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):