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Gold, Bonds and Oil

Richard Russell snippet
Dow Theory Letters
Sep 22, 2006

Extracted from the Sep 21, 2006 edition of Richard's Remarks

Gold has been moving basically sideway for five days. The stochastics look as though they are ready to turn up. RSI is favorable. I checked the histograms on a few leading gold shares (ABX, GG, NEM) and although still negative, they are advancing towards zero, which is a plus. All this suggests that the correction in gold and gold shares is growing "tired."

Bonds -- The bellwether 10 year T-notes have had a nice rally, from a 5.26% yield in late-June to today's 4.64% yield. Bond bulls must be smiling, and certainly the lower yields have been a blessing to the stock market -- er, that is, so far.

Since about August 21 the notes have been working essentially sideways in a tight little formation. This means that the notes (and bonds) could break out either way -- up or down. Today the mystery ended -- the notes and bonds broke out sharply to the upside with interest rates heading DOWN. The bond market appears to be taking the economic slowdown seriously, very seriously, I might add.

Bulls on the economy are not giving up. "There isn't going to be any real slump, which is why the stock market has been going up," insist the bulls. And they add, "The worst we're going to see is a soft-landing, and the market has already discounted that."

And I reply, "Maybe, but you're ignoring that non-confirmation by the Transports. And why has the advance been so selective? Why have so many sectors failed to follow the lead of the big-cap stocks?"

In all, it's a tough business. As for me, I still like the old thesis of a "return on your investment." And I still think in terms of the time-honored warning that's expressed in three words -- "margin of risk."

Oil -- Oil has had quite a correction, from just below 80 dollars a barrel in mid-July to just above 60 dollars yesterday. Many oil bears are talking 40 dollar oil, while oil bulls are talking 100 dollar oil. I just watch the daily action, but I personally side with the oil bulls. I note that oil is looking oversold at this time; RSI is in oversold territory and the stochastics are scraping the bottom.

Those thinking in terms of lower oil believe that the US will somehow come to an agreement with Iran regarding Iran's desire to possess nuclear weapon capabilities. Time magazine this week has a feature article on what a war with Iran would look like. Time thinks it would include an all-out bombing of Iran's nuclear sites. Politically, a US preemptive war with Iran would involve Russia and China, which is something the US most definitely wants to avoid.

I'm sure that Iran believes that the US is too involved in Iraq and Afghanistan to start another war, thus Iran can pretty well ignore US threats and warnings. All this has a lot to do with oil, but so far, the stock market has been ignoring the oil problem, in the same way that the market has been ignoring the deterioration in the housing picture. Either the stock market is far too optimistic or the stock market just wants to see more. We should know shortly.

I thought the feature of today was the big upside breakout in the bonds. That means lower rates. Lower rates means that the bond market is discounting declining business. Of course the question is -- how much of a decline. I still don't think investors are taking the housing situation seriously enough.

Friday should be interesting --

The R man.

lots more follows for subscribers...

Sep 21, 2006
Richard Russell
website: Dow Theory Letters
email: Dow Theory Letters

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