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A Primary Bear Market

Richard Russell snippet
Dow Theory Letters
Nov 23, 2007

Extracted from the Nov 21, 2007 edition of Richard's Remarks

It was a noble battle, it was a battle that seemed almost endless. But today the great battle ended. Today the D-J Industrial Average closed below its August 16 low of 12845.78, thereby confirming the prior violation of the Transportation Average. In so doing, the stock market and the Dow Theory have spoken -- they have confirmed the existence of a primary bear market.

One of the precepts of the Dow Theory is that neither the duration nor the extent of the primary trend can be predicted in advance. I have absolutely no idea whether this is fated to be a mild bear market or a severe one.

Well, there is one hope and one hint. The most authoritative bull or bear signal comes when both Averages, Industrials and Transports, break through critical levels simultaneously. That is not what happened in the current instance.

The Transports broke under their August 16 low of 4672.35 back on November 7. Today the Industrials finally confirmed, so the bear signal was not given simultaneously. If there is even a hint that this bear market will be "kind," this is the hint, but I'll admit that this line of reasoning may be far-fetched. The fact that we must operate on is that the primary trend of the stock market is now definitely bearish. The great primary trend of the market is pointing down.

I've done my best to prepare my subscribers for this possibility. True, I did continue to "hope" that the Dow could stave off a break below 12845.78. The Dow did resist that situation for week after week. Alas, today the support gave way, and the Dow succumbed.

What to do now? I don't have any magic formula. Prudence dictates that we be light, very light, in our holdings of common stocks. Those subscribers who are holding top-grade dividend-paying equities may decide to sit tight. Those subscribers in the "compounding business" with large reserve funds may decide to weather the storm, collect the dividends, and continue to compound, buying additional shares at whatever price the market may offer at the time.

Those with large stock holdings may simply decide to cut back. After all, a lot can be said for the luxury of a good night's sleep. Personally, I've chosen what I call the "way of the sleeper." I'm very low on common stocks, in fact the only common stocks I now hold is a limited position in GDX, the exchange traded fund for precious metal shares.

Thought -- the market was oversold or actually severely oversold as of yesterday's close. A big break today renders the stock market oversold to the extreme. This could lead to a rally very shortly, and such rallies often take the Averages back to test their initial breakdown levels. If we do get such a rally, it would provide subscribers with a second chance to lighten up.

Note that the S&P and the Wilshire have NOT confirmed the Dow. In one of the strangest situations I've ever dealt with, neither the S&P 500 or the Wilshire 5000 have confirmed the Dow in that neither the S&P nor the Wilshire have violated their August 16 lows. What is the meaning of this absolutely weird situation? I don't know -- honestly I really don't know. But it is certainly something to think about.

Does the superior action of the S&P and the Wilshire cast doubt on the Dow Theory bear signal? I don't know. I've never in fifty years of watching market action seen this type of situation.

There isn't a lot more that I can say that is worth saying. The market has told its story. The scene has changed. I've lived through these changes before, and so have my subscribers. A few of my subscribers have been with me for almost 50 years. We've survived and done pretty well over those 50 years. We will continue to survive, regardless of the mildness or ferocity of this bear market.

charts courtesy of stockcharts.com

This is an adage that I dreamed up many years ago, but I'm afraid that it's just as true today --

"In a bear market, everyone loses, and the winner is the one who loses the least."

lots more follows for subscribers...

Nov 21, 2007
Richard Russell
website: Dow Theory Letters
email: Dow Theory Letters

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