|
PureBytes Links
Trading Reference Links
|
Get out! Get out! Whoever you are!
Richard Russell, longtime publisher of Dow Theory Letters, is one the few
voices predicting pure gloom and doom for the market. He says the numbers
show we're in the first phase of a major bear market, with nearly every
sector in trouble.
By Eneida Guzman
Get out of the market, because it's headed nowhere but south. That's the
jarring advice of newsletter publisher Richard Russell, a 50-year student of
the market.
Russell's discipline of choice is the Dow Theory, which he calls a set of
observations in market valuations, economic conditions and technical
indicators that identify the market's overriding trends. The indicators, he
says, lead him to believe we are in the first phase of a major bear market,
with major wipeouts to follow. He estimates that the markets may not hit
bottom for another three to five years.
The forum for Russell's unusual views: Dow Theory Letters, which he's
published continuously since 1958 and which has some 7,000 subscribers.
Russell took his message online at the Dow Theory Letters Web site (see the
link at left.)
Russell's mantra is the Dow Theory 's central premise: That the Dow Jones
Industrial Average ($INDU) and the Dow Jones Transportation Index ($TRAN)
must both move in the same direction and print new highs within similar time
frames, and if not, it's a signal that the market is changing direction.
Russell, 76, spoke with MSN MoneyCentral from his La Jolla, Calif. office
and offered his unique views.
Part of the premise of your theory is that the Dow Jones Industrial Average
and the Dow Jones Transportation Index should move in tandem to confirm each
other's new highs or new lows. What does that tell you?
The industrial average reflects the industrial capacity of the nation, the
ability to produce goods. The transportation average basically reflects
shipping, travel and movement of goods. The thesis is that if you produce,
but you're not selling, you're in trouble; and if you're selling a lot, but
you haven't got the production behind you, you're in trouble. The Dow Theory
requires that the two averages move in harmony, both on the upside and the
downside, and when they do that, the moves are considered valid.
The real basis of Dow Theory is values. Beyond that, according to the Dow
Theory and according to observations first put forth by Charles Dow back at
the turn of the century, the market makes a long trip on the upside of the
bull market, and usually yields on the Dow drop down to 3% or below.
Yields have gone to 1.5% and that's never been seen before, so this is, in
some ways, the most overvalued period in the bull market history. That's the
upside. The downside is the bear market corrects the bull market. In the
bear market, 80% of all stocks will go down, and ultimately you'll hit a
bottom. These bottoms are usually characterized by the Dow yielding 6% or
more.
How has the Dow Theory helped you and your followers become better
investors?
Well, I think it gives you a broad view of the market. It tells you what you
can expect. In other words, in a market such as we have today where, for
instance, the S&P sells at 28-times earnings, and yields are about 1.13%,
the Dow Theory tells you that you're at the top of the market and the next
major move is going to be on the downside. I'm not talking about moves of 50
or 100 points on the Dow or swings back and forth within a trading range.
I'm talking about broad moves that take years to complete themselves.
You call the Dow Theory more of an art form than anything else. Why?
It entails a lot of interpretation, a lot of study, and more than anything
else it's a series of observations of how the market works over a decade.
Your view is that we are in the first phase of a bear market. What does this
entail?
In the first phase stocks erase much of the froth and foam of the preceding
bull market top. In the first phase business continues to be good and people
remain optimistic. But stocks are beginning to top out, and we see that now
in sector after sector. I call this my "parade of top-outs."
Richard Russell's Parade of Top-Outs
Index Topped Out At Date
Daily new highs on the NYSE 631 Oct. 3, 1997
Advance-decline ratio for the NYSE 13 April 3, 1998
Value Line 508.39 April 21, 1998
Morgan Stanley Cyclical Index 619.09 May 10, 1999
Dow Jones Transportation Index 3,783.50 May 12, 1999
NYSE Financial Average 584.21 May 13, 1999
Dow Jones Utility Average 333.45 June 16, 1999
NYSE Composite Average 663.12 July 16, 1999
Dow Jones Industrial Average 11,722.98 Jan. 14, 2000
Russell 2000 606.05 March 9, 2000
Nasdaq 5,048.62 March 10, 2000
Amex Index 1,036.40 March 23, 2000
Wilshire 5000 14,751.64 March 24, 2000
S&P 500 1,527.46 March 24, 2000
How big or costly will this bear market be?
All bear markets of the past have wiped out at least half of the gains of
the preceding bull market. I don't know if that's what we'll see this time,
but if we do, it won't be pleasant. The last bull market took the Dow
roughly from 1,000 to 11,000. The halfway level would be 6,000 and most
probably well below 6,000.
>From another standpoint, most bear markets take the Dow down to where it
yields 6% or more. If that happens this time, the Dow could easily break
4,000 on the downside.
When will things turn around?
This is just a guess, but it could take three to five years before this
thing hits bottom.
The bear market's longest phase
What's in store for the second phase?
The second phase is usually the longest phase, and that's when business
visibly turns downward. We're not doing that yet. When it happens, you'll
see major breaks in individual stocks, and the public gradually begins to
realize that there is something wrong in the picture. The bullishness turns
to skepticism.
Dare I ask what happens in the third and final phase?
The third phase is the liquidation phase where people sell stocks simply
because the stocks have gone down so far that they can't bear to hold them
any longer. The third phase is where you really see the blue-chip stocks
start collapsing, and that's when you see the yield on the Dow push up to 6%
and beyond. In other words, that's the phase where people who have been
saving for a rainy day find out that it's raining.
The third phase is the liquidation phase where people sell stocks simply
because the stocks have gone down so far that they can't bear to hold them
any longer.
Is a yield of 6% on the Dow particularly meaningful to your theory?
It is, because historically, when the Dow is yielding 6%, that's where so
many bear market bottoms have occurred. The worst bear market in history
ended in 1932 and the yield on the Dow was actually at 10%, but that was
exceptional. In the bear market of 1949, I think we got to about 7%, but 6%
is a fair observation of what you can expect before the market finally hits
bottom.
Outside of the Net and tech sectors, what other areas in the market are
headed toward a bear market?
I hate to say it, but I think almost all areas are. The utilities are not
far from their highs now. They've been bucking the trend because they're
fairly stable stocks, and they don't experience too much cutback in a
recession, but I'd say that almost all sectors are going to get hit and hit
hard before this is over, particularly the stocks with no dividends.
This is something I've never seen before and I've been watching the market
for more than 45 years. Stocks that don't pay dividends will be more likely
to be perceived as companies that offer no return on your investment.
They're going to get hit very hard. In a bear market, dividend-yielding
stocks do much better than those without. In other words, if a person is
sitting with a stock that's yielding 7% or 8%, they are more reluctant to
sell it than they are a stock that is going down, and there's no dividend
and no return.
Surely there are sectors in the market that dispel your theory on the
current state of affairs. We've seen good recoveries across the various
averages in the past few weeks.
There are always some sectors that buck the trend but it's pretty early to
tell which sectors will do so. Right now, telecommunications is one of the
obviously strong sectors. How this is all going to work out, we don't know.
It's too early to tell.
When the market turned sour
By your count, at what point did the market start turning direction and stop
performing?
In the middle of 1999. According to Dow Theory, the move ends at the point
where two averages, the industrials and the transports, reached their last
highs together and that was on Oct. 12 of last year. That was the last time
we saw both the Dow transports and industrials hitting new highs. The Dow
continued to print new highs, but the transports didn't.
What is it about the transportation average that rounds out the Dow Theory?
Well, this is something that's come up ever since I've been writing the
letters. The logic is that if the Dow Jones Industrial Average, which
reflects industrial capability, keeps rising and fails to drop off, then
there are goods that have to be sold. Those goods have to be moved out of
the factory. That's what the transportation average reflects. When the
transportation average stops going up it signals that there's something
wrong.
The current market environment is extraordinarily volatile, which is nothing
new to financial markets except that with the averages close to all-time
highs the swings are much broader. Is the market's current level of
volatility any different from past volatility levels?
It's one of the most volatile periods in history. The only more volatile
time that I know of was back in the early 1930s, as the market was finally
crashing in 1932. When it finally exploded in this intense depression of
1932, we had huge volatility during 1933 and 1934. One thing about
volatility that every veteran commodity trader knows is that usually after a
long period of volatility, you're almost back where you started.
Now it's interesting that we've had this tremendous volatility for really
the last year-and-a-half. If you look at the Dow over the whole period,
we've actually gone nowhere. It's gone up and down, it's ripped around, and
so forth, but the Dow is at about the same place it was 13 or 14 months ago,
actually slightly lower.
Has your theory ever gotten you into trouble? In hindsight has it ever
steered you off course into regrettable territory?
It's the old story: It's not the theory, it's the people who practice it.
You gather experience through the years. The worst time I had was in 1962. I
was bearish then. The market did cave in and I stayed bearish through 1963,
1964, right up to 1966. I never got with it, and that was really my mistake.
I think I've learned since then. I don't fight what the market's doing.
Get out or use stop-losses
Most of the current active investors have never been through a severe bear
market. What sage advice can you offer them as they move into this bear
market?
Well, the most important thing I can offer them is to not take big hits. In
other words, if the disaster is taking a huge loss in your portfolio, my
feeling is that you have to do one of two things. Either get out of the
market and get on the sidelines, or put definite stop-losses under your
stocks, and if you have a mutual fund, pick a percentage that feels OK to go
down.
What's a good percentage?
I think a good percentage is 8%. I don't care what you buy. Once it drops
below, say, 8% you should sell it, particularly in a bear market atmosphere.
That's the No. 1 rule. Don't take the big hits. In this business any trader
will tell you that everybody's wrong at times. The disaster is to stay
wrong.
Are the Fed's actions likely to wreak further havoc on the market averages
next week?
Ironically, interest rates have been coming down, which is going against
what the Fed wants. The bond market has been looking ahead and discounting
the Fed's actions. I think the bond market is literally looking at a
recession starting toward the end of this year or the beginning of next
year.
So the Fed tries to push rates up, but the bond market says, you know, we
don't care what you do, we think there's trouble ahead and, as a result,
people buy bonds and rates go down. For instance, just recently bonds have
recovered better than two-thirds of their losses over the previous couple of
months. They're pushing toward the highs again, and that presents a real
problem for (Fed Chairman) Alan Greenspan. I think the consensus now is that
he's probably not going to do anything on June 27. But oil is up to about
$32.50 and gold has popped close to $6. Greenspan is a big gold follower. He
may decide that this is serious and raise rates on June 27.
Increases in oil and gold prices are measures of heightened inflation.
Should we expect more in the way of overall price increases in the economy?
I don't think inflation will go much higher, but I look at housing prices
here in California. I look at restaurant prices. I look at auto prices, and
you have to say that prices are pushing up. That's the reality.
Would you be investing in this market at all?
No. Right now, I'm pretty much in top-grade municipal bonds.
What was the last stock you owned?
It was Texas Industries (TXI, news, msgs).
Do you advise selling all equity holdings?
Yes. I think it's just too hard to make money in this market. Every day you
see good stocks break 10%, 15%, 20%. In that type of atmosphere, it's just
very tough to make money and too easy to make mistakes.
|