The following is an excerpt from Richard Russell's Dow Theory Letters
"The problem cannot be cured through using the cause of the problem. Both the cause of the problem and the attempted cure are the Federal reserve and its mistaken monetary strategies." Richard Russell
Where are we? Here's my thinking: My position is that we will remain in a long term or primary bear market as long as one or both of the Averages -- Industrials or Transports -- are below their September highs. If the stock market is turning bullish, let the market prove it to us by having both Averages rally and close above their September highs. At this point, I'm a neutral observer, and I'm asking the market itself to identify the trend.
The September high close for Industrials was 13,596.93, for Transports 5215.97.
The stock market talks, and Russell interprets -- The Dow futures were down a whopping 175 points all during Saturday and most of Sunday. Russell interpretation -- the Dow slumped on the thesis that Romney might win, and if Romney were to win, he would fire Fed chief Ben Bernanke, which would also be the end of QE3. So ironically, the Dow dropping 175 points during Saturday and Sunday was the stock market's way of "protecting itself" against a Romney win, and a farewell to Bernanke and his QE3.
Then at about 4 p.m. Sunday, suddenly everything turned around and the Dow futures reversed from minus 175 to up 12 points. Russell interpretation -- The market suddenly decided that Obama is a certain winner, and with an Obama win, Bernanke would stay on as Fed Chairman. Obama would back Bernanke 100%, and Bernanke would be free to continue with his "QE to infinity."
They may not admit it, but the stock market loves "QE to infinity." With QE3 in place, the Dow will remain on the plus side. With QE3 in place, gold will advance. Bernanke may ultimately prove to be a menace to this nation, but good or bad, the stock market loves Bernanke with his monetary fiat money spigots wide open, and interest rates near zero.
That's the way I see it. Why the stock market at 4 p.m. Sunday suddenly decided that Obama is in for a second term is beyond me. But the above is the way I interpret the dramatic events of the weekend: Obama is in, Bernanke is to remain as Fed head, and "QE to infinity" is to remain.
Question -- What makes you so certain that the stock market is correct about an Obama victory?
Answer -- I can't account for the stock market's mysterious and incredible perceptions. But I've learned never to bet against the genius of the stock market.
Question --What if both Averages close above their September highs?
Answer -- Well, that would be great! In that case I'd shout "three cheers" and maybe buy a conservative position in the DIAs and more physical gold.
Question -- What if one or both Averages remain below their September highs?
Answer --In that case, the great bear market continues. As to what we should do? I listen to Bloomberg TV for hours every day. During the day they bring on dozens of experts. Every expert offers his list of securities to buy. Most of these experts will tend to be wrong -- they don't know how to read the market. My own advice is that the best place for us to be is on the sidelines, at least that's where I am. My physical gold position I treat as a permanent position, not as an item that I will trade.
Question -- What about the dreaded fiscal cliff?
Answer -- Forget it, the stock market has already forgotten it. The market is saying that the pols will kick the fiscal cliff out a year or two. The market is not worried about the fiscal cliff, and neither should you.
Question -- What's coming up after the election?
Answer -- I'm going to abide by the verdict of the stock market and state that Obama will be re-elected for another four years. If that's the case, here's what we can expect: (1) a liberal Supreme Court, (2) a blocked or stymied government, and (3) a permanently big government. Obama wants a permanently big government. His current budget plan calls for spending to reach 23% of GDP by the year 2022, which would be the highest spending, except during WWII, in the nation's history. All the new spending will come from entitlement programs, and mainly from Obamacare. By 2016 Obamacare will fundamentally reshape the way Americans receive health coverage -- with millions of people forced into subsidized government-run exchanges after their companies drop coverage, plus roughly 17 million people added to Medicaid. Obamacare's regulations and mandates will fundamentally reshape the insurance market, making the rules virtually impossible to unravel. As is the case with other major new entitlements, once on the books, the fight will no longer be whether to keep it, but over arcane rules, cost controls, benefits and the like.
The Dow, below, has acted quite well, considering the current dismal economic news. As of Friday, the Dow has managed to hold above its September low (blue horizontal line), which is excellent action on its own. And look -- the blue histograms at the bottom of the chart are turning up.
Gold --On Friday, the 1700 support gave way, and gold slumped to test the territory just above its red 200-day moving average. The slow stochastics at the bottom of the chart appear to be turning up. And RSI is about to enter the oversold zone. But don't worry, unlike a stock, gold can't go bankrupt. You hold it as a tangible measure of wealth until it regroups and heads higher again.
Below is one of my favorites, GDOW, the international or "Global Dow," which is composed of 150 of the world's leading corporations. The formation I show here is seen on a great many stocks now. I call it a rectangle which could break out either way. It's a pattern of indecision, which is a good description of the stock market as a whole.
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