I'm the barn owl watching the mouse
What am I thinking about these bright summer days? I'm thinking, as usual, about a long list of things, but one item I've been zeroing in on is the 50% Principle as it applies to the current market.
The 50% Principle works like this -- We have the Dow low of 7286 recorded in October 2002. And we have the record Dow high of 14164 recorded in October 2007. The 50% or halfway level between Dow 7286 and Dow 14164 comes in at 10725.
As of today's close, the Dow was just 375 points above the 10725 halfway level. The 50% Principle tells us that if the Dow closes decisively below 10725, then there is a good chance the Dow will continue down to test the level from which the entire advance started -- that level is 7286.
And I wonder to myself -- what would happen if the Dow breaks below 10725 and then declines to the 7286 area? My immediate thought is -- disaster. And probably a severe recession or even a depression. Remember, the Dow is only 375 points away from the halfway or 50% level.
Anyway, that's one thing I'm thinking about, and that's one thing I'm watching. I'm watching it the way a barn owl watches a mouse -- in other words, with extreme interest.
A second phenomenon I've got my eyes on is the extraordinary performance (at least so far) of the D-J Transportation Average. At today's close, the Transports were a big 635 points ABOVE their January 2008 low close of 4140.29. The Transport action is the most bullish event that has taken place in the market so far.
What happens, I ask myself, if the Dow collapses through 10725 and the Transports still do not confirm, meaning that the Transports continue to hold above 4140.29? That's a question I can't answer, because I've never seen a situation like the present one before.
Here's oil (which almost all Transportation depends on) over 145 a barrel, here's gasoline near five dollars a gallon, here's diesel at record highs -- and the Transports continue to hold up. Amazing. Something's going on with the Transports that I don't know about. But I don't have to know -- I don't have to know why, I just have to know what -- what are the blessed Transports doing?
I do feel this in my guts. Between now and the fourth quarter of 2008 we're going to see some fireworks. And I'm wondering whether this market can possibly hit bottom somewhere during October-November period. I talked to Paul Desmond (head man at Lowry's) yesterday. He said that one reason for the huge spread between the Selling Pressure Index and the Buying Power Index (compared with spreads in the past) has to do with the massive increase in NYSE volume over recent years.
Paul also offered the opinion that the lows of this market maybe take place over an extended period of time such as the extended low base of 1980 to 1982. And I agree with Paul -- I've been thinking the same thing. The problems now imbedded in the US (and the world) economies are so severe that it could take several years of a bottoming process before the next bull market can get started.
We both agreed that the next bull market, from wherever and whenever it starts -- could be huge, could be a super-whopper. There's all that fiat currency in the world today -- multi-trillion of dollars worth of it. One of these days, that money will be spent. But first we must somehow arrive at the bottom of the current damnable bear market or whatever you want to call it.
Dow vs. Gold -- The ratio between the Dow and gold has hit a new low. Today, one share of the Dow will buy only 11.44 ounces of gold -- that's down from 43.75 ounces back in July 1999. In other words, since mid-1999 the Dow has lost 73.8% of its value in terms of real money -- gold. Talk about a silent and insidious bear market, you're looking at one.
lots more follows for subscribers, and subscribing is a MUST.
Richard Russell began publishing Dow Theory Letters in 1958, and he has been writing the Letters ever since (never once having skipped a Letter). Dow Theory Letters is the oldest service continuously written by one person in the business.
offers a TRIAL (two consecutive up-to-date issues) for $1.00 (same price that was
originally charged in 1958). Trials, please one time only. Mail
your $1.00 check to: Dow Theory Letters, PO Box 1759, La Jolla,
CA 92038 (annual cost of a subscription is $300, tax deductible
if ordered through your business).