Reading Richard Russell’s daily notes are like reading a real-time history book. Like any investor, he is often wrong, but his knowledge of the history of the market is truly unmatched. He is one of the few men who is still around to tell us about the Great Depression and how similar today’s economy feels. Russell has become increasingly bearish since early April. He says the market is crumbling and believes the internals are so bad that the market is very vulnerable to substantial downside. He even goes so far as to say the we won’t recognize the country by the end of this year. “There’s a hard rain coming”. Yikes:
“The market is crumbling, in the face of rosy news this is the worst kind of action. The market is severely oversold now, and if we don’t get a bounce next week, it’s “Katie, bar the door.” My PTI was down 6 to 6116. MA was 6075, so my PTI remains bullish by a shrinking 41, lowest in weeks. June gold gave up less than two bucks today, which is great relative strength action. GDX closed higher today, which is bullish for gold. This market action is catching investors by complete surprise, and as such it is proving very costly. Billions in paper values are being lost.
Finally, it’s happening. The stock market has “lost its mind.” The poor thing is falling apart, when every sane investor knows that the market “should be” going up as it discounts the almost certain better economy that lies ahead. Then I remember that the stock market reflects what everybody knows about everything and anything that pertains to business and the forthcoming economy. So alas, the stock market has finally gone insane. It’s not telling us what we already know.
I search Saturday’s Wall Street Journal and right on the front page I read, “The recovery is beating expectations as data show consumer and manufacturing strength.”
Then I look at the latest issue of Barron’s and right on the cover I read, “STRONGER THAN EVER – America’s biggest companies are sitting on loads of cash and ready to earn higher profits than ever before. What it means for the economy, dividends and your investments.”
And I ask myself, “Am I seeing things? The April 26 high for the Dow was 11205.03. The Dow is selling as write at 10557 down 648 points from its April high. If business is even better than expected, then why is the Dow down over 600 points? And why, if there were 674 new highs on the NYSE on April 26, were there only 20 new highs on Friday, May 14? And if my PTI was 6133 on April 26, why is it down 17 points since its April high?
The fact is that I’ve been seeing deterioration in the stock market ever since early-April, and this in the face of improving business news. The D-J Industrial Average is composed of 30 internationally known top-quality blue-chip stocks. These are 30 of “America’s biggest companies.” If Barron’s is so bullish on the future of America’s biggest companies, then why isn’t the Dow advancing to new highs?
Clearly something is wrong. But what could it be? Much as I love Barron’s, but I trust the stock market more. If I read the stock market correctly, it’s telling me that there is a surprise ahead. And that surprise will be a reversal to the downside for the economy, plus a collection of other troubles ahead.
Do your friends a favor. Tell them to “batten down the hatches” because there’s a HARD RAIN coming. Tell them to get out of debt and sell anything they can sell (and don’t need) in order to get liquid. Tell them that Richard Russell says that by the end of this year they won’t recognize the country. They’ll retort, “How the dickens does Russell know — who told him?” Tell them the stock market told him.”
Source: Dow Theory Letters
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.