Dow Theory Seer cites poor action in market leaders, Apple and Google, as indication of coming rout

We have been reading the latest copy of the Dow Theory Letters, one of the longest running investment letters in the US written by the highly regarded Richard Russell. Richard Russell has turned quite adamantly bearish, encouraging his 12,000 + subscribers to get out of equities now.   Russell has been writing his letter since 1958, and is an elder statesman of the US investment newsletter business, and his views are always heard at turning points echoing around the financial press.  He had believed the May 7th lows to be extremely important and that breaking them on the downside could predict a crash. We are now well below that level and the bearish action is continuing.

What is it that he sees is so bad in the US markets and economy? He claims that the markets are at a critical turning point due to many factors including:

•  A lack of leadership from previous stars such as Berkshire Hathaway (NYSE:BRK.A), Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) - they are showing collapsing volume, topping action and breakdowns through 200 day Moving Averages
• Correlated downside across supposedly uncorrelated markets simultaneously indicating deflationary forces at work - commodities, equities etc
• Market breadth falling apart - the advance decline line and his own proprietary PTI indicator have turned decidedly negative.
• P/E ratios dangerously over 20.
• The Market ‘acting awful in the face of rosy news coming out of Washington, the Fed and the Treasury’.
• Confirmation of trend changes in both the Dow Jones Industrial Average and Dow Jones Transportation Average (see below)

For the full story and investment perspective you'll have to sign up at his website http://www.dowtheoryletters.com.  It's worth noting that Dow Theory is more an art than a science and while Russell's record is extremely good he has been caught on the wrong side of the trade before - which is worth bearing in mind given the regular polarity of his views.  But as a pragmatist, he's always quick to admit his mistakes and give credit to the market where it's due.   His longevity as a market commentator is practically unrivalled and his writing is always infused with a grasp of history that you rarely hear in the financial press which is one of the reasons his readership is so incredibly loyal.

It’s refreshing to read someone so very forthright and critical of conventional thought,  the ‘academics’ at the money pumps and the ‘promoters’ that spin eternal optimism and general euphoria.  All investors who are 'long' equities or buying during this correction should endeavour to weigh and consider contrary opinions - of which there aren't enough in mainstream dialogue.  The market needs more voices willing to stick their neck out like Richard Russell.

 

Background on Dow Theory

Charles Dow was the founder and editor of the Wall Street Journal, and later went on to found Dow Jones and Co and gift the world the famous Industrial Average that we all still check on a daily basis. What many followers of the Dow Jones Industrial Average don’t know is that the index was originally compiled at a time when Railroads were one of the boom areas of the markets and as a result Dow put equal emphasis on another index called the Dow Jones Transportation Average. One of the key tenets of his theory was that changes of trend in the DJIA must be confirmed by the DJTA.

The main tenets of Dow Theory are:
• The market moves in three main trends composed of a primary movement that lasts months to years, secondary reactions moving counter to the main trend lasting days to weeks, and minor swings that last from hours to weeks.
• The primary trend exists until it is definitively proven to have changed.
• All changes in trend must be confirmed by increases in volume in the direction of the swing and must be confirmed by action in the other average as explained above.
• The market averages completely discount all news.

Charles Dow himself never came up with the ‘theory’ himself, but his followers (in the style of many religious disciples before them) compiled it from some 255 Wall Street Journal columns he wrote in the 1930s. The purists Rhea and Hamilton both put total emphasis on the market’s price and volume action, whereas it’s more modern proponents including Schaefer and Richard Russell put more emphasis on other market factors including breadth, sentiment and valuation.

Many have discounted Dow Theory as tea leaf reading and completely unverifiable by empirical backing, but the fact that markets trend cannot be denied and the 12,000+ $300 paying subscribers to Richard Russell’s ‘Dow Theory Letter’ back the theory by sheer weight of money.

There are many books written on Dow Theory. But the best are still those written by Rhea, Hamilton and Russell.