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Dow 2500, Anyone?
A veteran theorist fears that the worst still hasn't arrived
An Interview With Richard Russell -- As a long-time interpreter of the venerable Dow Theory, which tracks the primary trend of the stock market, Dick calls 'em as he sees 'em. His comments have graced our pages since 1958, the year in which he launched his newsletter, Dow Theory Letters. These days, most subscribers read his views daily on his Website, www.dowtheoryletters.com. Like any umpire, Dick occasionally misjudges a curve ball. For example, he caught the market top in the spring of 1962, but stayed bearish too long and missed the entire bull move that ran until 1966, when he correctly restated his bearish case. That said, the long-term track record of this technician is impressive at major turning points. He nailed the exact bottom in December 1974, and has been rather prescient ever since.
Last spring (June 12, 2000) and again last fall (December 4), Dick explained in these pages why a primary bear market is under way. Keep your eye on the big picture, he advises, and don't be distracted by short-term fluctuations. Currently, he's invested mainly in Treasury bills. For the reasons, read on.
Barron's: Last November you correctly warned that a potentially brutal primary bear market had entered the second -- and usually longest -- of three psychological phases. Where are we now in your scenario?
Russell: We're still in the early part of Stage 2, where stocks decline in the face of visibly deteriorating business conditions, and corporate profits are falling. Several things are critical here. First, value is the key to Dow Theory [see below]. Even though popular indexes have fallen sharply over the past year, stocks are still very expensive by historical standards.
Second, studies have shown a relationship between current price/earnings ratios and dividend yields and the likely future performance of equities. With the P/E for the S&P 500 Index now at a lofty 23 and dividends below 2%, stocks aren't priced to even match the return on T-bills over the next 10 years.
Third, I believe we've entered a period that will play out like 1966-74, with a series of mini-bull and mini-bear swings. Over this span, the market on balance will go nowhere for years, then collapse in the third, or "give-up," stage. That's when good stocks are thrown away with the bad, and people want out at any price. This final phase hasn't arrived yet, and likely won't for some time. In other words, we're nowhere near the bottom of this bear market.
Q: Is there any good news?
A: Maybe. The single most puzzling aspect of this bear market is the fact that the Dow Jones Transportation Average [recently at 2716] steadfastly has refused to confirm the downward path of the Dow Jones Industrial Average.
Q: What does that tell you?
A: This could be an intermediate-term plus in a primary bear market. The DJIA recently has been locked in a narrow trading range. If the Transports hold up, the Industrials [recently at 10,056] could rally first to their 50-day moving average at 10,315, then to their 200-day moving average of 10,618 or even beyond. However, this wouldn't mark the start of a new bull market. Remember, bear declines can take well-deserved breathers at any time. These rallies tend to be sharp, sudden and very dangerous. They tend to end as abruptly as they began. The flip side of this scenario is that Transports could turn around and decline, and Industrials could drop to new lows. I'm not certain what will happen. The market will make its own judgment. Meanwhile, a major milestone has been reached. Not since 1982 had the DJIA closed below its low of the prior year. That was a heck of a 19-year run, but it recently was broken when the Dow fell to 9389.48 on March 20, before rallying. The drop below 9796 was a major crack in the structure of the market, but it's not yet a fatal one.
Q: What else bothers you?
A: The dollar is the wild card here. I'm worried about it. The dollar has remained surprisingly strong in the face of ongoing U.S. trade deficits. When the dollar finally turns down, foreigners could cut back on, or even retreat from, dollar-based financial assets. This would put downward pressure on U.S. bonds and stocks. I'm watching the dollar index that trades on the Cotton Exchange. The June contract recently was 114.90. If it breaks below 114.50, and more importantly 113.50, I'd be reasonably certain the dollar has topped out.
Meanwhile, the euro, a major component of the dollar index, is trying to form a head-and-shoulders bottom. This can be seen clearly on weekly charts and is the first hint of a possible major turn to the upside for the euro. If we start to see a real slide in the dollar, all bets are off. A sliding dollar would put huge foreign holdings of U.S. securities in danger. If foreigners cash in their dollar chips, the dollar could step on the down escalator and all hell could break loose. Gold might even go up.
Russell: "We're seeing the beginning of the end of the cult of "buy the dip."
Q: How would you categorize this bear market in equities to date?
A: The Nasdaq collapse is one of the meanest and most vicious bears that I've ever seen. Greed, ignorance and stupidity on the part of brokerage houses, their strategists and their analysts have cost investors in individual stocks and mutual funds tens of billions of dollars. By staying bullish too long, so-called professional investors have violated some primary rules of investing. The No. 1 goal in a bear market is to avoid losing money. He who loses least is the winner. It's okay to be wrong, but it's not acceptable to stay wrong. It's okay to take losses, but you must avoid taking huge losses.
Q: The speed of Nasdaq's decline is frightening.
A: It sure is. The public has been heavily invested in tech stocks and technology mutual funds. The Nasdaq Composite Index topped out on March 10, 2000, at 5048.62. At its recent low of 1638.80, Nasdaq had dropped nearly 68% in little more than a year. In comparison, the worst bear market in history, the one that ran from 1929 to 1932, saw the DJIA plunge a horrendous 89%, but it took almost three years to get there. Which was the more vicious bear market? Nasdaq's 68% drop or the Dow's 89%? I leave it to you to decide.
Q: In recent months, many pundits have insisted that the DJIA isn't yet "officially" in a bear market because it hasn't closed 20% below its 2000 peak.
A: That's ridiculous. I don't know where that idea came from. It sounds like something Joseph Goebbels, Hitler's propaganda minister, could have dreamed up. Remember him? He said that if a lie is repeated often enough, no matter how outrageous it is, people start believing it. Well, to say 20% is a bear market and 19.9% isn't is simply an idiotic lie.
Q: Let's back up a minute. What is a primary bear market?
A: Charles H. Dow, whose editorials in The Wall Street Journal between 1899 and 1902 later became known as the Dow Theory -- even though Dow himself never used the term -- strongly believed in buying great values and selling those values when they become overpriced. But Dow Theory can't be summed up in one or two sentences. It's more of an art form than anything specific. It requires a lot of interpretation. Which is probably why its value has lasted so long.
If you make the same prediction over a long enough period of time, it's bound to appear to come true. Even a broken clock is right twice a day and even a blind pig finds an occasional acorn.
When the economy is doing great, there are flakes using the media to predict the next depression. When the economy is down, there are flakes predicting "the worst is yet to come".
For some reason, the flakes want to be seen as having the ability to predict the future, but whats funny is that few ever get close to reality with their silly predictions.
Carol
Where does Russell predict a 2500 DOW?
This guy hedges his bets at every turn.
Gold "might" rise. OTOH, the Transportation Averages have dropped, but it's not "fatal."
The truth is, Russell hasn't a clue as to where the market is going, and neither does anyone else. Over time, the stock market has made money for investors.
So, I'm betting on the historical averages.
If this market timer Russell really knows where the market is going, how come he's been working so long? I'm always amazed that these market pundits can try to predict markets with a straight face, yet fail to explain why they haven't made billions themselves. Nobody can time the market; you have to be right at least twice every time (when to sell; when to buy). So if you believe in capitalism, hold a diversified equity portfolio (plus bonds, cash and real estate), or else just put it in a tin can under your mattress and watch it eroded by inflation.
If you go to any book store that sells used or 'overstocked' books, you will see a plethera of books predicting catastrophies that never occured. Titles such as:
"The Stock Market Crash of 1984"
"Why the Ecomomy Will Crash in 1992"
"1994- The Year Banks Fail"
"America's Second Great Depression Coming Your Way in 1997"
Most of the recent decline of the DOW has been attributed to a lack of confidence in the economy which in turn was greatly influenced by the media's propaganda campaign to convince the American people that no one had any confidence in the ability of George Bush to lead America.
The media will now continue to tell us how the US was humiliated by the Chinese in the EP-3 incident. Despite the media, the American people are beginning to show signs of recognition and confidence in George Bush's leadership. IMHO this will translate into increased confidence in the economy. The tax cut policy will go along way in renewing and expanding that confidence. There will be more tax cuts and other fiscal polices such as SS Reform that will beg the question, "Dow 12500, Anyone?".
If you go to any book store that sells used or 'overstocked' books, you will see a plethera of books predicting catastrophies that never occured. Titles such as:
"The Stock Market Crash of 1984"
"Why the Ecomomy Will Crash in 1992"
"1994- The Year Banks Fail"
"America's Second Great Depression Coming Your Way in 1997"
In 1987, I saw an economist on CNN say, "I've been predicting a depression since 1984 and one of these days I'm going to be right."
Still waiting . . . .
Who can forget Ravi Batra, who wrote two books:
The coming depression of 1989.
The coming depression of 1992.
Haven't heard from him in a while.
The S&P Index at 23 & a 2% dividend yield has to make one sit up & take notice. Who knows. When we went off of the gold standard everything became a hype. If Bubba can hype this nation with a willing media then I assume they can do it for a emotional stock market. For myself I have little market participation with basically short term investing when I am confident in a stock & I don't ride it out until it retrenches. My best market gift is my ability to sell. Ownership in a few business who I know & trust the leadership plus land owner makes me more confident that I am in control of my destiny rather than Greenspan making it for me.
If this guy really knew what hes talking about he'd be a billionaire. The only thing thats true about the market is that whenever everybody agrees, do the opposite.
His parents didn't name him Dick for nothing.
This author needs to get on the cluetrain. It is too late to short, and too early to go long. Stocks will begin their rise in the early part of 4th quarter.
I do believe that we will see the numbers 2,500 on the Dow, but the question is when. Definitely not within the next three months. It seems like the Dow and the NASDAQ started their rebounds, and they intend to go up for a while. That way, before you'll see the Dow at 2,500 you'll see it at around 11,000. And then when someone is going to write, Dow 30,000, you might experience the Dow going to around 2,000.
The NASDAQ and the Dow are looking pretty healthy at this point in time. I covered my shorts at around 9,500, and I am totally happy about it. There isn't any news that could take the Dow down to 2,500, with the exception of China, but that would require a war with them, which I deeply doubt will happen. Tax sales are over and the stupid bears are sitting short in most of the stocks. How do I know that the stupid bears are sitting short? I tried to short Amaon.com for a couple of days on 13.25, and I couldn't find any brokerage house to lend me the stock. Merryl Lynch didn't have any, Goldman Sachs didn't have any, and that instantly changed my mind about shorting Amazon.com. We are in a short squeee at this point in time. As most traders know, we are in a short squeee on almost all of the stocks, NASDAQ and the Dow.
Yep, the elevator is going to the top; how high, I cannot say. But it will be fun, watching the dumb bears losing their shirts.
Anyway, I wish good luck to the shorts, they're going to need it. And good luck to the longs, too. They are already lucky, we're in a short squeee.
This is the rest of the article.
Q: Can Dow Theory predict the duration and extent of a major bear decline?
A: No. But over many years, I've observed some very useful clues. First, every primary bear market has wiped out at least half the gains of the preceding bull market. Let's say the late bull began at 1000 in 1982 and ran to 11,700 last year. That's a gain of 10,700 points. Half of that is 5350. Deduct 5350 from 11,700 and you get 6350, which could be the minimum level to which the DJIA drops.
Q: That's your best-case scenario?
A: It could be. But things also could get much worse. At other major bear-market bottoms, the Industrials have tended to sell at 10 times earnings and yield 6%. We saw a 10% yield in 1932, but that was a historic extreme. In 1949, in 1974 and again in 1982, the yield at the bottom was about 6%. Assuming current dividends on the DJIA components hold up, which they probably won't, the index could fall to between 3000 and 4000.
Q: In what time frame?
A: Bear markets usually last about 25%-33% as long as the preceding bull market. Assuming the recent bull market ran from a low in 1982 to a peak in 1999; we're talking 17-18 years. By this measure, I expect the decline to last at least four or five years, until 2003 or 2005. One possible difference this time is the speed at which Nasdaq has plunged. If the Dow picks up momentum on the downside, its bottom could arrive sooner than 2003.
Q: What about the S&P 500 Index?
A: At its recent 1166, the S&P yielded about 1.2%. Were its yield to quadruple to 4.8% -- and it's been higher than that in the past -- the S&P would drop to about 300. Interestingly, the S&P now trades at over three times revenues, six times book value and 75 times dividends. These figures are well above peaks seen at previous bull-market tops, and illustrate just how overvalued the S&P 500 now is.
Q: Whew! Do you have a worst-case scenario for the DJIA?
A: Yes. In this business, it always pays to consider a worst case. Why? All you need is for one worst case to occur and it can cost you a lifetime of worry and losses. Take a trendline that connects the 1932 and 1982 lows and extend it. Were the DJIA to intersect with that 70-year trendline from 1932, it would have to fall to about 2500. I'd say the odds of this happening are one in three. It probably won't happen, and I hope it doesn't because it would be a disaster, but I certainly believe it's possible.
Q: Why?
A: The U.S. is swimming in debt, the U.S. savings rate is negative, $4.5 trillion in U.S. stock values already has been wiped out, corporate manufacturing facilities have been overbuilt, retail sales are dropping, world competition is vicious, the U.S. is running a trade deficit of over $1 billion a day, the dollar's strength is probably not sustainable, mutual funds are fully invested in other people's money and both individual-investor and professional sentiment still are far too bullish. Investors obviously aren't prepared for anything resembling a worst-case scenario. Most keep looking for, hoping for, a bottom.
Q: Given this, what have you done?
A: I've moved almost entirely into Treasury bills. But that's me. I believe in the bear. When I was in the Army Air Force during World War II, sitting in the nose of a B-25 and flying combat missions as a bombardier, I knew what my worst case could be. I could be killed by a piece of flak from a German 88 [gun] blowing me to kingdom come. The problem was, the only thing I could do was pray. Now, prayer is powerful, and I like to think it saved my life. But the crux of the story is, I knew all about my worst case, and there wasn't a damn thing I could do about it. Today, I can visualize a worst case in the U.S. stock market, and there is something I can do about it. I can make myself and my family as safe as possible by moving into short-term government paper, meaning T-bills. Remember one thing: The U.S. itself can't go broke because it can print paper money. The paper may not be worth much a year from now, or it may be worth a lot, but it is worth something because the U.S. says it's legal tender. So the dollar can fluctuate versus other currencies, but I can buy a house or a hamburger with dollars, and other things I need to stay alive.
Q: Amen. Let's switch gears. Why do you suppose the public remains so optimistic about the outlook for the stock market?
A: Their resistance to believing we're in a bear market is mind-boggling. People still seem to be hanging on for the "long haul." This really is a tragedy. The losses in the average portfolio must be horrific. Foolish optimism and the speed of the Nasdaq decline literally have "locked in" millions of investors, the people who buy individual stocks and mutual funds.
In my experience, the single hardest concept to get across to investors is the fact that there are tidal movements in the market. The bull tide takes stocks from being undervalued to being overvalued. Then the bear tide comes in, corrects the bull movement, and takes stocks back to undervalued again. Why can't people accept this? Probably because the idea is too simple, too basic, too theoretical.
Oldtimers have seen extreme undervaluations before, and can envision them returning. However, the vast majority of investors and analysts don't relate to extreme undervaluations. This phenomenon isn't new. Way back at the turn of the 20th century, Charles Dow wrote that the most difficult concept to teach people is the inevitability of change. Sometimes the simplest ideas are the hardest to get across.
Q: Does anything else account for today's blind bullishness?
A: Sure, the very nature of Wall Street itself. The awful truth is that Wall Street doesn't care about you as a person. It only cares about your money. Wall Street isn't interested in conserving your assets, Wall Street is interested in getting control of your assets. Everything about Wall Street is directed toward selling merchandise to you. Brokerage-house managers ask their brokers: "How are your sales?" They don't ask: "How are your customers doing?" May I tell you my fundamentals of investing?
Q: Of course.
A: First, above all don't take big losses. This is critical. It means: When in doubt, get out. There's nothing wrong with moving to the sidelines, even though current propagandists tell us we should be in the market at all times. Lose 60%-70% of your assets and psychologically you are whipped. And the odds are that you'll never recover those losses.
Second, understand the power of compounding interest. Compounding is the royal road to riches. For more on compounding, read the article on my Website. Third, learn some history. Learn what great values are.
Learn what overpriced stocks look like. Learn about bull and bear markets. Study some historical charts. You can't run your own business without a knowledge of your industry. And you can't manage your own money without a knowledge of how markets work.
Fourth, learn to ignore the words and predictions of Wall Street's gurus. Learn to trust market action and only market action. Most Wall Street strategists and gurus don't have the vaguest idea of how markets work. They don't even understand that markets discount the future, that markets move before the economy moves. These guru-strategists are amateurs. They didn't understand what was happening when popular stock indexes turned down and, for the most part, they still don't.
Q: Can additional rate cuts halt or slow this bear market?
A: No. Before it's over, we'll see the end of the "cult of the Fed." The fact is that the Fed created the biggest economic and stock market balloon in U.S. history, and they did it over a period of years. This allowed, in particular, the technology sector of the economy to expand production capacity far beyond what was needed. Lowering interest rates and flooding the banks with liquidity won't solve the problem. Only time will solve the problem. Excess capacity will have to be worked off. The Fed can't work it off. Time, bankruptcies, removal of excess capacity are what will work it off. That entails time -- and pain. And everybody is up to his eyeballs with debt. Corporations are choking on it. To work off debt also takes time and pain.
In a bear market, margin debt is a speculator's worst enemy and a trader's worst nightmare. The peak for margin debt on the New York Stock Exchange was $278.5 billion in March 2000. By February 2001, it was down to $186 billion. It wouldn't surprise me to see this figure drop to around $30 billion before this bear market is over. We're also seeing the beginning of the end of the cult of "buy the dip." Come hell or high water, in a major bear market, stocks head for levels that I call "great values." And the dreaded secret is: We're not there yet.
Q: Any final thoughts for our readers?
A: Take this bear market seriously. It's never too late to do the right thing. In a primary bear market, the right thing is to play it safe. That means getting out of almost all common stocks and into U.S. government paper. With cash in hand, you boost your buying power at the eventual bottom.
Q: Thank you very much.
PS:The author missed only one bull market --that during the Viet Nam War. If you believe you are buying an actual business when you buy a stock, it is time to think carefully about what you do. If you believe that when you buy a stockyou are buying a piece of paper which someone else will pay more for, go buy the dips.
So everybody is OK with out-of-line P/E ratios as such. What's was Netscape at one time?... 300/1?...I have a hotdog cart I'll sell to anybody for a million....Go ahead invest fools.
Yes, that's a piece of paper for which someone will pay a little more. That's for sure, and that's the definition of "short squeee". There was someone dumb enough to sell short on that level, and they will be buying their stock much higher. And what makes you so sure that the paper you call a dollar, whoever is on it, is worth more than my paper, which they call a stock certificate, with a picture of whoever is on it? (Some stock certificates have pictures on them, too.)
If you believe that your paper is worth more than my paper, you could be awfully wrong. And this shos that you might not be in touch with reality. If my paper becomes worthless, then definitely your paper will become worthless, too. It's just a matter of taste - what paper would you like to hold on to?
This is good news! This is the kind of tripe you start hearing just before the market takes off.
Who can forget Ravi Batra ... Haven't heard from him in a while.
He's still beating the bearish drum
Yes, but Im getting email from people who say that this 76 year old ol' fart is the worlds greatest at predicting the future of markets. I would say then that he must be the worlds richest man right after Gates....oh, he's not??? Well, why not if he's such a profound "seeer"?
Thats whats cool about markets and making predictions...the guys who do good will eventually blow it so badly that they lose their entire reputation. Those who say, "I don't know, so I'm being conservative right now" are the real winners in the long run when things become unstable.
Carol....NOW IS THE TIME TO BUY... I LIKE LUCENT, COMPAQ, IBM. Buy low, sell high. If you've got cash, don't blow all of it, but if you can, invest in those that are way down right now, and hold tight until they do well.
Oh oh, the poor man is massively short. LOL
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.
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