- (Note - Mr. Russell is often referred to as the Dean
of Wall Street Finance)
-
- Wholesale prices were up 0.3 percent for January, but
the so-called "core" inflation rate (minus food and energy) was
up 0.8 percent, the biggest monthly rise since December 1998. On this news,
the 30 year T-bond dropped a full point at the opening. After all, we're
talking about an annualized inflation rate of almost 10 percent.
-
- One of the curious phenomena that I monitor is the action
of the S&P futures prior to the regular market opening. Day after day,
almost like clockwork, the S&P futures are higher during the evening,
prior to the opening of the next day's session. Why is this? How is this?
And I wonder, is it Wall Street's manipulative way of providing an "up
market" at the opening? Is it simply ever-bullish traders betting
that the market will be higher each day. It really is a mystery, at least
to this writer.
-
- There's a theory that the "dumb" retail public
buys their stocks at or near the opening, while the "smart" professionals
do their transactions at or near the close. In fact, some analysts (me
included) keep a chart of the difference in the Dow between the opening
of the market and the close. When these accumulated differences are in
a rising trend, the theory is that the pros are buying and it's bullish.
The converse is the case when these accumulated figures form are in a declining
trend.
-
- This is an interesting study and it can be counter-intuitive.
For instance, if the market opens strongly with the Dow up 15 points, if
the Dow is unchanged at the close, my open-close Index will be down for
the day, even though the Dow was unchanged. And by the way, the Index has
been declining.
-
- Dow Theory takes account of this in a roundabout way.
As you know, followers of Dow Theory aren't interested in what the market
does at the opening or what it does during the session. Dow Theorists are
only interested in where the Averages and the market are at the close.
The men who discovered and refined Dow Theory intuitively knew that "It's
only the close that counts." And they were right.
-
- True to its low volatility level, the stock market today
opened sluggishly, and aside from the drop in bonds, the inflation news
had very little affect on the early market. I did notice the Fannie Mae
was down over 2 points right after the opening, taking Fannie Mae below
its major support at 60. Freddie Mac followed, down over 2 points and below
its 50-week moving average -- down to its 200-day MA at just over 61.
-
- I have been thinking of Fannie and Freddie as the two
most important stocks on the Board, since together they are huge financiers
of the home-buying frenzy. I do note that all the home builders are down
today, but so far there's certainly no hints of hysteria.
-
- Nothing seems to shake this low-volatility, "what,
me worry?" stock market. So it's the old story, a story that I've
lived through many times over the years. The story runs like this, "Nothing
moves the stock market -- until something comes along to move it."
-
- Random thoughts from the brain of Richard Russell --
The most speculative and overvalued bull market in history topped out in
January 2000. At that time I said that the Fed would fight the bear "tooth
and nail." And that's exactly what the Fed has done.
-
- It's now been five years since the bull market's death.
The Greenspan Fed, taking it's warning from the deflating Japanese situation,
flooded the system with liquidity and at the same time brought short rates
down to a 40-year low of 1 percent. With all that, here we are, five years
after the top, and the Dow has not been able to climb back to its bull
market high of 11722. Why? What's wrong?
-
- What's wrong is that a bear market has the economy and
the markets in its grip -- and the bear has no intention of letting go.
Now inflation is starting to kick up, and Greenspan has a big, dangerous
problem on his hands. With inflation now rising (due to the Fed's machinations),
Greenspan has little choice but to continue raising rates. But this is
becoming a dangerous balancing act, due to the massive amount of leverage
and debt now built into the US economy. Roughly 70 percent of American
families now own their own home, many "owning" their homes with
fat mortgages at low rates and many with very little equity in their homes.
-
- As rates rise, pressure builds on mortgage holders, and
obviously on variable-rate mortgage holders. So on the one hand rising
rates are necessary if Greenspan is to even begin to control inflation,
and on the other hand rising rates constitute a danger to a leveraged and
debt-clogged economy.
-
- At what point will rate increases topple the US economy?
Ah, that's the question that neither Greenspan nor anyone else knows. But
one thing is clear. The low-inflation level that Greenspan has been enjoying
is now coming to an end. >From here on, raising rates to halt inflation
becomes a dangerous "high-wire" act, and Greenspan knows it.
-
- By the way, Mr. Copper today hit its highest level since
1995. They call it Mr. Copper because copper is used in everything everywhere.
Copper isn't at a ten-year high because there's no inflation.
-
- In the meantime deficits build, debts build, budgets
grow larger, and markets edge back and forth in their never-ending struggle
to fathom the future. My own assessment of the situation is that the upward
correction in the stock market that began in October 2002 -- is now running
out of steam. The markets are tired. Stocks are tired. Bonds are tired.
Maybe even housing is tired. Only commodities appear to be "coming
to life."
-
- I've told subscribers that I've started an Inflation/Deflation
Index. Here's how that Index has fared. On January 3 the Index was at 491.
It then declined to a low of 457 on February 7. Since then the Index has
risen steadily. At today's close the Index was at 484.
-
- I show below a daily chart of the widely-followed CRB
Commodity Index. Note the series of rising bottoms since mid-December.
Now it appears that the CRB is getting ready to test its high of 291 recorded
on November 24. Commodities are strong, and inflation is in the air. And,
of course, the air has been "perfumed" by the wildly inflationary
action of Fed chief Alan Greenspan, who must have decided years ago that
he, Alan Greenspan, could prevent corrections, recessions and bear markets.
-
- Speaking of Alan Greenspan, I listened to the Congressman
Ron Paul of Texas confronting Greenspan about inflation and gold at this
week's Humphrey-Hawkins meeting. And Greenspan gave a most interesting
answer, one that explains a lot about Greenspan's thinking and his rationale
as he operates today in a world of fiat currencies.
-
- Greenspan said that the Fed is operating as though the
dollar was still backed by gold. In other words, Greenspan was saying that
the Fed, by managing the markets, was literally taking the place of gold.
At that point it was clear that Greenspan did not want to delve further
into the subject of the Fed and gold.
-
- The obvious question that Greenspan was avoiding was
this -- If Fed "management" of the nation's money is so expert,
even without the discipline of gold -- why has the purchasing power of
the dollar been declining year after year, decade after decade? And, of
course, that's the one subject that Greenspan doesn't want to touch. So
the slow, systematic destruction of the dollar and the nation's savings
goes on. Maybe that's the real reason why Americans save nothing today.
And maybe it's the "hidden" reason why Americans are buying houses
rather than (or as a substitute for) gold today.
-
- On another subject, a few days ago I read that Goldman
Sachs had fired about thirty of their stock analysts. Then yesterday I
heard that Smith Barney fired their entire technical group. What's going
on? I believe this is the story -- the pros don't really need the advisory
output of brokerage house firms. The pros have their own methods and resources.
It's the retail public that brokerage house analysis is aimed at. And the
retail public has left the market. The retail public is off somewhere buying
houses. So, in the interest of cutting costs, the brokerage houses are
unloading their research departments.
-
-
- TODAY'S MARKET ACTION (February 18) -- Stock market acted
like it was having a slow nervous breakdown today. My PTI was down 1 to
5585. Moving average was 5549, so the PTI remains bullish.
-
- The Dow was up 30.96 to 10785.22. One mover today, MRK
up 3.76.
-
- Mar. crude was up .81 to 48.35.
-
- Transports were up 15.78 to 3619.93.
-
- Utilities were down 3.83 to 352.37.
-
- There were 1297 advances on the NYSE and 2058 declines.
But up volume was 52% of up + down volume -- a mixed-up day.
-
- There were 174 new highs and 17 new lows. My 5-day high-low
differentials dropped from yesterday's plus 1378 to today's plus 1258.
-
- Total NYSE volume was 1.39 billion shares.
-
- S&P was up .84 to 1201.50.
-
- Nasdaq was down 2.72 to 2058.62 on 1.51 billion shares.
-
- My Big Money Breadth Index was unch. at 768.
-
- Mar. Dollar Index was up .04 at 83.52. Mar. euro was
down .01 at 130.75. Mar. yen was down .08 at 94.80.
-
- German DAX was down 10 to 4359. Mar. Nikkei was up 155
to 11,700.
-
- Bonds were sharply lower. Mar. long T-bond was down 27/32nds
to 113.30 to yield 4.64%. Mar. bellwether 10 year T-note was down 16/32nds
to 111.15 to yield 4.26%.
-
- April gold was down .20 to 428.40. Mar. silver was up
4 to 7.41. April platinum was up 2.30 to 865.50.
-
- Gold advance-decline line was down 7 to 1301.
-
- XAU was down .15 to 96.29. HUI was down 1.07 to 209.89.
-
- AU up .41, GSS down .12, HMY up .19, NEM down .16, PAAS
up .18.
-
- Very little movement in gold or gold shares, but at this
point that's a good sign, since so far gold and gold shares are giving
back very little of their recent gains or.
-
- STOCKS -- My Most Active Stocks Index was down 3 to 414.
-
- The five most active stocks on the NYSE were -- PFE up
1.74, MRK up 3.76, Q up .11, XOM up 1.28, and GE down .15.
-
- VIX was down .59 to a low 11.18.
-
- McClellan Oscillator was down 55 to minus 75 and probably
moving lower towards an oversold market. Lousy action.
-
- My Inflation/Deflation Index was up 3 today to 483.
-
- CONCLUSION -- When was the last time you saw the Dow
up 30 points and there were 1297 advances and 2058 declines? Is the Fed
adding spirits to the punch bowl or is the stock market drinking out of
the punch bowl.
-
- Not much to be gained from analyzing today's action except
that oil keeps creeping up, and the oil stocks like it -- a lot. Higher
energy ahead (China and India competing with the US) seems to be a "no-brainer."
But watch out for the obvious, as Joe Granville likes to say, "If
it's obvious -- it's obviously wrong."
-
- I'm going to skip writing anything this weekend, so I'll
see you Monday. When I say "I'm skipping the weekend," nine times
out of ten that will be correct, but once in a while a brain-storm or some
hot news comes along, and I decide to write a weekend piece anyway, so
always check to see if I've written something.
-
- We're more than halfway through February. Daughter Lauren
comes home Monday after being away for months -- Europe, Bali, Australia
-- I'll see if I can keep her here for a while. But I'm very excited to
see my long-lost daughter.
-
- Adios --
-
- Russell
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- http://www.dowtheoryletters.com/
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