It’s one thing to read this sort of stuff on various blogs and financial websites, but it hits home when the market veteran of all market veterans begins pondering the same things that many of us have been thinking about as we watch the stock market in near disbelief during this crazy time. Richard Russell, as always, has some great thoughts:
I guess I should come clean and admit it. After reading all about Goldman Sachs and studying Paulson and Geithner and former NY Fed Chairman Friedman, I have become almost hopelessly cynical about the markets. Is anyone ethical? Is anyone honest? I’m starting to wonder. Where money is concerned, is there anything Wall Street or the bankers won’t try?
Rumors of manipulation have been around ever since I started writing Dow Theory Letters in 1958. I always pooh-poohed those rumors, believing that it was the losers who always blamed their losses on manipulation. But now I’m not so sure.
For instance, I watched yesterday’s close on the NYSE minute by minute. The Dow was fluctuating back and forth — up 5 points one minute, down 3 points the next minute. But with one minute to go, the Dow suddenly spurted 33 points higher. I stared at my computer screen in surprise, and I asked myself, “What the hell was that?” It seemed apparent that “somebody” wanted a noticeable higher Dow at the close.
The market can be manipulated on a daily basis or maybe for a week. But in the big picture, as to the primary trend, I don’t believe the stock market or the economy can be manipulated. Although heaven knows that Washington is trying — throwing unprecedented trillions of dollars at the US economy. It’s never been tried before, but won’t trillions of dollars be enough to manipulate the great tide or the primary trend of the market? Maybe for a few weeks or even a few months, but I still don’t believe that the primary trend can be halted or reversed, no matter who tries and no matter with how many Federal Reserve dollars.
The study of the market is part theoretical and part philosophical, and that is what makes it so fascinating. There are certain forces that are so giant, so irresistible that man has not been able to harness them. The tide of the ocean is one. The revolutions of the moon around the earth is another. And I believe the primary trend of the market is a third. The stock market is an invention of man, but although man invented it, like Frankenstein, the tide of the market, the great primary trend of the market, is beyond the power of its inventors to manipulate.
We can’t control the primary trend. Ironically the best we can do is to identify its direction, and even here there are doubts and arguments. Man has invented the X-ray and the Internet, but it’s ironic that man has not invented the fool-proof way to identify the direction of the primary trend of the stock market.
Some of the best minds in the nation have applied themselves to unraveling the mysteries of the stock market. Yet, to my knowledge nobody has come up with the ultimate method of beating the market. I’d say that the stock market is the ultimate mystery to which men have applied their intelligence. How do we know that no one, to date, has solved the mystery of how to beat the market? We know because the day someone discovers how to consistently beat the market, on that day the market will cease to exist. It won’t be a market — rather it will be a sure thing. And one man will be able to accumulate most of the wealth of the world.
I’ve worked for over 50 years with the Dow Theory. A basic tenet of Dow Theory is that it is not infallible. The good and the bad (frustrating) part of Dow Theory is that it requires interpretation. Robert Rhea wrote that “those who demand least from the Dow Theory gain the most from it.” I might add that those who demand most from the Dow Theory are the ones who will be most frustrated by it.
Turning to the present, the great stock market argument today is whether we are experiencing a new bull market or whether we dealing with a retracement and correction of a preceding bear market? I’ve given this question a lot of thought, and my conclusion is that we are dealing with a normal correction in a bear market. Some call it a “cyclical bull market,” other call it “a bear market rally.” Giving it a name won’t solve the problem of “what is it’?
Who cares — and if so why? If it’s a new primary bull market it can be expected to take the major stock averages to new record highs and we can hold stocks for the longer term with few worries. If it’s a correction in an ongoing bear market, it will end on this side of the old bull market highs, and we will have to be on our guard. Bear market rallies are tricky and deceptive, and they tend to end suddenly while leaving amateur speculators in tears.
I don’t want to see any of my subscribers in tears, so I am issuing my “be cautious” warnings well in advance.
Interesting, on August 3 we had a 90% upside day on the NYSE. This is a sign of strength, and it was followed by further strength on August 4. On August 4 Lowry’s Selling Pressure Index dropped below a significant level, signifying further impressive market strength.
At yesterday’s close the market was heavily overbought. Today (I’m writing this in the morning two hours after the market opening), the market opened on the weak side with Industrials down 89 and Transports down 84. When this happens, my thought is always — Is this the first hint of this rally possibly topping out? The advantage of a decline is that following every decline the market (i.e. the uptrend) must prove itself again. To prove itself the Dow and the Transports must advance to new highs. If they can’t or if one Average rises to a new high unconfirmed by the other, then we can look for trouble. The highs that must now be surpassed are Industrials 9320.19; Transports 3676.64.
Let’s stay alert (as always) and see what the market gives us. Bear market rallies tend to end on dull volume, non-confirmations, or divergence in the Averages.
Source: Dow Theory Letters
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.