Grizzly's Growlings 092799

Monday Morning Market Musings 09/27/99

October, Here We Come!

Last week it was down, down, down across the board for the US stock markets:
Dow Jones Industrial Average: -4.9%
S&P 500: -4.4%
NASDAQ 100 : -4.5%.

Indeed, that’s been the story for the past four weeks. From its peak of 11,365 one month ago, the DJIA has fallen 1,178 points (10%) into Friday’s intraday low, before rebounding a bit to close the week at 10,279. The other major market indices have seen similar market action.

Notably, the DJIA’s drop has triggered a Dow Theory sell signal. Peter Eliades of Stock Market Cycles explains the significance of this event in this posting to an Internet chat board:

Both the Industrials and Transports made new all-time highs in mid-May and began declines. It is the lows right after those declines that is important to Dow Theory. In the case of the Transports, that low came on June 25 followed by a brisk rally. When the Transports subsequently broke below that June 25 low on August 4, it was the first step needed for a Dow Theory sell signal. In order to complete the signal, the Dow Industrials needed to close below their equivalent post mid-May low. Russell originally used the June closing low of 10490.51 as the "signpost" but he subsequently realized the closing low after the mid-May high was on May 27 with a reading of 10466.93. A close below that figure will confirm a Dow Theory sell signal. Intra-day numbers are unimportant. It is only the close that is watched by Dow Theorists.

So--- does it mean anything? Many are quick to denigrate Dow Theory, calling it old-fashioned and out of touch with the times. I guess one could argue that any theory that says stocks could go down would seem out of touch with the current times. Nevertheless, Martin Pring, in his excellent book on technical analysis wrote: "If an investor had purchased the stocks in the DJIA following each Dow Theory "buy" signal, and if he had liquidated his position on "sell" signals and reinvested his money on the next "buy" signal, his original investment of $44 in 1897 would have risen to about $14,500 by December 1977 (I have the 1980 edition of Pring's book). If instead he had held onto his original $44 investment throughout the 80 years, his investment would also have grown, but only to $800.......... Even if a wide margin for error is allowed the investment performance using this approach would still have been far superior to a "buy and hold" strategy."

I realize the whole underlying precept of Dow Theory can now be questioned by those who would have us in a new paradigm, but I would suggest it is still necessary in the "new economy" to have the manufacture of goods and the transporting of those goods in synch in order to substantiate a healthy economy. In any event, I hope this blurb has clarified Dow Theory in relation to the current market.

Peter Eliades Stockmarket Cycles

The DJIA’s 10% drop marks an official correction according to the official pundits on the official network of the Great Bull Market, CNBC. The reality is that the markets have been in a stealth Bear Market for nearly 18 months, since in April 1998. The Russell 2000 index peaked back then, and today stands at 417, down some 17%. Moreover, 63% of NYSE stocks are DOWN year to date. Friday’s action saw just 3 new 52-week highs vs.84 new 52-week lows.

A "Bear Market " is generally defined as a 20% drop. We think the New Bear Party has "bearly" just begun. By the time the Fat Bear has his fill, we’ll see the major market indices down by 50-60-70%. We think from here on out, for the next 12-18 months at a minimum, the markets are header lower, much lower.

US STOCKS REMAIN ON FULL CRASH ALERT!

Given the 10% drop in the markets in just one month, a counter-trend rally is likely soon, possibly starting now. As we go to press early Monday morning, the S&P 500 futures are up 9 points and the NASD 100 is up 25.

The "buy the dippers" will make another stab at the strategy that has worked so well over the past twelve years. The rebound may be sharp and enthusiastic, but it likely will be short-lived. The perma-bulls will be jumping on yet another "buying opportunity."

But the dreaded month of October lies just around the corner. Remember October 1987? We think the odds are very high that the Crash of 1999 will make 1987 look like the proverbial pimple on an elephant’s butt.

Over in Russia, the Russians are rushing into the abyss:

Money-laundering scandals
Rumors of Yeltsin’s resignation
The escalating civil wars in Chechnya and Dagestan
Never-ending debt refinancing negotiations with the IMF and World Bank
Recent terrorist bombing strikes in the heart of Moscow.
The ruble is now 25 to the US buck. "Hey, get your rubles here, now only four cents apiece." With the ruble at 8 to 1 on August 31,1998 we wrote "[the ruble] is poised to drop to 20 or 30 [to the dollar] before attracting any significant buying interest." We’re there, but there's still little buying interest, so there’s much more downside ahead for the ruble.

Stay abreast of all the latest developments in Russia at www.russiatoday.com

And stay tuned for an October to remember!!

"A rapidly rising stock market is a pleasure, and in contemporary America pleasures quickly become entitlements."

Syndicated Columnist George Will 09/26/99