Richard Russell: Fair chance that most of bear market is behind us
I do not always agree with 86-year old Richard Russell, author of the Dow Theory Letters, but there is no disputing that his commentary provides food for thought. The views on the stock market below are an excerpt from his latest newsletter.
“We’ve seen some extreme downside action. But Jim Stack of InvesTech Research reports that on the August 8th panic the ratio of declining stocks to advancing stocks was 77 to 1, a ratio never seen before in the past 80 years. The closest incidents were the May 1940 ratio when France fell to Germany; that ratio was 60 to 1. The second incident was on Black Monday during October 1987 when the ratio was 49 to 1. In both cases, those hugely high ratios marked a near-bottom, and within one month of those ratios the market was 10% higher.
“A few days ago we saw down volume equal to 98% of up + down volume, an incredible extreme. After all the negative action, if the S&P still chooses the bearish path and breaks to new lows, then we’re in for another spate of down-markets. In other words, after all the negative action, the market should be rally — we need at least a “dead-cat” bounce to above 1208. If the market can’t rally from here, then we know that something is really wrong!
“My feeling now is that this bear market will probably not be a monster, but I believe that there is a fair chance that most of it is behind us. This will be a long and arduous recovery, and stocks bought here (even blue chips) will not prove to be winners over the next five years. I would not buy stocks for income.
“It all reminds me of the great Zen Koan, “One fool can ask more questions than a dozen wise men can answer.” And who’s the fool? Why it’s none other than you editor.”
Source: Richard Russell, Dow Theory Letters, August 19, 2011.
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