Did Richard Russell Capitulate?
Published May 17th, 2007 in Technical Analysis Tags: bearish, bullish, capitulation, crash, doom and gloom, Dow Theory, market tops, real estate flipping, retail investor, Richard Russell, sentiment, stock market, world boom.After Richard Russell’s recent bullish pronouncement that “an unprecedented world boom lies ahead” many - especially the permabears - have interpreted this as the last great bear throwing in the towel.
They go on to claim that this capitulation by the formerly bearish Dow Theory guru means that we are at the top and about to crash. I find this sort of thinking to be nonsense. First, the idea that the market tops when everyone is a bull is true. That’s because with everyone on one side, there’s no one to provide buying pressure to drive the market higher.
But is that the situation we have? According to sentiment the retail investor is keeping as far away from the stock market as they possibly can. Presumably they are otherwise occupied in real estate, flipping condos. And what about all the other gurus out there that are still preaching doom and gloom? that a crash is just around the next new high?
Most importantly though, those that interpret Russell’s new bullish stance as capitulation simply do not understand what he has been writing about for the past 50 years: Dow Theory.
Dow Theory is a mechanical system that, although far from perfect, leaves little room for interpretation. Simply put, when the indices are in synch and reaching new highs, Russell could not do anything but follow the clear signal and write what he did. He wasn’t capitulating to anything. He was simply following the playbook he’s been following since he became involved with the markets.
No one knows the future. Are we truly at the foot of an unprecedented global boom or are we just days away from a devastating crash? What we do know is that sentiment is decisively bearish out there and there are still plenty of naysayers that criticise and disbelieve in the performance of the markets.
Richard Russell with B-25 Mitchell Bomber in Italy (1944):
bearish, bullish, capitulation, crash, doom and gloom, Dow Theory, market tops, real estate flipping, retail investor, Richard Russell, sentiment, stock market, world boom
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2 Responses to “Did Richard Russell Capitulate?”
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This is a very nice article. I agree with your comments about the chronic bears. The Dow Theory can be and probably should be interpreted mechanically. However, I doubt that Mr. Russell follows a strictly mechanical approach. If he did, he would have turned bullish somewhere around June 2003 and would not have turned bearish anytime in between now and then. How can I say that? Well, I have tested a computer model of the Dow Theory and June 2003 is pretty solid regardless of parameter settings.
So, I suspect that Mr. Russell does not follow a strictly mechanical approach and may use “other, proprietary indicators” for his predictions. This time around he got caught with his pants down and has missed a good part of the last bullmarket.
At any rate, I have documented my test methodology and test results. Reading it may be a bit tedious, but in case anybody cares here is a link to the report:
http://www.mydatabus.com/5z/tznvy.pbz/Werner.Merthens/TheDowTheory.pdf
Werner, you’re right. I suspect that he changed his mind because he saw a tenaciously bullish market. But most importantly, the value part of the Dow Theory kicked in. The permabears hate to be reminded of this or poo-pooh it but the P/E ratios are actually looking very reasonable. This is just guesswork though because unless you get inside his head, who knows why he didn’t go bullish earlier and why he did now.
Thanks for the link btw, I’ll check it out.