Zeev's Turnips Patch-No Politics (ZEEV)

[basserdan]

RUSSELL BULLISH ON THE FINANCIALS

July 17, 2008-- I've dealt with unusual market over the last 60 years, but this one may take the prize. Here's what I see --

The Dow has sold off to its lowest level since mid-2006. On Tuesday the Dow closed at 10961.72, which was a loss of 3203 points from the record Dow high set in October 2007 and far below the Dow's 2008 March low.

But the D-J Transportation Average never got close to its own 2008 low (that low was 4140.29). At yesterday's close, the Transports were a big 774 points above their 2008 low. In other words, we have a flagrant non-confirmation on the part of the Transports.

The 50% Principle tells us where the Dow is in reference to the halfway mark between the 2002 low and the 2007 high. That level is important. The 50% or halfway level comes in at 10725. On Tuesday the Dow closed at 10961 which was only 236 points above the 50% level. But on Wednesday the Dow surged a big 276 points, taking the Dow further away from the critical 10725 level. Today the Dow headed even higher.

At this point, I see two major positives in the price structure. So far, the Transports have not confirmed the Dow on the downside. So far, the Dow has not closed below the 50% level (10725) or halfway level of the 2002-to-2007 advance.

So is the decline over? Anything is possible, but we still have not seen the kind of action that has ended almost every bear market of the last 75 years, according to the Lowry's studies. These previous declines have been characterized by a series of 90% down-days, with the last 90% down-day quickly followed by a 90% up-day.

Since the May peak, we have seen only two 90% down days -- June 6 and June 26. As I said, the "normal" situation at the final bottom of a true bear market is a 90% down-day quickly followed by a 90% up-day. So far, this has not occurred.

Will this decline (or bear market, if that's what you want to call it) end in a different way? I've said that I can't see the market hitting bottom until at least the financials stop declining. Did the financials make the crucial turn to the upside yesterday? We should know shortly.

How significant is it that the Dow has held (so far) above the 50% level. And how significant is it that the Transports have refused to confirm the successive Dow lows?

In both cases, it could be very significant. But unfortunately, it will require more time in order to see whether the situation stabilizes or not. I had originally felt that the next bottom might appear in the October-December time frame. It would be most unusual to see the market make its bottom in July or even August.

Over recent months the rising price of oil has ruled the markets along with the collapse of the banks and the financials. Below we see a weekly chart of XLE, the Financial exchange traded fund. Has XLE, following its long, painful collapse, finally hit bottom? I think there's a fair chance that it has. If so, that would be a huge plus for the market.



Next, we see a weekly chart of the Bank Index, and it's the same story here. In both cases RSI, MACD and the full stochastics indicate a severely oversold condition and a violent move to the upside. Of course, it's possible that the financials and the banks have recorded their lows but the US economy will continue to sink based on other considerations. And above all, we'll have to keep an eye on the dollar.



CONCLUSION -- It's too early to make anything definitive out of this week's market action. It does appear that the financials and the banks have hit bottom. It does appear that crude has topped out.

It's obvious (at least to me) that Bernanke's looking at the big picture, and he sees the big picture as deflation, not inflation. Which is why he's keeping the Fed Funds at 2%, despite being denounced by a large element of the hard-nosed capitalists. The latter are screaming, "Socialism, it's socialism, nobody fails, the government backs everything down to the neighborhood candy store with tax-payers' money -- nobody fails. You can be a dunder-headed idiot running Fannie Mae or General Motors but you're not allowed to fail. Bernanke is a socialist, send him back to teaching at Princeton."

Richard Russell
Editor-in-chief - DOW THEORY LETTERS
http://ww2.dowtheoryletters.com

http://www.gold-eagle.com/gold_digest_08/russell071708.html