Richard Russell – Multi

Richard Russell continues:

“One measure that has become popular is the 20% measure.  If the Dow and the major stock averages drop 20% or more, then it’s presumably a bear market.  But if you wait for the 20% measure, by that time, you’re broke, so I’d rather depend on the Dow Theory.

I even saw that metric being applied to a single stock today.  That stock was Apple.  Apple has now crashed over 20% from its high … Apple is now “in a bear market.”

Why am I worried that we could be in a primary bear market rather than a correction?  First, the bear signal occurred back in October of 2007.  The trouble came following a long climb from the early 1980s.  The timing was right for a bear market to appear.

Secondly, stocks were in a bubble at the 2007 highs.  The yield on the Dow and the SP was below the dangerous 3% level.  The decline from the 2007 high came amid a period of generally bullish sentiment.  At the time, most of the newsletters and magazines were bullish and were suggesting stocks to buy.

I felt in my bones that a bear market had started (this, of course, is not proof of anything) but I often have to go with my instincts.  What have we seen since?  We saw a crushing decline from 2008 to 2009.  Then from the 2009 low we saw a huge recovery that took the Dow back within shooting distance of its 2009 high. 

I compared the advance from the 2009-2012 advance with the huge 1929-30 recovery that followed the 1929 crash.  The only difference in the two episodes was that the 2009-2012 advance was even larger and more sustained then the 1929-1930 affair.

At first, some advisors did indeed compare the two recoveries, but when the 2009-2012 recovery continued to near the record Dow high, advisors threw caution to the wind, and declared that a new bull market was in place.  At any rate, I have never, since the 1980s, seen anything that resembled a true bear market bottom.  And I think one is coming.

Putting it all together, I believe we are due for a true bear market that will culminate with a classic bear market bottom — with blue-chip stocks selling at extremely low prices and below known values.

After reviewing everything I’ve written above, I don’t believe I’ve made an airtight case for our being in a primary bear market at this time.

As I write, the Dow has fallen below both its 50-day and 200-day moving averages.  The next theoretical “support” comes in at Dow 12,000 and after that at Dow 10,000.  Of course, the trouble with that kind of thinking is that in a true bear market, supports are meaningless.  In a bear market, the Dow will cut through supports the way a hot knife cuts through butter.

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Two items that I took as warnings.  After (last) Wednesday’s “mini-crash” of 305 Dow points, I expected the Dow to recover a bit on Thursday.  But no, (Thursday) the Dow closed right on its low, down 121 points.  Also, Investor’s Intelligence’s survey of newsletter writers still shows bulls outweighing bears by 43.6% to 27.7%.

As the old adage runs — Bull markets climb a wall of worry.  Bear markets descend on a slope of hope.  And it looks as though there is still a lot of hope.

Below we see a daily of the Dow.  It looks as though we’re seeing a variety of the oft-seen head-and-shoulders formation.  The HS formation often appears at the bitter end of an advance (remember Apple?).  Note the dramatic pick-up in volume on Wednesday’s violent decline.  My instinct tells me that we are in a bear market, and I’ll stick to that opinion until the market tells me I’m wrong.

If there’s no rally, then the market appears ominously bearish.I trust my subscribers are on the sidelines watching this painful and costly show.  Note the increase in volume as the Dow declines.

In analyzing the Apple crash, note that the decline didn’t halt at the July low, which should have acted as support.  Instead, Apple cut right through the July low of 564.  This is brutal bear market action — where so-called “supports” don’t mean a thing.

The pros aren’t crazy about the Dow with its meager 30 Industrial stocks.  They prefer the SP 500 as a measure of the market.  The daily chart below shows the SP 500 closing below its 200-day moving average.  The formation is the little rectangle, which now appears on so many stocks and indices.

As for the rectangle formation, I consider it a variation of the HS.  The left shoulder and the right shoulder have risen to the level of the “head” — if they were lower we’d have a perfect HS pattern.

Gold — has reversed and has surged above the blue trendline.  MACD and RSI have both turned up.  But what impressed me was the huge increase in volume as gold turned up.  Buy the one ounce bullion coins while they’re available, and put them away for the duration.

Gold was unchanged at 1730.90 and holding steady.  If the economy worsens, I think the Fed will open the money spigots even wider, which, ironically, would be good for gold. So as far as gold is concerned, bad is good for gold.

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Eric King

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