Richard Russell's Blog

Up to now it's been obvious that the "safe haven" money has gone into the Dow, gold, Treasuries and the dollar. But Monday the Dow was the "odd man out". Why? I wonder, was the Dow left out in the cold?

We suffered through four 90% panic-type sell-off days in June. Normally that should have been enough to clean out the overhead supply and prepare the base for an impressive rally. But the four 90% decline days were evidently not enough to create a severe oversold...

The best weapon the amateur investor possesses to protect himself from stupid or ill-conceived action is technical analysis. For instance, if you own a stock, and you watch your stock "walking" up and above a rising moving average, then as long as that action continues, the amateur knows he's on the right track. But the higher the stock climbs, the more enthusiastic the amateur becomes.

When all is confusion, I turn to Dow Theory. The chart of the Dow below shows the Industrials yesterday breaking to new lows for the decline.

September 3, 1929 -- The Dow surges to a record high of 381.17. Months later, years later, decades later, I wonder, "Will the Dow ever reach its 1929 high again?" All during the Depression years of the '30s I wonder, all during the War Years of the 1940s I wonder, all during the early '50s I wonder, and then on November 23, 1954, the Dow finally rallies above its "impossible" 1929 high of 381.17. I blink my eyes in excitement. I can't believe it. It's finally happened after 25 years of waiting.

The Dow has been rallying steadily since March of 2009, and in doing so, it has been lifting the spirits of both investors and consumers. But there's one item that bothers me, and I've written about this before.

I’ve written about the over-production of merchandise and goods due to the entrance of China and Asia into world markets. These are all export-dependent countries, and they are out to sell their goods to the so-called developed nations. The ironic fact is that the world simply can’t use or digest all the goods that are being created. The net result is worldwide deflationary pressures.

I don't think people understand the Chinese psychology. China has been denigrated, despised and "spat on" for decades. Strange, but I believe you can see the Caucasian attitude towards the Chinese in the price of Chinese food in Chinese restaurants. I remember years ago when Chinese chefs complained that their food was unappreciated and sold too cheaply compared with other cuisines.

The critical question facing the market and the nation is -- what will happen when the Fed halts its monetizing machinations at the end of June? Some believe that the Fed will (out of fear) immediately move into QE3. My own guess is that after June 30, the Fed will wait a bit, just to see how the markets are reacting to the end of quantitative easing.

Holders of gold in the US possess some protection against inflation and dollar devaluation. If the US continues on its current policy of dollar devaluation, the Fed and the administration will receive far fewer objections if its people hold gold or silver. I believe that Bernanke intends to devalue the dollar so that the government can better address its outrageous mountain of debt.