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Archive for the ‘Richard Russell’ Category

Rich valuations for the stock market’s global elite

The news that Paul Walsh, the CEO of Diageo, has unloaded a huge amount of stock (£16m) after exercising a raft of share options draws attention to the extent that the prices of high quality companies with strong global business franchises and the ability to generate cash have been bid up to very rich levels. The veteran market-watcher Richard Russell has observed something similar on the other side of the Atlantic.

What do billionaires Warren Buffett, John Paulson, and George Soros know that you and I don’t know?  I don’t have the answer, but I do know what these billionaires are doing.  They, all three, are selling consumer-oriented stocks.  Buffett has been a cheerleader for US stocks all along. But in the latest filing, Buffett has been drastically cutting back on his exposure to consumer stocks.  Berkshire sold roughly 19 million shares of Johnson and Johnson.  Berkshire has reduced his overall stake in consumer product stocks by 21%, including Kraft and Procter and Gamble.  He has also cleared out his entire position in Intel.  He has sold 10,000 shares of GM and 597,000 shares of IBM. Read the rest of this entry »

Too Early To Panic (Though Some Are)

After another turbulent week in the markets, it seems a good point at which to stop and take stock of where we are. Equity markets are now oversold and will certainly have a bounce soon, for sure. Readers of Independent Investor will know that Jim Rogers thinks this is just a normal market correction, after the strong run from February to April.

Crispin Odey thinks the trend is still upwards. Ken Fisher does so likewise. Sanjeev Shah, Anthony Bolton’s successor at Fidelity, also thinks the market is oversold and has bought some more units in his own Special Situations fund – always an encouraging sign.

In a short Q and A last week, Richard Oldfield, the founder of Oldfield Partners, a specialist equity fund manager which has no public profile but is much admired by those who know it, is keeping his pro-equity bias in place, though he also said that he has learnt to ignore at this peril technical indicators such as Investors Intelligence’s bullish/bearish sentiment indicator, which has been flashing a clear warning sign.

So, at the very least, even if you don’t dare to be bullish, don’t be fooled by dramatic media headlines into thinking that the equity market rally is necessarily yet over. The crisis in the eurozone is real enough, and has been confounded by the unimpressive response of Europe’s political leadership to date. There is no doubt that there is an element of investor panic out there in the response to the unfolding eurozone crisis.

You can see this in a number of different indicators. The VIX index, which is often used as an indicator of fear in the market, has risen sharply in the last two weeks.

More worryingly, so too has the Libor rate, the key interbank lending rate which can also be interpreted as an indication of how willing banks are to lend money to each other.

This underlines the fact that behind the worries over the eurozone is the fear of further banking collapses. The rescue of the Spanish bank this weekend underlines how weak many lenders in the eurozone still are.

If banks start to stop lending to each other again, and liquidity dries up again because of fears over bank solvency, we will heading back towards a new crisis.

The technical condition of the stock market has deteriorated in the last few weeks. Richard Russell, the doyen of all technical analysts, now in his ‘80s, reports from his San Diego home in dramatic tones that the stock market has entered a primary downtrend.

All this may help to explain why Philip Gibbs, the financial expert at Jupiter, moved a lot of his funds out of equities and into cash earlier this year, fearful of the impact that the new crisis over sovereign debt might have. Against is the fact that Jupiter has announced last week its intention to float on the stock market, not something the firm would presumably try if the hugely influential Mr Gibbs was as bearish as he was in the run up to the 2008-09 banking crisis.

The risk of a new financial crisis, as has been noted here before, has never gone away, but the odds against it happening have been lengthening. Now the odds have taken a hit back in the opposite direction. A new crisis can still be avoided, but investors need to be aware that the possibility remains, even if it is still more likely that the equity market will start to pick up, as it was clearly beginning to do on Friday before news of the Spanish bank rescue.

While I remain confident that the case for equities remains robust, therefore, it is clearly sensible to remain alert to the danger of a new crisis, and be prepared to act accordingly if the market fails to bounce back. The next couple of weeks will give us more clues as to whether another dramatic stock market crisis is imminent.

Written by Jonathan Davis

May 24, 2010 at 8:33 AM

An Important Technical Signal

You may not have read much about it so far, but last week saw an important technical signal in the behaviour of Wall Street which has led the doyen of market-watchers in the United States, Richard Russell, to declare that we are now formally in a new bear market. This is what he had to say after the Dow Jones Industrual Average breached its November lows on Thursday last week, thereby confirming the earlier similar move by the Dow Jones Transportation index.

“I just went through 12 newspapers this morning. Not one mentioned the fact that under Dow Theory, the primary bear market was re-confirmed yesterday. I find that very ominous. In a multi-trillion dollar business, nobody knows how to read the market. Let’s see whether Barron’s says anything tomorrow. News travels across Wall Street in an instant”.

“Did the recent great bull market start at Dow 776.92 in 1982 or Dow 759.13 in 1980? I picked 776.92 in 1982 as the start of the bull market. The bull market ended in October 2007 at Dow 14164.53. Turning to the 50% Principle, the halfway level of the entire bull market of 1982 to 2007 is 7470. Yesterday the Dow closed at 7466, 4 points below the halfway level”.

“On this basis, the 50% Principle has turned bearish. According to the 50% Principle, if the Dow closes below the halfway level of the preceding major advance, the Dow can decline towards and even test the level from which the advance started. To do that, the Dow would ultimately have to test the area from which the bull market started — that area was 776.92″.

“Could that happen? I have no idea, but I’m merely relating the possibilities under the 50% Principle — a study I learned from the great Dow Theorist, E. George Schaefer. But wouldn’t a return to the Dow 776 area be catastrophic? I’m sure it would be, but a year ago who would have thought the Dow in February 2009 would be at 7468? The market is a law unto itself, and the market doesn’t care about human triumphs or human misery. I’m merely repeating stock market mechanics as I know them”.

“One of the mechanics is the 50% Principle. The monthly chart follows the Dow from it’s bull market beginning in 1982 to the present. The horizontal red line identified the halfway level of the great bull market. As I write, the Dow is below the 7470, the 50% level. Not a pretty picture, but it’s reality.The Dow is now fluctuating around the 50% level. This is a level so critical that it would not surprise me to see the Dow hesitate and flounder around in the 7470 area. This will serve to confuse and even encourage investors (“maybe we really are at a bottom”)”.

“My advice, don’t let the market fool you. The path of least resistance continues to be down. Banks — I find it hard to imagine the market turning bullish while the banks remain in trouble. I’ve been watching BKX, the banking ETF, which continues to slump to new lows. Worse, MACD is about to give us a new bear signal as the histograms sink into negative territory”.

Whether or not you believe in technical analysis, or indeed in Dow Theory, you will get the drift. It is clear that the breach of the November lows on Wall Street is an important psychological milestone in market evolution. Nobody should underestimate how widely read the 84-year-old Richard Russell is among investors, and if he has turned negative, you can be sure that there will be many more who will take his views on board and adopt a similar attitude.

He is also surely right that as long as bank stocks stay so weak, it is unlikely that a new bull market can begin, and all the more likely that the bear market has another downward leg to absorb. Like Mr Russell, my view is that gold is the only certain antidote to the renewed wave of negative investor sentiment that is likely to follow this cathartic moment. Despite the hopes of many, it looks like we could be in for a long, hard year.

When I asked the well-known money manager Ken Fisher recently for the results of his annual survey of market forecasters’ opinion, he told me that pretty much the entire sample was concentrated between a range of minus 6% to plus 21%. In other words, no forecaster was predicting was either a big negative or a big positive year on Wall Street.

Yet in most years the one certainty you can put money on is that the actual outcome in any given year will not fall within the range suggested by consensus opinion. It would be no surprise therefore if we experienced a big move in world markets this year – and the way things are going, it seems as if that move is more likely to be a large negative move than a large positive one. Disappointing if true.

Written by Jonathan Davis

February 22, 2009 at 11:13 PM

Posted in Richard Russell