Richard Russell: “Be prepared!”
by Prieur du Plessis
Sat 8 May 2010
With stock markets tanking around the globe, one would be remiss not to take note of Richard Russell’s view of the selloff. The 85-year-old dean of newsletter writers and author of the Dow Theory Letters, said:
“… something dramatic lies ahead. I believe we’ve been experiencing a rally within a continuing primary bear market. Over recent months, I’ve warned that the rally shows signs of topping out. If or when a bear market rally tops out, the losses can be horrific. At this time, because of the profusion of ‘rosy’ news stories about the economy, many amateurs and ignorant fund managers have loaded up again with stocks, thinking that they can recoup some of their 2008–09 losses.
“If this entire bear market rally is fated to fall apart, the losses and troubles will be fearful and traumatic. This is true because I’ve never seen a time when so many people were unprepared to withstand a crumbling market or a sinking economy.
“From what I gather, most players believe that yesterday’s [Thursday’s] ‘sell-off’ was a direct result of the mess in Greece. Maybe so, but that seems too simple and obvious to me. The far more important question is whether the entire advance from the March, 2009 low is fated to be wiped out. At this time there’s no way of knowing, but I suggest that we play it safe. My suspicion is that the stock market is back in the grip of the bear. If so, we could be entering the Elliott C or the second major wave down. I hope I’m wrong on this, but if I’m right I don’t want to find out while holding even a few stocks.
“Hope for the best, but be prepared for the worst. If this is the bear market’s final wave down, we’re going to see one of the worst markets any of us has ever seen. Just as bad, it will be a forecast of hard times ahead, and a nasty resumption of the recession (or depression).
“The boy scouts motto – ‘Be prepared.’ Better believe it.”
Although stock markets now appear oversold as far as short-term indicators are concerned, weak markets can stay oversold for a while. Looking at longer-term (monthly) data, it is premature to argue that the end of the U.S. cyclical bull market has ended, but a worrying picture emerges when considering the Shanghai Composite Index. Not only has the Index broken below its key 10-month (200-day) moving average, but the momentum oscillator (ROC) in the bottom section of the chart below has fallen below the zero line which indicates a primary bear signal. The Chinese stock market was the first to turn the corner after the credit crisis sell-off – a full five months before the majority of indices bottomed in March 2009 – and could also now be leading global markets lower. Be careful out there.