Friday, January 22, 2010


I wanted to post this earlier in the week but work, family, and other important issues of the day prevented it. Here is a quote from Richard Russell's web site dated September 28, 2009:

"I look at the big picture, and I scratch my head. One item remains on my mind. Back in 2008 I wrote a good deal about the 50% Principle. Considering the entire Dow rise from its 2002 low to its 2007 high, it was important what the Dow did on a decline toward the halfway point or 50% level. That level was 10725. On October 6, 2008, the Dow closed at 10249. On that day the Dow closed below the 50% level. From there, the Dow declined to a March 8 low of 6547. Since then, on the advance from March low, the Dow has never climbed back above 10725, the 50% level. I find that significant."

On Tuesday the Dow closed at 10, 725.43. It reached the critical 50% Principle threshold. In terms of Dow Theory, this represents a test of the rally. It is not uncommon for major market corrections to retract half or even two-thirds of what they either gave or took away in the first place. At that point, the test of the continued rally or decline is whether it pushes through the 50% point between the timeframe for consideration of the highest high and lowest low. The longer the timeframe considered, the more meaningful the action at the 50% point becomes.

Since Tuesday the Dow has fallen over 600 points, a significant drop. Is this the resumption of the original bear market or simply a correction in an emerging bull market? My bet is on the bear so I exited the markets (a bit early) before the new year. I have continued adding to my large position in GLD but even Gold sucks in this market. Still, my recent losses are trivial compared to what I would have lost if I had still been in stocks.

So, I'm lucky. Gold will come back (GLD is only less than $4 under where I started buying it again). I'm not sure the Dow will test 10,725 again in the near future. Tonight Russell writes: "I can't say that I like the market action here. But the implications of whether this is a simple correction or whether this advance is in the process of cracking up are so important (actually world-shaking) that I want to be patient just a little while longer to see "what happens." As I've written many times before, my instinct is to be extremely cautious here. If you don't love a particular stock in your portfolio, then get rid of it."

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