Subject: Russell's Dow Theory 19 Feb 2009

The five paragraphs below have been written after today's close. Everything below the Feb. 19 date was written last night before I knew what was to happen today.
........................................................................
The verdict, at long last, is in. Today the D-J Industrial Average closed below it November 20 bear market low. In so doing, the Dow confirmed the prior breakdown of the Transportation Average. The two Averages jointly closed at new lows today, thereby signaling that the great bear market remains in force.

According to Dow Theory, neither the duration nor the extent of a bear market can be predicted in advance. However there are some useful hints. Most major bear markets end with stocks at "great values" or as some Dow Theorists put it, "below known values." This has meant in the past that price/earnings ratios for the Dow and the S&P have fallen to single digit numbers. It has also meant that dividend yields have moved into to the 5-6% zone.

According to the latest Barron's, the P/E ratio for the Dow is now 18.62, 17.90 for the S&P. The dividend rate for the Dow is now 3.98%, for the S&P it is 2.78%. These are hardly the kind of figures I'd expect at a great bear market low. With the bear market reconfirmed, I'd advise subscribers to be largely out of common stocks (not gold stocks) and in cash, T-bills or gold, physical gold if possible.

The country is now at economic WAR. My objection to "paper gold" or listed gold items is that the government could halt trading in all gold items if it wishes to. The government is at all-out WAR against deflation and possibly at war with rising gold.

With a great bear market in force, we're forced to think in terms of individual or family survival. My subscribers and I are on our own now, dealing with a government that is attempting to print itself out of a bear market. More inflation on top of a bear market that was created out of debt and inflation will not work, at least I don't see it working (not does the market). Gold will be "the last man standing," as has been the case for thousands of years.


February 19, 2009 -- (written Tuesday evening) I've seen a lot of "white-knuckle" markets, but this baby has to be a craziest. Day after day the Dow flirts with its bear market low of 7552.29. Will it close above it, will it close below it? It's a war, and it's impossible to tell which way the Dow will end. My own sense is that the path of least resistance is down, but I'll let the market decide. Yesterday the Dow closed 3 points above its critical November 20 low -- the day before the Dow closed less than a point above the November low

The P&F chart of the Dow below eliminates most of the minor moves, but the chart is bearish. If this was a stock, would I buy it? The answer is "no, I would not."

Is this manipulation or are the gods of the market teasing us? We'll probably never know whether the Dow is being manipulated. Even if the Dow is being manipulated, the market will be guided ultimately by the primary trend. "The market always does what it's supposed to -- but never when."


Below is another chart of the Dow, a weekly chart. RSI looks bearish, and the blue 10-week moving average is bearishly below the red 40-week moving average. MACD at the bottom of the chart is on the verge of giving a bearish signal with the histograms about to drop below zero. Conclusion -- the Dow looks bearish and appears to be heading lower.



GOLD -- I've been writing about gold and following other analysts on gold since 1960. To my mind, the best gold commentary has come from my very good friends, the Aden sisters, who write The Aden Forecast. In the current issue of the Forecast, the Adens present the concept of an 8-year cycle in gold. In other words, gold tends to form a low area or important bottom roughly every eight years. I have drawn a monthly chart below of gold going back to 1980. I have marked off the eight-year cycle bottoms as described by the Adens.

The cycle bottoms are shown by the red arrows. The cycle (low area) bottoms starting with the first red arrow are --
August 1976 (not on chart)
February 1985
February 1993
February 2001
February to August 2009



If this holds true, then gold is now at, or near, an eight-year cycle bottom. What's so important is that if we are at a cycle bottom, then it's doubly significant that gold is doing so well here. If the cycle bottom has about passed, then gold should be heading higher until the next peak, which could lie around four years ahead or around 2013.

The Adens write that the cycle low "could have been last November's low, three months shy of eight years, or it could still be upcoming. The long side would be a low this summer. .... The point is that gold is near or at a time for an important low. This means we want to buy more gold during weakness this year because gold is set to reach a record high, and the $2000 level would eventually be a likely target near the top of the mega upchannel.

"In other words, if the eight year low pattern repeats, the now almost one year decline is coming to an end. Whether it was last November's low or a low upcoming this year, the gold price is getting closer to the start of a great bull market rise. We should therefore have all our positions completely bought well before year end."

There, you heard it from my favorite gold experts, the fabulous Aden sisters (Aden Forecast; 1-305-395-6141; www.adenforecast.com).

Comments -- On January 20, Dow Jones removed all stocks in the Industrial Average that were below ten dollars in price. This removed C, BAC. GM, AA. Removing the weak financial (bank) stocks rendered the Dow stronger. Why didn't Dow Jones replace the stocks removed with other stocks? Well, historically, the D-J revises its averages every January.

I've never in 60 years of watching the market seen a battle like the current one to keep a Dow Theory bear signal from occurring. I've wondered what could possibly be going on. My guess -- certain large equity funds believe we're in a bear market, and they want time to unload some of their stocks. They're buying just enough big cap stocks near the end of the day to keep the Dow above 7552.29. Could this be what has been keeping the Dow above its November low. I wouldn't doubt it, after all, hundreds of billions are involved. And it would be legal.

Today, gold made the front page of the money section in America's most popular newspaper, USA Today. I don't know what to make of all the publicity gold is receiving these days. But after all, the only bull market in effect today is the gold bull market. However, if gold is in a primary bull market no amount of publicity will sidetrack the bull market. Ultimately, gold is going to where it's going, and nothing will halt its long-term objective. Most major bull markets end with a third phase explosion. As for gold, we're not there yet. Gold is the only item which is bought out of both fear and greed. Which gives way to the old aphorism, "There's no fever like gold fever."
...............................................................
GLD -- Many subscribers have expressed suspicions about GLD, claiming that GLD holds futures rather than actual gold. I've looked into GLD and can find nothing wrong with it. Please read the prospectus. If you don't trust GLD, buy CEF or GTU. The following is from today's Financial Times. "Holdings in the SPDR Gold Trust, the largest physically backed exchange traded fund, surpassed the 1,000 tonne mark on Tuesday, and traders said that a continuation of the strong investor inflow seen already this year makes assault on gold's price record of $1,030.80 set in March 2008 look increasingly likely."

TODAY'S MARKET ACTION --

My PTI was down 4 to 5851. The moving average is 5880, so my PTI is bearish by 29 points.

The Dow was down 89.68 to 7465.95.

Transports were down 57.58 to 2708.30.


Utilities were up 2.11 to 344.31.

March crude was up 2.77 to 40.18.

Total Volume on the NYSE and associated exchanges was 6.52bn.


There were 856 advances and 2215 declines on the NYSE.

There were 2 new highs and 299 new lows.

S&P was down 9.48 to 778.94.


NASDAQ was down 25.10 to 1442.80.

My Big Money Breadth Index was up 2 to 666.

Dollar Index was down ..44 to 87.56. Euro was up 1.34 to 126.85. Yen was down .76 to 105.94. Currency prices as of 1 PM Pacific Time.


April gold was down 1.70 to 976.50. March silver was down .25 to 14.05. Metal prices as of 1 PM Pacific Time.

HUI was down 13.89 to 310.10.

Bonds
: Yield on the 10 year T-note was 2.84%. Yield on the long T-bond was 3.66%. Yield of the 91 day T-bill was 0.30%.


CRB Commodity Index was up 2.74 to 349.53.


My Most Active Stocks Index was down 9 to 30.

The VIX was down 1.81 to 46.65.


Late Notes -- I've done everything in my power to prepare my subscribers for today's turn of events. In thinking about it, I'm afraid I should have been more emphatic. The deed is done, and the great primary trend of the market and the economy is reconfirmed as bearish.

This looks to me to be the correction of the 64 years of inflation and debt-building that has gone on ever since World War II. I see the months ahead as being very difficult, but I'll do my best to be helpful to my subscribers. I lived through the Great Depression and combat in WW II. I can't imagine that the years ahead will be more difficult than those old bleak and frightening days. For decades the American punch bowl overflowed, with the help of the Federal Reserve and the creation of unconstitutional fiat money.

There's little sense in analyzing today's market minutiae, the market did what it had to do. It pointed the way for stocks and the economy. The Founding Fathers and creators of the Constitution must be shaking their heads and smiling wryly. The money system that they had so carefully inserted into the Constitution had been thwarted and degraded. Now we must pay.
....................................................................
The rifle -- My dad was born in 1892. His family lived in Charleston, South Carolina. His father (my grandfather) owned the largest jewelry store in Charleston and was a big speculator in the stock market. During the bear market of 1902, dad's father lost everything in the stock market. Grandpa couldn't face his disaster. He committed suicide, shooting himself in the head at 5AM in the morning.

My dad and his mother were left destitute. They packed up and moved to the little town of Orangeberg, S.C. , where living was cheap.

My dad saved up and bought a 1904 .22 caliber Winchester rifle from Sears. The rifle cost $4. It came in a wooden box with a can of oil, a screwdriver, and four boxes of .22 ammo. My dad used to go out and shoot rabbits and squirrels for dinner with that .22. That rifle and some medals (my dad was an intercollegiate 100 yard track champion) are the only things I have left from my dad.

A few weeks ago, my son Ryan, was looking through my old stuff, and he found the rifle. He asked what it was -- I told Ryan that it had been my dad's rifle. Ryan said he'd like to have it so I decided to recondition it, and gave the rifle to a buddy of mine who is a gifted gunsmith. He's going to recondition the rifle, "make it like new," and he's even going to build a Winchester box (like the original) to go with the rifle.

I told Ryan that it's the only thing I have left from my father. "That rifle" I told Ryan, "brought in a lot of dinners for my dad and his mom." I told Ryan to take good care of that old Winchester. He said he would and added "I may need to use it again the way things are going. I've never cooked a squirrel but rabbits are damn delicious."