Richard Russell is the Dean of Dow Theory. He’s also been around for a long time, and brings a good historical as well as institutional perspective to observing the markets.
You can see his "greatest hits" available on his website for free — no subscription required.
Here’s a list of his most Popular Articles:
The History of the Dow Theory
The Four Greatest Calls
Rich Man, Poor Man (The Power of Compounding)
The Perfect Business
Hope
Bonds
Fixed Income and Interest Rates
Time
Acting
Critical Indicators:
Primary Trend Index (PTI)
Advance-Decline Ratio
The Big Money Breadth Index (BBI)
While I surely believe in the logic of Dow Theory and the confirmation of Transports and Industrials required for a healthy market, it is sort of a self fulfilling prophecy in the markets and money steps aside when they see any type of divergence. It is far from a science and doesn’t really work well in a range bound environment because by the time the divergence develops, the up or down move may be over. ie, It’s nice but nothing but a health checkup.
And Richard is a perma bear. I don’t doubt much of the “concern” is warranted over the years but failing to take the market action means perma bears are usually stuck with little positive returns-but-they have their ever diminishing capital. Ever diminishing because we’ve lived in a world where the Fed has a propensity to inflate our way out of any sticky situation that may arise.
I want to go back to a few other posts you’ve made. Specifically on the housing market. While many would have us believe construction, mostly residential, are in a bubble, what has not been mentioned often in the press is that construction cycles have always been very pronounced. And historically, they have been very boom/bust oriented, especially on the coasts. Nothing higlights this more than the late 88-90 peak where housing permits in the good ole bubble California were over 3X what they were at the trough just seven years prior. Bubble? Well, housing definitely cooled or more in the 90ish time frame in the Golden State but how did that translate into equity performance? We saw a mild correction then a roaring bull. Actually, I’d love a remake of the early 90s again. I’m not wedded to any opinion as to whether that scenario will repeat or not but an interesting note. We also had a banking mess. Can you say asset backed securities today? Same cycle and same results?
I believe one of the keys to maintaining a neutrality as it pertains to investing is to view all points of perspective without significant bias and to try to think opposite the crowd. Or more aptly put, not to be a CNBCer. As Livermore said, “There is no stopping a bull or bear market. Not war or anything else. And all you need to do is recognize the direction to profit from it.” Not a direct quote but generally accurate as I recall. In other words, bull markets are just as likely to creep up on us as bear markets are. And as we’ve all heard many times before, the economy is not the stock market.
So, I’m curious as to how you would spin a positive view of the next few years, Barry. ie, Not being wed to the fact that a worst case scenario, or something like it, comes to fruition, what situation would unfold that would make you bullish on equities, bonds or whatever? Does the Fed need to start cutting first? Do we need a correction of a certain amount? Do we need some type of fundamental or economic indicators to get to a certain level of oversold? Sentiment really crater? We are definitely do a breather and one that involves more than biding time as we are doing now. Short term sentiment is out of whack. But, many sentiment indicators can remain out of whack for a year or more as witnessed by 2003 and pre-equity bubble years. While there may be some correlation to the 70s and a range bound market, aren’t going to spend 17ish years of Dow 10000-11000. In fact, I’d say we are just about done with that two year mess. (Just a guess based on history, volatility, average true range on pricing, etc.) If we get a protracted trading range, it’s more likely Dow 7000-11000. So, if we don’t break out, are we headed back to a retest of the 2002 lows? No one is talking about that scenario. Frankly, no one is talking about Dow 15,000 either. Or the Chinese miracle becoming less miraculous under the Commy Politburo’s centrally planned guidance. We are going to likely pop some time.
Just curious on your perspective. I know you are defensive as I am but might you expand upon that and some future thoughts. Obviously I understand that is sort of like a Ouija Board deal but…………
There is no doubt there are many dislocations and issues in America and other legacy economies. But, I’ve heard this recording before. Right before we get to Pamplona. Maybe different this time or maybe not.
We’re not all Jesse Livermore. Mr. Livermore’s idea of a sell discipline was immediately to go short. We don’t all have that sense of timing.
If you have directional opinions but lack the same skill, your portfolio can make money on the way up or down and still be positioned for any break. That way, if you were wrong, your capital does not diminish, you merely underperform. In a probabilistic world, you simply need be right slightly more often than not to outperform an indexer.
There are more than two portfolios out there. Just because I was a bear in 1999 doesn’t mean I lost money that year.
Hi,
Thanks for the links.. they are sure very useful for an ameteur like me.
want to thank u for the wonderful blog of urs.
Wow, two Navins on the same thread. It defies the law of averages, Barry.
B – I’m really not sure what your point is – if you want to see a positive spin on the economy, just turn on CNBC and listen. Listen as they talk about positive GDP and the balance sheet of the consumer. Listen how they talk about corporate balance sheet strength. E-mail Kudlow – I’m sure he can come up with something for you.
And then come back, and listen to huge consumer debt, home equity extraction, flat wages, huge government debt, large social security and medicare problems, and then decide for yourself which is the more compelling vision of our current state. Add to that an economy that is ever-increasingly dependent on the consumer, and where job creation is almost all out of the real estate sector. Add to that the increasing inflation (which is strangely understated by CPI). Add to that the new fed is known for printing money. Where to stop really…
For me, I never trade against the market – I’ve made good money in this past month or so – but, to me, the bulls need to come up with some really compelling data to show me that we’re not in trouble in 2006.
Barry is here to represent the view he believes – not one he doesn’t.
i have major concerns about our top 25 banks holding $321 TRILLION OF DERIVATIVES–THIS MAKES OUR SOCIAL SECURITY DEFICIT AND MEDICARE DEFICITS AND FANNIE MAE AND FREDDIE MAC AND PBGC PROBLEMS AND CURRENT ACCOUNT DEFICITS AND BUDGET DEFICITS ALL SEEM INCONSEQUENTIAL–ESPECIALLY IN LIGHT OF A WORLD ECONOMY OF $40 TRILLION. IF WE HAD ANOTHER HEDGE FUND DEBACLE OR OPEC CHANGED IT’S OIL SALES TO EUROS OR IF CHINA DID A MAJOR CHANGE IN ITS CURRENCY MIX AND THIS WHOLE THING UNRAVELS BY JUST 5% THOSE BANKS WOULD ALL BE BANKRUPT!!!!