As Dow Theorists, it is required that we read the information that is put out by Richard Russell. So it perturbed us to find that there has been nary a peep on Russell’s site about Dow Theory based on the recent movement of the Dow Jones Industrial Average and the Dow Jones Transportation Average. As noted on our site today, Dow Theory has given a reiteration of the bullish trend that has been in place since the July 2009 bull market confirmation.
In the last two days we have feverently scoured Russell’s website for any confirmation of our perspective on Dow Theory. We’ve found nothing. Even more alarming is the vague reference to Dow Theory as it pertains to value. This reference in passing was circumspect at best and puts into question any attempt to demonstrate any understanding of the topic. On November 3, 2010, Richard Russell said:
“My own opinion regarding the markets is that the test of values trumps all other considerations.”
Russell goes on to conclude that based on historical values of the market, stocks and bonds are in a bubble. After concluding that stocks and bonds are in a bubble, Russell says that he doesn’t want his subscribers to buy stocks or bonds. Finally, in his November 3, 2010 posting, Russell laments the period of 1997 to 1999 and states, to our disbelief:
“Who were those geniuses who piled into AMZN [Amazon.com] when it was selling for under five clams?”
Along with the preceding quote, Russell included only a chart of Amazon.com (AMZN) and a description on how much he buys almost everything from the Amazon.com.
We’re not so sure that Russell was pining for Amazon.com (AMZN) back in July 1, 1998 when Amazon.com was selling for $19.02 [adjusted for splits]. At that time, in his letter published on the same date, Russell said:
“Bookseller Amazon.com is priced at over 81 [ $81 unadjusted/$19.02 adjusted] now, but it won’t be making a nickel of profit for at least two years.”
There was no indication that Amazon.com (AMZN) was at a value at the time.
On November 4, 2010, Russell ties the concept of Dow Theory to values. This was the first reference to Dow Theory after the bull market confirmation on November 3rd. In this excerpt, Russell gives an idea as to what exactly he looks for to determine values, namely dividend yield and P/E ratios. Then Russell goes on to say:
“In the business of investing, money is made in the buying (see Amazon study on yesterday’s site). Buy right and you’ll end up with profits. Buy wrong, and you’ll end up with tears.”
We were perplexed that Russell would connect Amazon.com (AMZN) with buying values at a time when, back in 1998, there were no dividends to generate a dividend yield and no earnings to generate a P/E ratio. This attempt to demonstrate the importance of values was further distorted when Russell starts discussing buying gold in the November 4th article. Russell said:
“Buy gold at the highs, buy gold on a correction, buy gold when its in a confusing consolidation, and within five years you’ll thank the day when you bought it.”
To say “Buy gold at the highs…” counters all the efforts to educate investors on the importance of values. In addition, there was no reference to the fact that Dow Theory had giving a bull market confirmation. It is troubling that Russell further tarnishes his reputation as a keen observer of markets [regardless of being right or wrong] by not addressing the validity of the signal on a theory that is the title of the newsletter.
Although we generally agree with Russell’s perspective on gold, for different reasons, we hope his subscribers aren’t being led astray by his blatant contradictions simply because he is bullish on gold at a time that the gold market happens to be moving higher.
Sources:
- Russell, Richard, Dow Theory Letters, (San Diego, California), July 1, 1998, page 6. Letter 1255. http://www.dowtheoryletters.com/
- Russell, Richard, Dow Theory Letters, (San Diego, California), March 2, 2005, page 6. Letter 1384. http://www.dowtheoryletters.com/
- Russell, Richard, Dow Theory Letters, (San Diego, California), November 4, 2010, Daily Commentary. http://www.dowtheoryletters.com/
- Russell, Richard, Dow Theory Letters, (San Diego, California), November 3, 2010, Daily Commentary. http://www.dowtheoryletters.com/
Disclosure: Disclosure: Long gold and junk silver