Trader’s Narrative

Were you watching April 20th 2007? if not, did you catch it on April 25th 2007?

I’m talking about the Dow Theory buy signals that occurred on both those days.

Richard Russell didn’t miss them. He’s dedicated his life to the study of the markets through the prism of the Dow Theory and for the past 50 years written a newsletter called the Dow Theory Letters.

Recently he wrote:

“We saw something that is extremely rare, in fact I can’t remember ever having seen this before. What I’m referring to is that on those two dates all three Dow Jones Averages Industrials, Transports and Utilities — closed at simultaneous historic highs. To me, a fellow steeped in Dow Theory for over half a century, this was like a clap of thunder… My take on the situation is that the stock market (and the Dow Theory) told us that an unprecedented world boom lies ahead.”

This is an astonishing about face since Russell has been bearish, almost non-stop, for the whole duration of this bull market!

I say almost non-stop because he has taken a few short “trading” buys here and there. But for him to finally acknowledge that this is indeed a bull market is quite remarkable. For me, it crystalizes that whatever logic you bring to bear to your analysis of the markets, ultimately, you can not argue with the most powerful element: price action.

But what I’m curious about is how Russell has resolved the primary reason why he was so bearish: valuation. As he says on his site:

All other Dow Theory considerations are secondary to the value thesis. Therefore, price action, support lines, resistance, confirmations, divergence — all are of much less importance than value considerations, although critics of the Theory seem totally unaware of that fact.

I suspect that he still doesn’t feel that the market is “cheap” but has issued this buy signal because of the undeniable price action. We should remember that the Dow Theory is not perfect. It has given wrong signals before (which theory or method hasnt’?) but you can’t deny that it is yet another vote of confidence towards this market.

Finally, I wonder what this means for the gold market. While Russell has been bearish on the market, he has been staunchly bullish on gold. I wonder if this means that he has also changed his mind about that.

Things may get interesting with the Fed meeting tomorrow. Will we have another spike up? or will it be the end of the party?

via Mark Hulbert at MarketWatch.com