The following is an excerpt from Richard Russell's Dow Theory Letters
Strebler's Perspective —
What is going on at Dow Theory Letters? That’s a great question….
People who know him well describe Richard Russell using a variety of adjectives, but warm and fuzzy and diplomatic aren’t normally among them. Richard has always been his own man, spoken his mind directly, and that’s both the good news and the bad news of who he is. When he first took me under his wing nearly 40 years ago, at first it was because of my work ethic, later because I could quickly grasp the concepts he taught me, but finally because I also was direct, and didn’t try to mock him. So in the spirit of outspokenness that we share…..
Dow Theory Letters is morphing – into exactly what, nobody’s quite sure. Richard’s ways of looking at and writing about the markets have changed in recent years. Meanwhile, he’s brought me on board to help with the writing, and I favor the principles and methods that he so successfully pioneered over many years. At the same time, Richard’s daughter Daria has become deeply involved in running the business, and is occasionally voicing her own thoughts. Finally, there are these two new fellows, Chris Martenson and Adam Taggart, who Richard and Daria feel have an important perspective to share with DTL’s readers.
We’re not all on the same page much of the time, as we often use different criteria for evaluating the markets. And that’s causing some confusion for some readers.
I’ve asked Richard several times about what he wants me to do. DTL is his baby, after all, and I’ve offered to write only those things that support his views. But each time, his answer was “Don’t worry about disagreeing with me. Just write what you really think”. Yes sir. And so that’s what I intend to do, until Richard says differently or else shows me the door.
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Here’s what’s going on with the markets, in my honest opinion. It’s a bull market in stocks, according to both the Dow Theory and the PTI, and has been since mid-2009. Those two, the Dow Theory and PTI, have been the rock solid foundation of how DTL classifies the market for the past 40+ years. The PTI (at 6516 as this is written) would show the first sign of weakness by dropping below its moving average, now at 6474. But it would have to decline quite a bit - to around 6350 by my reading of its chart - in order to turn clearly bearish.
As for the Dow Averages, the fact that the Transports did not confirm the Industrials’ recent highs is of no major concern to a Dow Theorist. This particular bull market has been characterized by one Average making new highs, temporarily unconfirmed by another. But before too long, new highs are confirmed by the other Average and the bull market marches along – until the next non-confirmation, which – so far – has in turn always been resolved in a bullish fashion.
Mr. Russell is of course the best expert on what would constitute a valid Dow Theory sell signal. He first labeled this a Dow Theory bull market in August of 2009 (Letter # 1461), and clarified what it would take for the market to remain bullish in December of 2012 (Letter # 1520). So far, the Averages have done nothing to change their bullish Dow Theory status.
Here’s how Mr. Russell explains what would signal a bear market, in his definitive book on the topic, The Dow Theory Today. “Secondaries (often called intermediate reactions) tend to last from 3 weeks to three months, and to correct one-third to two-thirds of the previous primary advance. Bear signals may be recognized in the third phase of a bull market, as follows: after a secondary reaction has been completed, an advance will take place. If one or both Averages refuse to better their previous highs, and the two then turn down, at the point where they both violate the lows of the secondary reaction, a bear market will have been signaled.”
Following Mr. Russell’s definition then, we should not consider February’s 4-week sideways movement a “secondary reaction”. Thus, the last true secondary reaction in this bull market took place late last year. As the weekly charts show, we’d have to drop below the lows back then - about 12,500 on the Industrials and 4800 on the Transports – to get a Dow Theory bear signal. As that is unlikely in the near term, then any talk of a bear market would seem either very premature, or based on something other than the Dow Theory.
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In the precious metals arena, investors are still shell-shocked. Prices dropped further and faster than we thought possible. We’re getting a decent rebound in gold itself, but less so in silver and the mining shares. Speaking technically, so much damage has happened to gold, silver, and the mining shares that the bottoming process may take quite a while. Further, Daria and I are pondering the meaning of charts that show a possible peak in the very long-term trend of commodity prices after 12 years of heading higher. Based on all of the charts, plus the metals’ seasonal tendencies, the odds highly favor further price drops in the weeks and months ahead.
As my charts showed last week, gold (now at $1425) has no major support until the $1000-$1120 area, while the XAU index of mining shares (now at 104) has little until about 60. Showing a different chart on silver than last week’s, we can see that the support around $20 isn’t all that strong. If the $20 area doesn’t hold, then there is no reason - based on the charts - why silver can’t drop back to its 2009 lows around $9. Ouch – that would hurt. Silver may be the weakest of the three markets under discussion here.
Please don’t shoot the messenger, as the sad condition of the metals’ markets gives me no pleasure whatsoever. Are the central banks and governments working to wrest precious metals out of the public’s hands? Perhaps. But whether or not that’s the case, the path of least resistance for the foreseeable future appears to be down in the metals and mining shares. If the charts mean anything to you, then caution and relatively small positions are the appropriate responses.
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To recap and recommend, I think it is important to be consistent. Assuming one used good information and logic when making an investment, switching strategies mid-stream is unwise. I’ve recommended modest positions in the U.S. stock market, such as DIA, SPY, QQQ, XLK, or a good mutual fund, and adding to those on a 5-10% drop. Hold until and unless we get Dow Theory and/or PTI sell signals. The rationale for those recommendations is as valid today as it was last week or two months ago; nothing has changed.
I do not see any technical evidence to support the idea that the precious metals are bottoming here. Certainly, 5 years from now I expect to see them above these levels but #1) I’ve been wrong about this kind of stuff before, and #2) even if that IS the case, they may well drop much lower in the interim. If you don’t understand why I say these things, then please re-read my columns from April 16th and April 9th, and kindly remember that I’m merely reporting what the markets themselves are saying.
The precious metals are in bear markets technically-speaking, for at least the intermediate-term. Accordingly, we may reasonably expect them to stay bearish for several months to several years and my original recommendation stands. Readers should identify which gold, silver, and mining shares they wouldn’t be comfortable holding in the event of a drop to $1000/oz. or even lower in gold, and comparable drops in silver and the mining shares. It would be great if most readers had sold their excess speculative metals holdings when gold dropped below $1520, as recommended here. But if not, last week I suggested selling perhaps half of those now, while hoping for a bounce to the $1450-$1475 area in gold to sell the rest of your speculative gold, silver, and mining shares holdings. That’s still as good a strategy as any.
Hold onto your long-term, core positions of gold and silver. Things change, and who’s to say the charts aren’t wrong this time, the metals turn around, and zoom right back up? Stranger things have happened! Mr. Russell and others believe that, and make their own case for why one should in fact buy gold and silver here. Ultimately, you have to decide what makes sense for your own situation.
Jon S. Strebler
Monday, April 22, 2013
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