Market in Dangerous Territory

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The following is an excerpt from Richard Russell's Dow Theory newsletter

"There was a time when a fool and his money were soon parted, but now it happened to almost everyone." ~ Adlai E. Stevenson

At the close of the market on Dec. 23, Lowry's Buying Power Index stood at 262 and their Selling Pressure Index stood at 434. This means that Selling pressure (supply) was 172 points above Buying Power (demand).

This is the posture of a bear market and not a bull market. It means that any sudden drop in Buying Power or a sudden rise in Selling Pressure can send the stock market spiraling down almost without notice. In other words, this market is walking on a tight rope and is in dangerous territory.

The news is now so confused and mixed that it is of little help to fundamentalists who trade on the news. Today, fundamentalists not only have to read and analyze events in the US, but they also have to keep an eye on both Europe and Asia. Moreover, as I've often said, markets don't trade on today's news, they trade on what the best minds see for tomorrow and next month or even next year.

Therefore, the intelligent position is to analyze the action of the market itself, rather then invest on the basis of news, and the market's supposed reaction to the news.

The public is further misled since every move of the Dow is attributed to something that has occurred in the news. Example: "The Dow was up today as it reacted to improving auto sales." Or "The market backed off today on disappointing forecasts concerning after-holiday retail sales." Or "The market closed on a brighter note as Ford reinstated its dividend after five non-dividend years."

Hovering over the whole picture is the dismal fact that the dividend yield on the Dow is now a lowly 2.59%. Anything below 3% is a caution signal that should not be ignored.

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