billy, LINES in the sand article
By Peter Brimelow, CBS.MarketWatch.com
Last Update: 12:58 AM ET July 15, 2004
NEW YORK (CBS.MW) -- This appears to be a side-winding market -- but who is it going to bite?
Dow Theory Letters' endlessly creative Richard Russell wrote recently:
"I haven't written about lines for years. Robert Rhea, the great Dow Theorist of the 1930s, stated that a line existed when the Averages held within an area of 5 percent or less for an extended period of time. A line is an area in which either quiet accumulation or distribution is taking place. The problem is that we don't which one is the stronger. We have to wait, which means that we only know when the averages break out -- either above the line limits or below the line limits."
Curiously, this line seems to be an international phenomenon. The respected institutional service Bridgewater Associates said on in its Daily Observations on Tuesday:
"Looking around the world, it is hard to find many compelling bets. Most markets are discounting conditions that are at least reasonable, or close enough that you would have to squint to see the value. As a result, almost all markets are stuck in sideways trading ranges. Money is being made by trading against the trends when pricing reaches something approaching a misvaluation... Money is lost by following trends, which is what most people do."
Richard Russell, needless to say, is prepared to trade against the trend. He says:
"I'm going to break Rhea's rule, and jump the gun. I believe the averages will break out to the downside. I say this because my advance-decline line of the Dow is breaking down. I say it because my High-Low Index is deteriorating. I say this because my Big Money Breadth Index is weak. I say this because Lowry's Buying Power Index is in a "head-and-shoulders" pattern and is on the brink of breaking support -- at the same time Lowry's Selling Pressure Index hit a low on June 23 and has been trending higher ever since. I say it because the VIX [The Chicago Board Options Exchange (CBOE) Volatility Index ($VIX: news, chart, profile) has been low, indicating investors are complacent. I say this because the Dow ($INDU: news, chart, profile) has still failed to confirm the succession of new highs in the Transports. Lastly, I say it because we're in a primary bear market, and in a bear market most lines end up breaking to the downside."
Wednesday night, Russell added that "VIX tells me that nobody's buying puts, meaning that nobody thinks this market could be in trouble... Maybe I'm too far away from Wall Street.
"But Wall Street's having its own troubles. Merrill closed just off its low for the year, Morgan Stanley at a new low, Goldman just off its low, JP Morgan falling out of a 'head-and-shoulders' top today. Schwab absolutely collapsing..."
However, it's worth noting that another market veteran with a substantial Wall Street following, Don Hays of Hays Advisory, expects the break to be to the upside.
Under the pretty explicit heading, "Building a launch pad," Hayes recently wrote:
"Back in my old days when we were testing rockets in the Saturn V program, we had this neat count-down, and when it got to T-10 your alert senses really started to quiver. Was everything going to come off as predicted, as calculated? More times than not, they did, so the more you ran these test lift-offs, the more confident you became. That's a taste of what it's like to predict a lift-off in the stock market when you have a well-constructed platform of psychological conditions (i.e. Rydex ratio), monetary conditions (i.e. yield curve) and relative valuation (i.e. the IBES/First Call Model of relative valuation.)"
In June, Hayes argued with remarkable precision that we are in the second, sideways, phase of a new bull market that began Oct. 9, 2002: "I expect this second phase to last for 5-9 more weeks -- until the end of July, or maybe as late as the end of August."
Ultimately, Hayes expects "a super strong new cyclical bull market to emerge that will last until 2008, and excite investors as much as they became in 1999-2000."
No wonder Wall Street likes him!
Editor's note: Peter Brimelow
Pennies not a zero sum game as much as some zero game.
