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One Picture is Worth a Thousand Tears

Richard Russell BIG snippet
Dow Theory Letters
Aug 5, 2011

August 4, 2011 -- It's no pleasant sight to see our beloved stock market crashing, but that's the sight that's greeting me this morning near the opening. The Dow is down almost 300 points, while its companion Average, the Transports are down 155 points. It's as if hell's fury has fallen on the NYSE.

Why is it happening? What's wrong? Answer -- Everything is wrong. The nation is suffering from 65 years of debt-building and over-leveraging, and instead of moving to right the wrongs, the US is slapping undersized bandages on spreading cancerous wounds. The fact is that if a private corporation was following the same path, it would have already have been forced to declare bankruptcy.

The US is "too big" to have its rating lowered by the rating agencies. The implications are too serious. Instead, the stock market is doing the job. After all, a crash is comparable to a rating lowered from AAA to AA or lower.

In this business, one picture is worth a thousand tears. Below we see the Dow plunging below both its 50-day and 200-day moving average and far below its near-by June lows. The Dow has fallen 8 out of the last 10 sessions. Oversold? Yes, indeed, but nobody's told the market yet.

Below we see the Transportation Average, falling lock and step with the Dow. Like the Dow, the Transports are oversold, yes they are.

But when the market fails to respond to "normal" developments, something new may be occurring. I ask myself "what's new" on the agenda. The only thing I can think of is that the US economy is unexpectedly sinking (again) into the mire. Evidently the "Great Recession" has not ended as advertised, and the stock market (and bonds) are saying that oversold or not, "there's more to go."

Meanwhile, aside from US budget troubles, European stocks are falling apart putting pressure on US equities. Tuesday I showed a chart of the tumbling German market. Today I feature the French market, and below that the British market. "A fine kettle of fish you've got us in to, Stanley." (Courtesy Laurel and Hardy)

My PTI has finally turned bearish on July 29th. At the same time the market is severely oversold. In the past, when my PTI has dropped to the point where it is bearish, the market has been oversold enough to rally. So far, not this time. History doesn't always repeat or rhyme.

As for gold, it's backed off considerably, but still selling in the 1600s. Gold-holders have been selling the metal to raise much-needed cash. But somebody is buying gold while it sells above 1600.


Richard Russell
website: Dow Theory Letters
email: Dow Theory Letters

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