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Wednesday, August 25, 2010

Richard Russell's Daily Letter

August 24, 2010 - "I place economy among the first and most important virtues and public debt as the great danger to be feared. To preserve our independence, we must not let our leaders load us with perpetual debt. We must make our choice between economy and liberty, or profusion and servitude." Thomas Jefferson. 

Throw a tennis ball up in the air, and it will lose upward momentum as it rises. At some point upside momentum will completely fade, and the ball will stand still in mid-air. After standing still for a brief moment, the ball will head back toward earth.

Somehow, I get the same feeling about the stock market. The market gained initial upside momentum as it surged up from its July low. By early August the market had lost upward momentum. For seven days the Dow moved sideways as if suspended in midair. On August 11, the market suddenly plunged 265 Dow points, and in so doing it fell out of its sideway trading range. From there, the Dow whipped back and forth, and by August 19, the Dow had fallen bearishly below both its 59-day and 200-day moving averages.

The daily chart below shows us what the Dow looks like now. Note that RSI is heading down, and MACD has turned negative. At the same time, the Dow is situated below its 50-day moving average, and the 50-day MA, in turn, is below its (red) 200-day MA. Finally, note that the Dow has assumed the form of a head-and-shoulders top that has now broken down. In all, a classic set of bearish relationships. 

I'm including a P&F chart of the Dow below. Note the latest red column of X's which just plunged below the 10150 box and below the rising blue trendline. According to this P&F chart, we received a "sell signal" this morning when the Dow broke below the preceding column of 0s and below it rising blue trendline. The P&F "projection" is that this break should take the Dow down to the 9750 box.

Incidentally, there is no shortage of "distribution days." The latest score for the last two weeks is -- 6 for the S&P 500, 5 for the Dow, 5 for the NASDAQ and 5 for the NYSE Composite. That's far too many, and it implies heavy institutional selling.
Yesterday, I wrote about the Treasury bonds. Every "smart" trader and investor has rushed into Treasury bonds as the ultimate save-haven area. I believe Treasury bonds and high-grade corporate bonds are in a bubble. There are just too many believers in bonds as the ultimate safe place to be. 

When everybody piles onto one side of the ship, the ship lists. And just as quickly, everybody rushes to the other side of the ship. That's where I think we are with bonds. 

The weekly chart below follows the 30-year T-bond. RSI tells us that the bond is overbought. The full stochastics at the bottom of the chart confirms that the bond is overbought. And the blue histograms are slanting downwards towards zero. All in all, I don't like the looks of the bonds. Any hint of rising interest rates could send the bond market off the edge of the popularity cliff. 

Gold -- I took today's stock market sell-off as an indication that business will be rotten in the months ahead. Rotten business will put pressure on the Fed to print, print, print. Wide open quantitative easing will put pressure on the dollar, and this, in turn, will put UPWARD pressure on gold. And gold may have started to discount that situation today.

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