markets continuously get it wrong,” is certainly a matter of subjectivity. Rosenberg’s assessment could be very accurate if viewed from the perspective that the popular media outlet’s parade of talking heads, representing the voice of the market, got it all wrong beforehand. However, if viewed from a Dow Theory perspective, especially in retrospect, the message that the market was sending was very clear and quite accurate, albeit somewhat delayed. Naturally, Dow Theory isn’t perfect but the consistency, as compared to the alternatives, is enough to give a general overview of future market activity that is later support by some, not necessarily all, economic indicators.

To be specific with Rosenberg’s contention, let us get the data portion on recessions during secular bull and bear markets out of the way. Below is a side-by-side comparison of the National Bureau of Economic Research (NBER) account of economic peaks to troughs (recessions) and the Dow Jones Industrial Average of peaks to troughs (bear markets).

Peak	Trough	DJIA peak	DJIA trough	DJIA % change	Coincidence
June 1899(III)	December 1900 (IV)	4/4/1899	6/23/1900	-29.40%	YES
September 1902(IV)	August 1904 (III)	9/19/1902	11/9/1903	-37.80%	YES
May 1907(II)	June 1908 (II)	1/19/1906	11/15/1907	-48.50%	YES
January 1910(I)	January 1912 (IV)	11/19/1909	7/26/1910	-26.80%	YES
January 1913(I)	December 1914 (IV)	9/30/1912	12/24/1914	-43.50%	YES
August 1918(III)	March 1919 (I)	no coincidence	no coincidence	no coincidence	NO
January 1920(I)	July 1921 (III)	11/3/1919	8/24/1921	-46.60%	YES
May 1923(II)	July 1924 (III)	10/14/1922	7/31/1923	-16.00%	YES
October 1926(III)	November 1927 (IV)	no coincidence	no coincidence	no coincidence	NO
August 1929(III)	March 1933 (I)	9/12/1929	7/8/1932	-89.20%	YES
May 1937(II)	June 1938 (II)	3/10/1937	3/31/1938	-49.10%	YES
February 1945(I)	October 1945 (IV)	no coincidence	no coincidence	no coincidence	NO
November 1948(IV)	October 1949 (IV)	6/15/1948	6/13/1949	-16.30%	YES
July 1953(II)	May 1954 (II)	1/5/1953	9/14/1953	-13.00%	YES
August 1957(III)	April 1958 (II)	4/6/1956	10/22/1957	-19.40%	YES
April 1960(II)	February 1961 (I)	8/3/1959	10/25/1960	-16.50%	YES
December 1969(IV)	November 1970 (IV)	12/3/1968	5/26/1970	-35.90%	YES
November 1973(IV)	March 1975 (I)	5/26/1972	10/4/1974	-39.80%	YES
January 1980(I)	July 1980 (III)	no coincidence	no coincidence	no coincidence	NO
July 1981(III)	November 1982 (IV)	4/27/1981	8/12/1982	-24.10%	YES
July 1990(III)	March1991(I)	10/9/1989	10/11/1990	-15.30%	YES
March 2001(I)	November2001 (IV)	1/14/2000	10/10/2002	-35.75%	YES
December 2007 (IV)	no trough announced	10/9/2007	3/9/2009	-53.38%	YES

For the sake of all the economists out there, we will only view stock market declines with recessions as a coincidence indicator. We cannot know when a sustained market decline is a simple correction or an indicator of a coming recession. However, in the table above, we can see that 19 out of 24 occurrences of a recession were led, or accompanied, by a decline in the stock market. The far right column indicates if there was no coincidence or an/or the percentage change of the market when there was coincidence.

I’m willing to submit to the view that the answer to this question is yes, stock markets lead or coincided with economic contractions. However, the nature of the recover may not meet the expectations of some, if not many, of the participants of the economy in question. During a secular bear market, the frequency and length of recessions will be longer and occur more often than during a secular bull market. The opposite is true during a secular bull market.

It is important to note that the designation of a recession often occurs months and sometimes year(s) after the fact. For example, the indication of the December 2007 recession was given by the NBER exactly one year later. At the same time, the coincidence of the market corresponding with or leading a recession has occurred in real time. Dow Theory gave a confirmed indication of a bear market in the month of December 2007.

During a secular bear market, only certain aspects of the economy will experience growth while other elements will continue to wane or hold in a range. The recession from 2007 to 2009 is just such an example. Housing and employment has not “enjoyed” the tepid growth in the economy that has occurred since the March 2009 bottom. The government has had a crowding out effect with preferential stimulus in housing and jobs, which has only prolonged the uncertainty of the “real” numbers in foreclosures and unemployment. After all, why pay your mortgage when there is a program set up to keep you in the house? Why take any old job when you could hold out for that “ideal” job because you’re getting another extension of unemployment benefits? These aren’t artificial attributes of the rising stock market and economy as some Austrian economists argue. Instead, stimulus and printing of money simply adds to the complexity within an overall secular bear market.

During a secular bull market, the impact of a recession will not be as deep or broad in its scope or as long as in a secular bear market. Most elements in the economy will thrive despite a build up of otherwise dire conditions (which result in severe recessions and bear markets). One industry’s fall will not impair the breadth of the economy. Corruption and scandal, in business and politics, is looked upon as isolated incidents. There is less of a demand for a complete change of the entire system when problems are revealed. Cyclical bear markets within a bull market allow for a healthy purging of excesses and reinforce the view that prior excesses were justified somehow.

Sources:

National Bureau of Economic Research. Business Cycle Dates. http://www.nber.org/cycles/cyclesmain.html
Sperandeo, Victor. Trader Vic II: Principles of Professional Speculation. John Wiley and Sons. 1997.
Hulbert, Mark. "Avoiding a Death Sentence." June 16, 2010. MarketWatch.com.

Leave a comment

Posted in David Rosenberg, Dow Theory, economic forecasting, Richard Russell

Tagged members

Richard Russell Review: Letter 762

Posted on July 20, 2010 by NLObserver Team | Leave a comment

Letter 762 was published on August 1, 1979. At the time, the Dow Jones Industrial Average was indicated at 839.76. There were a couple of items that stood out as I read this newsletter.

Richard Russell said:

“As a matter of fact with Libya’s recent 10% cut in oil shipments and Algeria’s just announced 20% cut, I suspect that there’s an oil (and gas) glut building up now! The world is learning to cut back on fuel use—and fast, and this could turn out to be the shocker of 1979-1980.” Page 2.

In fact, it wasn’t long before oil prices reflected the glut that Richard Russell spoke of. Under normal circumstances, it would be difficult to see beyond the present crisis and think that it will end at some point. It seems that Russell was cognizant of the prospect, as remote as it seemed at the time. Unfortunately, as indicated in the chart below, $15 oil would become a base, or floor, instead of a ceiling.

One item that has been a longstanding issue with Richard Russell is reflected in the next quote.

Russell said:

“Last week I was asked this question: ‘Russell, if you could change any part of your stock approach over the past year, what would have done?’ My answer was, ‘There are many subscribers who are willing to speculate, and I think I have been too conservative and too stubborn on this issue. The change I would have made is that I would have offered speculative choices for those willing to assume the risk of buying in a market that is not over-sold and not in an ideal buying area.’” Page 2.

In addition to the previous remark by Richard Russell, he also said:

“I want to add that I personally am buying no shares here. I prefer to wait for the ‘ideal buying situation.’” Page 2.

The two remarks above have been the biggest challenge to Russell’s ability to adhere to Dow Theory or even his Primary Trend Index which was created to avoid potential market manipulation. Russell is infinitely waiting for the “ideal buying situation” while ignore individual values along the way.

Russell points out a fact that every investor should have ingrained in their mind before committing a single dollar to the stock market or any other potential investment opportunity. Russell said:

“Every investment must ultimately be valued on its return. In the stock market that means dividends. Ultimately, dividends must be paid if a stock is to be worth anything.” Page 4.

I thought that the following remark was profound.

“Now here’s an interesting aside on inflation. One of the reasons it’s so insidious is that as soon as a man starts protecting himself against it, as soon as he buys a house or a load of gold coins or a painting or a stamp collection-that man wants his inflation hedge to go up. He becomes (deep in his heart) an inflationist. Take housing: the value of total housing in this nation is $2.2 trillion (two thirds of these houses have mortgages). The last thing these home-owners want is a declining market. They are secretly in favor of rising prices and inflation.” Page 4.

Russell’s comment is right on target when it comes to the attitude of most people. It seems that everybody is an inflationist. There are few market participants or commentators who express the view that they hope their long position will decline in value. The NLO team happens to be among the few who, after going long a stock, are eagerly anticipating a decline in price. Shameless self-promotion aside, Russell’s commentary on the closet inflationists is truly profound.

Russell points out that if you’re in commodities but not in precious metal then you could be losing your shirt. Russell says:

“Commodity traders have had one of their roughest seasons in years. If you weren’t in the metals, you probably ‘got killed.’ For instance, the October cattle contract is now down from 74.45 to 61, a drop of almost 18%. One trader told me that ‘it looks like the country is vegetarian.’ Live hogs are much worse, with the October contract dropping from 51 to 32 a drop of 37%. On piggies I was told that they act like ‘the whole world is going Jewish!’” Page 5.

This counters the belief that during inflationary periods, all commodities do well or go up in value. It should be noted that the declines that were mentioned by Russell could have been the equivalent of a temporary pullback or secondary reaction. Interestingly, monthly hog prices traded in a wide range from 1972 to 2004 as indicated in the chart below. Suffice to say, anyone involved in commodity trading should be willing to accept even greater losses than the 50% that we expect for long positions in stocks before seeing any gains.

On the topic of interest rates Russell says the following:

“To the casual observer, it looked like a world embroiled in an interest rate war. And the fact is that rising inflation is being fought all over Europe and Japan- via an interest rate squeeze. The US is a frightened and reluctant follower.

“A few weeks ago Germany raised her bank rate. At the same time Britain boosted her borrowing rate a whopping 2%. Last week the US raised its discount rate an insufficient .5% to a record 10%. Canada immediately followed with a boost to 11.75% in her bank discount rate. The Japan jumped her lending fee to institutions a full 1%.” Page 5.

My thoughts on this passage are that it seems fascinating that the US wasn’t taking the lead in interest rate policy. Especially in comparison to the countries that were mention. It may have been a purposeful attempt to adjust rates when it was absolutely necessary. Could you imagine interest rates jumping 2% at a time?

Russell indicated that as the world’s leading power, the U.S. with its excessive printing of dollars cannot continue unabated. Russell said that foreign holders of dollars would become anxious and “move towards the exits.”

Russell mentions the Gold/Stock ratio; which divides the price of gold by the value of the NYSE Composite. Of the rising trend of the ratio, indicating strength in the price of gold, Russell says:

“Day after day the ratio climbs higher, and it is clear to me that shortly, SOMETHING IS GOING TO GIVE.” Page 5.

With hindsight being 20/20, my thought is that what “gives” in this situation is high inflation unless Russell was proposing that all governments are going the way of hyperinflation. My observation is that what tends to break, when two normally divergent indicators are going in the same direction, is the one that appears to be the “strongest.” In this case the stronger component of the Gold/Stock ratio was gold which had been in a multi-year rising trend while the NYSE had been in a wide trading range for an extended period of time.

I do have concerns about the sensibility of a gold/stock indicator since I have presented the view that gold and stocks usually follow each other rather than move counter to each other. For the most part, we have seen gold lag on declines and lead on rises in the stock market. One thing I’m certain of, if the price of gold rises then the stock market isn’t far behind. There may be an occasional divergence but the overall picture is that gold and stocks generally move in unison.

Leave a comment

Posted in Dow Theory, Letter, Richard Russell, Richard Russell Review

Our 2nd Annual Reader Appreciation Day

Posted on July 16, 2010 by NLObserver Team | Leave a comment

We would like to show our appreciation to everyone who has continued to read our website on a regular basis despite our errors and omissions. This year, we will be giving away a copy of Dow Theory Unplugged: Charles Dow's Original Editorials & Their Relevance Today. This book contains the original articles written by Charles H. Dow, The Wall Street Journal's editor and founder. The book is in excellent condition and is almost new.

The following is the review of the book on Amazon.com:

"Dow Theory Unplugged is the most complete collection of Charles Dow's original writing ever assembled.

"Dow Theory is widely credited as the basis for modern technical analysis. Yet its origins, Charles Dow's original writings, have been all but forgotten. Dow Theory Unplugged contains a critical selection of 220 original Wall Street Journal columns from more than one hundred years ago, the raw material that led to the development of Dow Theory and remains relevant for the twenty-first-century trader. In addition, top Dow Theorists, including Richard Russell, Charles Carlson and Paul Shread, contribute modern-day analysis to help you apply Dow principles to your trading practice today.

"Charles Dow understood the markets better than anyone in his own time, and perhaps any time since. As co-founder of the Wall Street Journal and the Dow Jones Indexes, he developed the framework for monitoring market movement that we have been using for the last century. Dow also wrote hundreds of columns in the Journal outlining a groundbreaking market strategy that became the first chart-following systematic approach to investing."

Although billed as a book about technical analysis, you're more than likely to find concepts associated with fundamental stock analysis and economics terms like profits, capital, labor, values, supply & demand, dividends, scarcity, balance of trade, and the effects of easy money policies. In fact, there are very few references to stock charts. Actually, the original articles never did contain stock charts. For this reason, it became necessary, and easier, for future generations to represent graphically many of the concepts that Dow spoke of.

For the next 12 days we will put the email addresses of all confirmed subscribers to our website into a basket. On July 28th, we will randomly select the winner of the book. The email address that is randomly selected will be notified (by email) to obtain the mailing address and the book will be sent within 10 days and arrive at your location through book rate mailing to wherever in the world you are. Additionally, we will publish the winner's first name with the location on our website.

Last year's winner was very pleased to receive Robert Rhea's book Dow's Theory Applied to Business and Banking.

Thanks again for reading our website and tell a friend.

Email our team here.

Leave a comment

Posted in Reader Appreciation Day, Richard Russell

Odds and Ends

Posted on July 12, 2010 by NLObserver Team | Leave a comment

Question:

Do you think Richard Russell has been overrated regarding his abilities to forecast the directions of the markets? It seems like one good call (1975) allows one in his position to reap benefits for years despite demonstrating no skill when one goes back and, with the benefit of hindsight, takes a critical look at the entire record.

Our Thoughts:

Anyone, including NLO team, who attempts to predict the stock market is under extraordinary pressure. The challenge that Russell presents is that he often ignores that he has a bias towards the market falling rather than rising. This becomes a problem when, against his experience and better judgment, Dow Theory might be indicating that the direction is up despite all the negative market fundamentals.

Again, Dow Theory is supposed to include all the current and foreseeable hopes and fears as it relates money. I think that if Russell would follow Dow Theory or even his PTI indicator more often he would get a more accurate readings on the market.

It should be noted that within the content of his Dow Theory Letters from 1958 to the present, there are many great calls. As I post more reviews of Russell’s letters, I will be able to point out too many instances of where Russell was spot on.

Unfortunately, Russell often didn’t stick to his guns or he forgot his earlier good advice or information. As an example, Russell talks about the importance of compounding. This cannot be accomplished if you’re buying and selling based on Dow Theory. Another example is Russell’s commentary on values. You can’t speak of values if you’re primarily focused on ETFs, index funds or stocks that don’t increase their dividends when plenty of them exist.

The pace and excitement of the markets become challenging for anyone to remain focused on the fundamentals. Russell has fallen astray of the basic principals of Dow Theory and value investing. Although the two seem mutually incompatible, there is a middle ground which Russell hasn’t attempted to address in all the years of his work.

Question:

I'm curious that you write "In my observations, market volume has increasingly become an addendum to Dow Theory." Meaning, only as a sidelight, or as an increasingly important variable? It does seem harder to judge given increased manipulation on light volume. Looks like lots of stick saves last week.

Answer:

It may be a function of the markets being driven by various large institutions (mutual funds, hedge funds, index funds, ETFs etc...) but volume seems to be less reliable when trying to determine sentiment and trends on the NYSE. I suspect that the diminished impact of smaller participants and derivative markets have had a lot to do with my concerns about volume not being a strong indicator. However, I will continue track volume just in case.

Question:

What did you do with the proceeds from the sale of WTR?

Answer:

After investing in WTR we recommended CEPH and SVU which generated 13% and 11% gains respectively. Both stocks were on our Watch Lists and in each case we accomplished our targets and made subsequent sell recommendations. In addition to our posted recommendations, we also participated in CWT and GENZ. Both positions accomplished our short-term after tax goals which allowed for the purchases of new stocks on our dividend Watch List.

Our article titled “Meridian Biosciences and Other Profitable Market Lessons” provides a framework for the strategy we’d like to employ when investing in Dividend Achievers. Another article that weighs heavily on our investment decisions is titled “It Isn’t Easy Being Green.” That article outlined Hetty Green’s approach to handling her funds when not invested in stocks. We’ve simply applied a similar strategy to Dividend Achievers and Nasdaq 100 stocks at a new low (after careful analysis).

Question:

Would you venture to provide a top pick from your current dividend achievers list?

Answer:

As you can tell, the current list has too many companies that are candidates for investment. Without providing any detailed analysis, I would say that my top four choices for additional research would be Ritchie Bros Auctioneers (RBA), Northern Trust (NTRS), Dentsply (XRAY), and Meridian Biosciences (VIVO). We expect, and hope, that the price of these stocks will fall further while we get more research in. We're using the March 2009 low as our benchmark for all investment analysis going forward and we hope that you do the same.

Russell Blurb:

For what it is worth Richard Russell’s commentary today (July 12, 2010) seems to fly in the face of the commentary that he gave on Friday July 9, 2010. Go figure:

“The recent non-confirmation by the Transports may have served as an entry spot for bold speculators, but I doubt if the 2007 highs in the Averages will be approached or bettered. Nevertheless, we may see a brief period of better markets, a "breather" in the long life of the bear. I believe this primary bear market will extend into 2016.

A near-term marker or target is to see whether the Dow and the Transports can better their recent June highs. Those highs were 10450.64 for Industrials and 4467.25 for Transports. Write those figures down. I'm betting that the two D-J Averages will not be able to better the June highs. Let's wait and see.”

All I can say is, at least he indicated an upside target that matches the one we came up with yesterday. Can't understand how he was so bullish on Friday and is now sounding so skeptical today.

Email our team here.

Leave a comment

Posted in CEPH, CWT, GENZ, NTRS, RBA, Richard Russell, SVU, VIVO, WTR, XRAY

Tagged members

Dow Theory and Richard Russell

Posted on July 11, 2010 by nlo-admin | Comments Off

In attempting to understand Dow Theory it is necessary to follow the best and the brightest on this topic. Over the last 52 years, the brightest person on Dow Theory has been Richard Russell. No single person has been more outspoken on their views on the market using Dow Theory, uninterrupted since 1958, than Richard Russell. So when Richard Russell does an about face on his interpretation of Dow Theory it is worth our time to examine the reasons.

First, it is necessary to provide context around the ideas on Russell’s most recent market call.

From November 12, 2007 to January 2, 2009, Russell indicated that we were in a bear market. The Dow went from 12,987.55 to 9,034.69, a decline of -30.44%.
From January 5, 2009 to January 12, 2009, Russell indicated that we were in a bull market. The Dow went from 8,952.89 to 6,926.49, a decline of –22.63%.
From March 11, 2009 to July 22, 2009, Russell indicated that we were in a bear market. The Dow went from 6,930.40 to 8,881.26, a gain of +28.15%.
From July 23, 2009 to May 19, 2010, Russell indicated that we were in a bull market. The Dow went from 9,069.29 to 10,444.37, a gain of +15.16%.
From May 20, 2010 to July 8, 2010, Russell indicated that we were in a bear market. The Dow went from 10,068.01 to 10,138.99, a slight gain was registered for the period (<1%).

On July 9, 2010, Richard Russell said:

“When the facts change, I change. To do otherwise would be idiotic. Something occurred yesterday that made me sit up and take notice. We had the non-confirmation by the D-J Transportation Average, a situation that I discussed on the July 5 site.”

“Following the Transport non-confirmation, yesterday the market surged higher, Dow up 274 and Transports up 152. But that’s not all. What I noticed was that yesterday was a 90% up day [up volume versus down volume] — the formula for a bottom.”

According to Russell, the Transports non-confirmation along with a 90% up volume/down volume ratio is what led to the conclusion that the market was indicating that a bottom was in. Russell goes on to recommend buying various ETFs with stop losses. Several problems arise when market action is viewed from Russell’s perspective.

First, Russell has ignored the fact that a trend is in place until a counter trend is signaled. So far, we haven’t had a bear market indication since the March 9, 2009 low. If the Transports were to confirm the Industrials by falling below the February 5, 2010 low, then we’d have our first bear market signal.

Second, when thinking in terms of Dow Theory, market participants have three variables to consider the Dow Jones Transportation index, Dow Jones Industrials and NYSE volume. Volume attributes are considered over a period of time. Single day action on volume should not be the determining factor for considering a bull or bear market. If this is the case, then most market signals could be very misleading. In my observations, market volume has increasingly become an addendum to Dow Theory.

Third, Russell has often disregarded the pure Dow Theory indications that have come along the way since the March 2009 low. It seems that Russell’s understanding of macro issues and his personal experience in the markets has led to his decision to err on the side of caution. However, Russell’s cautious streak has usurped the value of Dow Theory to act as a “…composite index of all the hopes, disappointments, and knowledge of everyone who knows anything of financial matters, and for that reason the effects of coming events (excluding acts of God) are always properly discounted in their movement. The averages quickly appraise such calamities as fires and earthquakes.” (Rhea, Robert, The Dow Theory, page 19).

Next, Russell has set himself up for the need to change his analysis by not thinking through Dow Theory to its conclusion. By calling a bottom at this juncture, Russell has left out the all-important confirmation that is required by the Industrials and Transports. 10,450.64 and 4,467.25 are the new levels that the Industrials and Transports need to surpass before any buying policy should be considered. In addition, after surpassing the referenced upside confirmation points, the next level of resistance is 8% away for both indexes. This means that we could go to the old high and then quickly reverse to the downside if a bull market confirmation isn’t signaled. However, given the most recent market action, our focus should be on the confirmation of the reversal pattern first, then the possible bull market indication.

Another matter of concern is that Richard Russell makes recommendations that don’t address the issue of investing in values. Values are a core tenet of Dow Theory. In fact, when you read Dow Theory Unplugged or Charles H. Dow: Economist, you will find that values, not technicals, are espoused. Russell points his readers to speculative opportunities instead of undervalued stocks which can be held for “the long term” if the bullish assessment happens to be incorrect. Our list of Dividend Achiever stocks at or near a new low addresses the prospect that if we’re wrong there is some recourse. In this case, you get the ability to compound your investment over time with the prospect of capital appreciation.

Finally, our stance on stop loss orders is widely known as indicated in the article “Automatic Orders Don’t Provide Protection” as well as our disclaimer at the end of each sell recommendation. Russell’s recommendation of buying ETFs is reckless at best especially in light of the May 6, 2010 “flash crash.” Adding fuel to the flames is the article titled “ETF ‘Circuit Breakers’ Needed to Stop Flash Crashes: Pros.” Our stance on ETFs is well founded and preceded any discussion of the true risks associated with them on May 6th (“ETF: Mediocrity With No Pretense of Value” and “ETF: Indiscriminant Risk”).

It is likely that perma-bulls will seize on the Russell commentary of July 9th as the heralding of a new-new era in investing. On the other hand, “contrarian investors” will suggest that when Richard Russell, perma-bear that he is, has entered the bull ring then the bull run is definitely over. It is our contention that while Richard Russell might be right about a reversal pattern being in place he is not using Dow Theory.

Our latest views on Dow Theory can be found at the following link (NLO on Dow Theory). Keep in mind that all trends are considered to remain in place until otherwise indicated. So far we are still in a cyclical bull market within a secular bear market

Comments Off on Dow Theory and Richard Russell

Posted in Dow Theory, Richard Russell, Richard Russell Review

Dow Theory and Richard Russell

Posted on July 11, 2010 by NLObserver Team | Leave a comment

First, it is necessary to provide context around the ideas on Russell’s most recent market call.

From November 12, 2007 to January 2, 2009, Russell indicated that we were in a bear market. The Dow went from 12,987.55 to 9,034.69, a decline of -30.44%.
From January 5, 2009 to January 12, 2009, Russell indicated that we were in a bull market. The Dow went from 8,952.89 to 6,926.49, a decline of –22.63%.
From March 11, 2009 to July 22, 2009, Russell indicated that we were in a bear market. The Dow went from 6,930.40 to 8,881.26, a gain of +28.15%.
From July 23, 2009 to May 19, 2010, Russell indicated that we were in a bull market. The Dow went from 9,069.29 to 10,444.37, a gain of +15.16%.
From May 20, 2010 to July 8, 2010, Russell indicated that we were in a bear market. The Dow went from 10,068.01 to 10,138.99, a slight gain was registered for the period (<1%).

On July 9, 2010, Richard Russell said:

“When the facts change, I change. To do otherwise would be idiotic. Something occurred yesterday that made me sit up and take notice. We had the non-confirmation by the D-J Transportation Average, a situation that I discussed on the July 5 site.”

“Following the Transport non-confirmation, yesterday the market surged higher, Dow up 274 and Transports up 152. But that's not all. What I noticed was that yesterday was a 90% up day [up volume versus down volume] -- the formula for a bottom.”

Another matter of concern is that Richard Russell makes recommendations that don’t address the issue of investing in values. Values are a core tenet of Dow Theory. In fact, when you read Dow Theory Unplugged or Charles H. Dow: Economist, you will find that values, not technicals, are espoused. Russell points his readers to speculative opportunities instead of undervalued stocks which can be held for “the long term” if the bullish assessment happens to be incorrect. Our list of Dividend Achiever stocks at or near a new low addresses the prospect that if we’re wrong there is some recourse. In this case, you get the ability to compound your investment over time with the prospect of capital appreciation.

Finally, our stance on stop loss orders is widely known as indicated in the article “Automatic Orders Don’t Provide Protection” as well as our disclaimer at the end of each sell recommendation. Russell's recommendation of buying ETFs is reckless at best especially in light of the May 6, 2010 “flash crash.” Adding fuel to the flames is the article titled “ETF ‘Circuit Breakers’ Needed to Stop Flash Crashes: Pros.” Our stance on ETFs is well founded and preceded any discussion of the true risks associated with them on May 6th (“ETF: Mediocrity With No Pretense of Value” and “ETF: Indiscriminant Risk”).

Leave a comment

Posted in Dow Theory, Richard Russell

Category Archives: Richard Russell

Investment Observation: Simmons First National Corp (SFNC) at $26.65

Richard Russell’s Miscue

Market Review and Analysis

Dow Theory Q&A

A Lesson in Dow Theory

Yearning for the Richard Russell of Yore

On the Brink of a Secular Bull Market in Precious Metals

Beckman Coulter (BEC): Pondering the Imponderable

Richard Russell Review: China in the ’60s

Dow Theory, Stock Markets and Economic Forecasting

Richard Russell Review: Letter 762

Our 2nd Annual Reader Appreciation Day

Odds and Ends

Dow Theory and Richard Russell

Dow Theory and Richard Russell

Members

Topics

Archives

Recent Posts

Investor Education

"Guaranteed" Rates

Historical Data

Interesting Read