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Did Richard Russell Capitulate? at Trader’s Narrative

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):
Richard Russell Dow Theory.png

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7 Responses to “Did Richard Russell Capitulate?”  

  1. 1 Werner Merthens

    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 (pdf) [file removed]

  2. 2 Babak

    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.

  3. 3 HP

    Simply ask the “Venerable” Mr. Russell the same simple question you should ask any of your advisers: “Mr. Russell, over the course of your career as an investment guru, have you made more money off your newsletter or your investments?

    If it’s the investments then why do you write?
    If it’s the writing, you aren’t qualified.
    My guess it’s the second.

    Ask your money manager, your broker, etc a similar question sometime. The results are more instructive than any course or advice could possibly be.

  4. 4 Tony Tibbitts

    Two years later………………. Well what can I say? I almost fainted when Mr Russell went over to the bulls, but it turned out he was the last bear to cave……………………..

  5. 5 wayne


    I probably spent an hour or so perusing Dow Theory a couple of decades ago and do not profess to be a student or expert in the area. I certainly could be incorrect, but I surmised that it was likely that at the time Dow theory was in it’s genesis, there was not a full understanding or at least full appreciation for the relationship between the equity markets and interest rates. Since there is a strong correlation between interest rates and utilities, there ends up being a second degree correlation between utilities and the markets, thus the author’s of Dow theory probably indirectly and possibly unknowingly stumbled onto the market vs interest rate relationship via Dow Theory. I know that Dow index confirmation is one piece of Dow theory.

    I concluded that, (at least for myself), it would probably be more prudent to simply spend one’s time studying the impact of interest rates on the market. But different strokes for different folks, and if it works for Richard, more power to him. As they say, the proof is in the pudding.

    I mentioned about a week ago, in commenting on Precther’s use of Elliot Wave, that it is very beneficial in the newsletter business to possess a marketing angle that one can use to profess an insight into the market that is not available to the casual investor. It is my expectation that Russell, Prechter, etc, have a similar bag of support tools that they use in their analysis and it is my observation that the ones that have been in business for a couple of decades rarely deviate far from the price direction.

    What do you think?

  6. 6 Babak

    Wayne, as far as I know, and I’m no expert on Dow theory, the concept relies more on the relationship between the Industrials and the Transports. That is, the creation of goods, and their distribution to the consumer.

    Dow theory has a very good track record of timing the market, but it isn’t perfect of course. And the confusion is compounded by the inability of ‘experts’ to agree with one another as Hulbert shows in his article today.

  7. 7 Bob

    I’m a subscriber with access to his archives. He makes it VERY clear that the market hit a sell and entered a major bear market in Dec of 2007, not far from the high. He cautioned investors to cash out and predicted a rather significant drop. He has not been bullish since! Didn’t get it wrong for me or his subscribers.

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