You may not have read much about it so far, but last week saw an important technical signal in the behaviour of Wall Street which has led the doyen of market-watchers in the United States, Richard Russell, to declare that we are now formally in a new bear market. This is what he had to say after the Dow Jones Industrual Average breached its November lows on Thursday last week, thereby confirming the earlier similar move by the Dow Jones Transportation index.
“I just went through 12 newspapers this morning. Not one mentioned the fact that under Dow Theory, the primary bear market was re-confirmed yesterday. I find that very ominous. In a multi-trillion dollar business, nobody knows how to read the market. Let’s see whether Barron’s says anything tomorrow. News travels across Wall Street in an instant”.
“Did the recent great bull market start at Dow 776.92 in 1982 or Dow 759.13 in 1980? I picked 776.92 in 1982 as the start of the bull market. The bull market ended in October 2007 at Dow 14164.53. Turning to the 50% Principle, the halfway level of the entire bull market of 1982 to 2007 is 7470. Yesterday the Dow closed at 7466, 4 points below the halfway level”.
“On this basis, the 50% Principle has turned bearish. According to the 50% Principle, if the Dow closes below the halfway level of the preceding major advance, the Dow can decline towards and even test the level from which the advance started. To do that, the Dow would ultimately have to test the area from which the bull market started — that area was 776.92”.
“Could that happen? I have no idea, but I’m merely relating the possibilities under the 50% Principle — a study I learned from the great Dow Theorist, E. George Schaefer. But wouldn’t a return to the Dow 776 area be catastrophic? I’m sure it would be, but a year ago who would have thought the Dow in February 2009 would be at 7468? The market is a law unto itself, and the market doesn’t care about human triumphs or human misery. I’m merely repeating stock market mechanics as I know them”.
“One of the mechanics is the 50% Principle. The monthly chart follows the Dow from it’s bull market beginning in 1982 to the present. The horizontal red line identified the halfway level of the great bull market. As I write, the Dow is below the 7470, the 50% level. Not a pretty picture, but it’s reality.The Dow is now fluctuating around the 50% level. This is a level so critical that it would not surprise me to see the Dow hesitate and flounder around in the 7470 area. This will serve to confuse and even encourage investors (“maybe we really are at a bottom”)”.
“My advice, don’t let the market fool you. The path of least resistance continues to be down. Banks — I find it hard to imagine the market turning bullish while the banks remain in trouble. I’ve been watching BKX, the banking ETF, which continues to slump to new lows. Worse, MACD is about to give us a new bear signal as the histograms sink into negative territory”.
Whether or not you believe in technical analysis, or indeed in Dow Theory, you will get the drift. It is clear that the breach of the November lows on Wall Street is an important psychological milestone in market evolution. Nobody should underestimate how widely read the 84-year-old Richard Russell is among investors, and if he has turned negative, you can be sure that there will be many more who will take his views on board and adopt a similar attitude.
He is also surely right that as long as bank stocks stay so weak, it is unlikely that a new bull market can begin, and all the more likely that the bear market has another downward leg to absorb. Like Mr Russell, my view is that gold is the only certain antidote to the renewed wave of negative investor sentiment that is likely to follow this cathartic moment. Despite the hopes of many, it looks like we could be in for a long, hard year.
When I asked the well-known money manager Ken Fisher recently for the results of his annual survey of market forecasters’ opinion, he told me that pretty much the entire sample was concentrated between a range of minus 6% to plus 21%. In other words, no forecaster was predicting was either a big negative or a big positive year on Wall Street.
Yet in most years the one certainty you can put money on is that the actual outcome in any given year will not fall within the range suggested by consensus opinion. It would be no surprise therefore if we experienced a big move in world markets this year – and the way things are going, it seems as if that move is more likely to be a large negative move than a large positive one. Disappointing if true.