These are four of the biggest threats to the bull market. According to Hugh Johnson Advisors, first is the threat of oil skyrocketing over the turmoil in the Middle East, and natural gas prices soaring as Russia retaliates over U.S. and European trade sanctions. Number two, interest rates surging as the Fed continues its tapering activities. The third threat is that the housing recovery drops dead. This could happen if fixed rates for 30 year mortgages rise above 5% by early next year. The next threat would be a stock market melt-up against the possibility of an unexpected jump in U.S. growth, in which case investors who are sitting on the sidelines could panic about missing out on the action and decide to jump in as the market reaches crazy heights. This could create a dangerous bubble as the exploding market leaves all thoughts of earnings behind.
Again, I note that most of the advisories are offering thoughts, scenarios, guesses and opinions about the U.S. and world situations. I prefer to stay with my main interest which is the action of the markets. As Barton Biggs in his great book Wealth, War & Wisdom emphasized, the stock market in its uncanny wisdom is always ahead of any single person or group. I've spent the majority of my life attempting to read the message that the market is sending us. In the investment business, the most difficult and least understood endeavor is the proper interpretation of the stock market Averages. Robert Rhea, the great Dow Theorist in the 1930s, once said the he was perplexed by the market 90% of the time. This was a modest statement by perhaps the greatest reader of the Averages I have ever come across. It's no shame to be puzzled by the stock market.
Question: Do you have any prejudice toward this market?
Answer: I do. I want the market to remain bullish for the good of my kids and grandkids. I would like gold to remain in a trading range — preservation of capital!
It seems clear that the Fed will eliminate QE by October. The stock market must know this. I think this will be a case of hold steady on the rumor and this time buy on the news. Previously, when QE was reduced, the market sold off. But my thinking is that this time will be different. The news that tapering will be concluded by October will be greeted this time by a surge in buying.
So far the market is giving me what I want. A bullish trend with silver and gold holding in trading ranges. Is it wrong to have a prejudice regarding the trend of the market? In my case, I'm very aware of my wishes, but I continue to call the market the way I see it. One technical worry is that we now have 7 distribution days in the S&P and 6 in the NASDAQ This is telling me that money managers are taking profits and lightening up on their inventories. This is confirmed by the decline in margin accounts from recent record highs. Evidently the speculators are cutting back on their positions, which is probably a good indication that we're not in a bubble.
The big picture: the stock market holds steady to mixed, while precious metals sit in their trading ranges.
To read the rest of Richard Russell’s Dow Theory Letters and receive daily updates, click here to subscribe.
