The MasterCharts: Richard Russell’s Dow Theory Letters Daily Remark On Gold And The Markets
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Wednesday, January 26, 2011

Richard Russell’s Dow Theory Letters Daily Remark On Gold And The Markets

From Richard Russell's Dow Theory Letters Daily Remark

January 25, 2011 -- "Imagine telling Charles Dow 100 years ago about the inclusion of Disney, McDonald's, Wal-Mart, Home Depot, Amex, BofA, & JP Morgan Chase representing American industry for his index of 'industrial' giants'. Dow might have asked, 'What do they produce?" Without realizing that he was reacting like the Austrian school of economics that holds that wealth must be produced: It can't be borrowed or printed." From Ian McAvity's remarkable publication, Deliberations on World Markets."

Gold has risen a fantastic ten years in succession. Gold, of late, has been receiving a lot of interest and publicity and advertising. Gold is probably overdue for a correction in this ongoing bull market. Analysts are talking about "gold correcting down to 1200 or even 1000." However, I believe that the more important picture is that the gold bull market has much further to go on the upside.

I've been reading the
McClellan Market report for years. It's one of the better and more intelligent reports that I read. McClellan does a good deal of research on cycles, and I must say some of their cycle studies work out quite well.

McClellan has discovered that there's a
cycle low appears for gold roughly every 12.5 months. The cycle lows have run as follows: Jan 6, '06, Jan 8, '07, Jan 7, '08, Jan 5, '09, Jan. 4, '10, Dec. 31, '10. McClellan puts the next cycle bottom for gold at February 8, 2011. Which means that the cycle low for gold should arrive at any time between now and February 8, give or take a few weeks before or after that date.

Interestingly, the McClellan cycle bottom for gold is due to arrive amid a good deal of professional bearishness regarding gold ("gold overdue for a major correction"). Thus, many traders have traded out of their gold positions, just as we near the date for the McClellan cycle bottom.

Below, the red arrows mark the McClellan cycle lows.

The Russell view -- It's virtually impossible to successfully time in-and-out trades during an ongoing primary bull market. Usually what happens is that the trader has moved out of the market just as the bull trend resumes. Thus, the bull market does what it's supposed to do -- advance while leaving most traders and Johnny-come-latelies behind.

And now, the stock market. I've posted two daily charts below. The first shows the D-J Industrial Average surging to a new high for the advance.

The daily chart below shows the D-J Transportation Average not only failing to confirm the new high in the Industrial Average but breaking below its most recent ascending trendline. What does this mean? In Dow Theory terms, we have a glaring non-confirmation. Now, either the Transports will follow the Industrials to new recovery highs -- or the Industrial Average will follow the Transports to lower levels. Or, the stock market advance may now stall out and work sideways, remaining at a high level.

How serious is the current overall situation? Very little is crystal clear at this point. The reason I say that is because the
Lowry's statistics remain steadfastly bullish.

Here's the mystery:
Lowry's Buying Power Index, signifying investor demand, as recently as January 14, was at a new bull market high. Furthermore, Lowry's Selling Pressure, signifying the supply of stocks for sale, was very recently at its lowest level since August of 2005. Both of these indices suggest that the bull market in stocks is still in force, and that in due time the market should work higher.

This puts us, as investors, in an unusual predicament. What to do? I fall back on the thesis that "When you don't know what you're doing, don't do anything. Just sit tight." That's the advice I follow for myself, and that's the advice I give to my subscribers. In other words, "First, do no harm."

The fact is that we haven't done too badly over the last three years. We circumvented one of the worst stock market crashes (2007-2009) in post-war history, and we show great paper profits in holding gold over recent years. True, we never loaded up with the Dow (diamonds) following the 2009 low, but missing an advance is a far different matter than taking a loss.