[RT]

["JW" <JW@xxxxxxxxxxxx>]

Got this from a friend.  Very interesting.  Lots to digest...

JW
------------

June 12, 2000

Barron's Features

The Oracle Of Dow

Interpreter of a venerable theory sees markets at a pivotal point

By PETER C. DU BOIS

An Interview With Richard Russell

A long-time student of stock-market history and an accomplished
technician, Dick is a particularly strong believer in and proponent of
the Dow Theory, whose main function is to identify the primary trend
of the market.  Just how important is the primary trend? "Without
understanding that concept, you're lost," he says. "It would be like
trying to drive a car without an engine."  Now 76 and a longtime
resident of San Diego, Dick is no stranger to Barron's. Beginning in
1958, his comments on what the Dow Theory is saying have frequently
graced our pages. He has penned his newsletter, Dow Theory Letters,
since July 1958, and last year began offering daily comments to
subscribers on his Website, www.dowtheoryletters.com1.  For his
perspective and views on today's market, and why he believes we're in
the first phase of a bear market, read on.
-Peter C. Du Bois

Barron's: When did you first become interested in the stock market and
start investing in equities?

Russell: I have a very strange family history. My grandfather
committed suicide in the Panic of 1907, and my uncle was undone in the
1929 Crash. For all the talk about many people committing suicide
then, he was one of few who actually did.

I was born in 1924. In 1946, when I got out of the Army Air Force, I
read an article in Time magazine about the great future of Kaiser
Frasier cars. I bought a few shares in the 20s, and they promptly fell
to 10. That's what got me really interested in how markets work.

Q: When did you decide to focus on the Dow Theory?
A: In the mid-1940s, there wasn't an awful lot of material available
to help one  understand the stock market. I went to the New York
Public Library, which had a great section on economics. I pored
through every book I could find about stocks and happened upon a
collection of articles by Robert Rhea. From 1932 until he died in
1939, he wrote a newsletter called Dow Theory Comment that came out
irregularly every 10 days to two weeks. It was successful from the
start. Rhea had a big following in Barron's, which at that time was
quite technically oriented. Prior to starting his newsletter, on July
7, 1929, Rhea had called the 1929-1932 bear market, based on Dow
Theory principles. He also called the exact bottom on July 8, 1932, a
feat which I consider one of the most remarkable in the history of
stock-market analyses. He also called the turn to the downside in the
bear market of 1937. I was totally fascinated by what he wrote. The
material really made a lot of sense to me. It was the first time I
really got a feel for the market. I studied every word and sentence
Rhea ever wrote until I couldn't see straight.

Q: Let's back up a minute. Can Dow Theory be summed up in a sentence
or two?
A: Unfortunately, no. 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.

Q: Is it fair to say that Dow Theory tracks the primary trend of the
market by insisting that the Dow Jones Industrial Average and the Dow
Jones Transportation Average must move in the same direction and must
confirm each other's new highs or lows?
A: Yes, the theory helps to identify the primary trend. Without
understanding that concept, you're lost. It's like driving a car
without an engine. However, value, dividend yield and other factors
also play important roles.

Q: What do you consider your best and worst market calls?
A: I started my newsletter in July 1958, telling people to be fully
invested at a time when most observers were very gloomy. We had a huge
up-move that lasted into 1960. However, I think the best call I ever
made was in December 1974, when I said the 23-month bear market that
began in January 1973 had hit bottom.  Probably my worst call was not
turning bullish in October 1962. I caught the top in the spring of
1962, but stayed bearish too long. I missed the entire bull market
that ran until 1966. However, I restated my bearish case in 1966, and
the market fell.

Q: Back in 1962, did you let your own opinion override your data?
A: I think so. Around that time, I realized I needed something else to
keep me on the right track. That's when I started thinking about what
became my proprietary Primary Trend Index. I began publishing the PTI
in 1971. It's a compilation of eight components that measure only
market action. There's no subjective interpretation involved. I prefer
not to name the components. If everybody followed the same ones in the
same way, the PTI would lose its usefulness. The key here is that no
matter what I think, the PTI keeps me on the
correct side of the market.

Q: What are your indicators telling you now?
A: As measured by Dow Theory and the PTI, we're in the first phase of
a bear market that could be long, tedious, grinding and very painful.
Before it's over, I believe we'll see big pools of money moving out of
stocks and into cash. I also believe we'll see absolute slaughter in
that dinosaur industry, mutual funds.  There now are an absolutely
ridiculous number of equity funds. In time they'll be decimated, with
literally hundreds of them closing down as investors bid them
good-bye.

Q: When did the bull market end?
A: On May 12, 1999, when the DJIA and the Transports both hit peaks.
The Industrials subsequently hit several new highs, but Transports
didn't. That's called a non-confirmation, and it's still in effect.

But that's not the only bad news here. In what I call a Top-Out
Parade, a total of 12 key indicators are below their peaks. I doubt
that any of them will see new highs in this market cycle.
Sequentially, the Parade goes like this:

Daily new highs on the NYSE topped out at 631 on October 3, 1997.
The advance-decline ratio topped out on April 3, 1998, at 13.00.
The DJ Transportation Average topped out on May 12, 1999, at 3783.50.
The NYSE Financial Average topped out May 13, 1999, at 584.21.
The DJ Utility Average topped out on June 16, 1999, at 333.45.
The Value Line (geometric basic) topped out on July 6, 1999, at
472.95.
The NYSE Composite topped out on July 16, 1999, at 663.12.
The DJ Industrial Average topped out on January 14, 2000, at
11,722.98.
The Russell 2000 topped out on March 9, 2000, at 606.05.
The Nasdaq Composite topped out on March 10, 2000, at 5048.62.
The Amex Index topped out on March 23, 2000, at 1036.40.
The S&P 500 topped out on March 24, 2000, at 1527.46.

Q: You said we're in the first phase of a bear market. Typically, what
happens here?
A: Market action is very deceptive. Individual stocks and sectors
decline, some froth and excitement from the bull market top are
erased, the market fluctuates below its highs, sometimes wildly, but
the economy remains okay. In some ways, the current first phase is
different from any other I've ever seen.

Q: Why?
A: Because it has lasted longer, because many more individuals and
institutions are involved, because it's happening in an election year
and because a new phenomenon, the Internet, has emerged and obviously
is changing the world.

Then there's volatility. I've never seen anything like what we have
now. Among the reasons for it are day-traders moving in and out of
stocks, and the divisor on the DJIA, which is a price-weighted index.
To adjust it for stock dividends and splits, a divisor, which really
is a multiplier, is used. Following Intel's recent split, every point
up or down in a Dow stock moves the index by 5.48 points. A six-point
pop in IBM would add 32.8 points to the index. So it's not that hard
to manipulate the Industrials these days. But perhaps most important,
this first phase is occurring at a time of the first generation of
investors in U.S. stock market history to never have gone through hard
times. This big difference allows them to disregard risk.

Q: How else do you categorize this bear market?
A: So far, it is one of attrition, a deadening process that goes on
and on. Stock after stock falls victim to the bear, but the action is
subtle, and nobody seems particularly worried. The averages rally a
bit, often on lower volume. They decline, they wander about aimlessly,
but meanwhile, selected stocks get hurt, and many get hurt badly. As
this bear market moves along, attrition will give way to nasty
selling, big breaks in stocks and rising volume on the downside.

We're not there yet. Meanwhile, is the bear playing with us? Is he
trying to lull us into a false sense of security? Is he trying to bore
us to death? Damned if I know, but I do know this: The bear has time
on his hands. He's in no hurry. The bull certainly was in no hurry,
and the bear is perhaps just getting even.

Q: A whole generation on Wall Street never has experienced a real bear
market like the one that began in January 1973 and ran 23 months until
December 1974. What are the most important things to remember about
one like that?
A: Here are some critical axioms. In a primary bear market, values
deteriorate over time. Everyone loses, but the person who loses the
least is the winner. The one thing you should not take in this
business is a big hit. You can avoid taking a big hit in a bear market
by being low on stocks or out of stocks entirely.

Q: Why do you suppose most investors either don't see or won't admit
that we're in a bear market?
A: In a recent issue of Dow Theory Letters, I quoted something Charles
Dow wrote around 1902. He was the father of the theory, but he never
called it the Dow Theory. Even though his admirers begged him to write
a book explaining his theories, he stubbornly refused. However, his
good friend, S.A. Nelson, published 15 of his editorials that had
appeared in The Wall Street Journal between 1899 and 1902. The little
volume was entitled The ABC of Stock Speculation. A footnote at the
end of each chapter refers to each editorial as
"Dow's Theory." Dow himself never once used the term.  To answer your
question, here's one thing Dow had to say about the sheer human and
economic drama the stock market represents, and why most people are
slow to recognize change:

"There is always a disposition in people's minds to think that
existing conditions will be permanent. When the market is down and
dull, it is hard to make people believe this is the prelude to a
period of activity and advance. When prices are up and the country is
prosperous, it is always said that while preceding booms have not
lasted, there are circumstances connected with this one which [are]
unlike its predecessors and give assurance of permanency. The one fact
pertaining to all conditions is that they will change."

Q: What are the other two stages of a bear market?
A: In the second stage, business conditions really start to
deteriorate. Stocks go down further as they discount this climate.
Corporate profits decline, and the effects of the battering stocks
have taken so far is reflected in corporate earnings. For this reason,
the public relates much more to what's happening in the second phase,
and optimism begins to turn to questioning and even gloom.  This
usually is the longest phase. It's when the public finally really
realizes that something is wrong. Stage Three is the "give up" phase.
Rhea said that's when people who are saving for a rainy day find that
it's raining.

Q: So they want out at any price?
A: Correct. People dump stocks just to be out of the market. Extreme
fear is prevalent.

Q: Where do rising interest rates fit into your bearish scenario? Is
the stock market declining because the Federal Reserve is tightening?
A: That isn't the way I see it. Early signs of trouble were seen back
in 1997-98, when new highs and the advance/decline ratio topped out.
By May 12, '99, when the Transports topped out, it certainly was
clear, at least to Dow Theorists, that "something was wrong." That
"something" was unknown at the time and, frankly, I don't think it is
known today. To cite inflation is too easy.  Everybody knows the Fed
is worried about inflation. What everybody knows is fully discounted
by the market 99% of the time.

I'd say that something else is bothering the stock market. If I had to
guess, I'd say the dollar could be topping out, or consumer spending,
which accounts for a big percentage of gross domestic product, could
continue to slow down.  Obviously, I agree that rising interest rates
are a negative for the stock market and the economy. But more than
that, I believe the great primary trend of the market has turned down.
This implies that there are a lot more troubles out there waiting to
express themselves.

Q: Will the Fed raise interest rates again on June 28?
A: The Fed is in a bind. At this point, it easily can justify pushing
rates up another 0.25% on June 28, in an effort to offset what the
bond market has been doing. Yields on long bonds have been sinking,
and I believe the stock market has been reacting to this trend, not to
slowing business conditions. So, here's the way I see it: If the stock
market is looking strong in late June, the Fed will raise rates 0.25%.
If stocks are struggling and economic growth is slowing, the Fed will
stand pat.

Up to now, the Fed has been playing it cute. They've been raising
rates, but at the same time they've allowed the money supply to
expand. Thus, the Fed has tried to put a ceiling on the market with
rising rates while at the same time putting a floor under the market
with copious cash. In the end, we may get the worst of both worlds --
a slowing economy and rising inflation.

The net result of all this is that the Fed's manipulations are
extending the stock market's lengthy topping-out process, dragging it
on and on and on. The Fed objects to the "irrational exuberance" of
the stock market, but at the same time
is afraid to let the stock market go into the tank.

Q: By Dow Theory precepts, what index levels now are critical?
A: I need to discuss Charles Dow's "50% Principle." He noted that what
the averages do at the halfway level of a major rise or decline is
important. The greater the move, the more important the 50% Principle.
For example, I wouldn't apply it to a move of a week or so covering
maybe 100 points in the DJIA. However, for larger moves, this analysis
is often helpful.

The record high for the Industrials was 11,722.98 on January 14, 2000.
>From there it fell to 9796.03 on March 7, a decline of 1926.95 points.
The halfway point of the decline was 10,759.50. You have to envision
10,759 as a fulcrum, the center of a see-saw. According to the 50%
Principle, if the Dow, after all its fluctuations, can settle and hold
above the halfway level, there's a good chance that this end of the
see-saw will rise, allowing the index to test its prior high. But if
the index, after all its fluctuations, can't settle above 10,759, then
the odds are that this end of the see-saw will sink, taking the Dow
down to test or even break below its March 7 low. In this event, I
believe the second and longest phase of the bear market would be
triggered.

Recently, the Dow has been both a little below and a little above
10,759. Even if this battle is resolved on the upside, and the Dow
heads for its prior peak, I recently had a terrifying thought. The
next 10 years could be much like 1966-1974, with the market marching
up and down in a wide trading range,  never giving clear signals. Then
the bear finally takes over and knocks the market to its knees. That's
about what happened during 1966 to '74. It was a very difficult and
confusing period, with mini-bull and -bear markets, and in the end,
nobody made a lot of money. In fact, if they rode out the '73-74
collapse, they took the beating of their lives.

Q: Does it bother you that many people consider technical analysis to
be voodoo that doesn't make any sense?
A: Yes. These people haven't done their homework. To me, that's one of
the most incredible phenomena about investing. Here's an industry
involving trillions of dollars, and guys haven't bothered to study it
carefully. They haven't read Dow Theory, the basis of all technical
analysis. They haven't really studied bull and bear cycles. They're
amateurs. They haven't learned the lessons of history.

Q: Okay, what's the downside from 9796?
A: It's unknown. One of the basics of Dow Theory is that neither the
duration nor extent of a move can be predicted in advance. The
inference I draw is that in all history, periods of extreme enthusiasm
eventually end in a period of abject pessimism. I consider the latest
bull market as having started in December 1974. Some people say August
1982. Either way, it's been the longest bull market in history. To me
this suggests that it probably will be followed by one of the
worst-ever bear markets.

Another thing, the speculation that we've seen in this bull market
dwarfs what we saw in the early 1970s. This adds to my belief that
we'll see a huge bear market, one beyond anything we now are thinking
about.

Q: Are there any checkpoints on the way down?
A: Not since 1982 has the Dow closed on any day below its low of the
prior year. The 1999 low was 9120.67 in January. If that's broken this
year, it would be another milestone on the downside, and you'd see
more chaos than we've seen so far.

Fortunately, I'm not in the business of selling stocks, so I can say
what I want. I say your best position now is on the sidelines.
Remember, the current tax setup, with a maximum 20% federal levy on
long-term capital gains, means that if you make money, the government
is only a minority partner. But if you lose money, Uncle Sam doesn't
know you.

In this business, you never stop learning. Let me put it another way.
If you stop learning, you're on your way to going out of business.
Wall Street is a tough teacher but also a good teacher. If you have
any weakness -- arrogance, laziness, stinginess, cowardice,
procrastination -- the market will zero in on that weakness and make
you pay dearly. In this business, you listen, you think, you ponder,
you struggle, you wrestle with the gods of the market, and if you're
me, you put yourself on the line. When you do that, you take a chance
of looking like a damn fool. And if the stock market has the
opportunity, believe me, it will make you look like a damn fool, at
least for a while.

Everybody in this business is wrong at times. The fatal error is to
stay wrong. I think we're in a major bear market. If it turns out I'm
wrong, I'll confess. Right now I believe I'm correct.

Q: What's the most interesting facet of any serious study of the stock
market?
A: The market's uncanny way of looking ahead, of discounting the
future. And the incredible part of great primary swings from extreme
optimism at the top of a bull market to black pessimism at the bottom
of a bear market is the public's and the investment community's
inability to recognize and accept change.

Q: If you can't or won't predict a specific bottom, please categorize
it.
A: I think this bear market probably will end vastly lower. What
series of incidents will turn investors stone bearish? I don't know
how it will happen. But my answer is that 5,000 years of human nature
indicate that this market will end in the cellar. All human history
tells us that there are, and will be, swings from pessimism to
optimism and back to pessimism, then back to optimism.

Q: Is there any historic connection between a strong bull market and
the bear market that follows?
A: The bigger the bull market, the more speculative a bull market, the
more flagrant the price markups in a bull market, the more there is to
correct when a bear market finally takes over. If that's the case,
then I can't discount the possibility of this bear market becoming a
whopper. After all, it will be correcting the biggest and longest bull
market in U.S. history.

Q: Why can't the market just level off and stay relatively high? What
law says it must head down into the depths?
A: Obviously, no law states that. But all my studies suggest it. Bull
markets normally don't just fade out and level off. When the bull
dies, the bear takes over, and the correction process begins. In this
process, things go wrong, sentiment changes and dirty water begins to
seep out from under the closet door. Secrets are exposed, corruption
shows itself, fantasies turn to nightmares, and bull-market dreams
become bear-market horrors.

Don't ask how or why. It's simply the way bear markets work. The sad
part of it is that bear markets work just the opposite of bull
markets. Just as bull markets climb a wall of worry, bear markets
descend on a ladder of misplaced optimism.

Q: You've written that in major declines, big industrial blue chips,
the Dow-30-type stocks, usually are the last to really crack. Why is
that?
A: First, investors just hate to part with them. They don't believe
big blue chips also can collapse. Second, these are the most liquid
stocks. At the bottom of a bear market, when you really can't get a
decent price quote on anything else, these are the stocks that still
can be sold.

Q: On that note, thank you very much.

URL for this Article:
http://interactive.wsj.com/archive/retrieve.cgi?id=SB96059076431186216
6.djm

Copyright © 2000 Dow Jones & Company, 	Inc. All Rights Reserved.