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Is the stock market in decline?

*Dow Theory Letters, by Richard Russell, June 21, 2012

”I thought Bernanke did well but was confused by the information given to him by his own Fed members.  The future, out to 2015, was reported to be dull and in serious question, according to the Fed’s members.  The Fed’s own economists did not appear optimistic about the US economy — the stock market sold off on the Bernanke talk.  It was obvious that the stock market wanted another round of QE3, rather than Operation Twist.

The Russell view — The Fed and all central banks are fighting the implacable forces of global deflation. This is really the primary bear trend that I’ve been writing about.  It’s the result of a fundamental change in the world markets.  Suddenly, within the space of a few years, Asia has entered the global economy.  The world is now producing far more goods (and more competitively) than ever before.  I think deep in his heart, Bernanke knows and understands this.  As a result, he does not want to use all the possible anti-deflation ammunition that the Fed can muster.  The reason — it is dawning on Bernanke that the Fed cannot defeat the powers of deflation and the primary bear trend.

The result is that the sinking economy is actually producing signals ahead of the Fed, and Bernanke knows it, but cannot talk about it – it’s too frightening.  Now Bernanke is playing for time.  He’s hoping that somehow, some way, the US economy will not get worse and that it might even improve slightly.

Bernanke is worrying about the Fed’s bulging balance sheet.  It’s so huge, how will he ever contract it?

In the meantime, the stock market is more puzzled than ever.  With uncertainty looming large, the market backs off.  It is giving up on QE3.  In the absence of QE3 the market does what it always does to protect itself, it backs off.

I’m writing this two hours after the opening, and the Dow is down 166 points.  It’s lost half its gains for the year, so far.

Note — In choppy and schizophrenic markets like this one, it’s very easy to lose track of the prevailing trend.  Remember, on October 9, 2007 the Dow was at 14,164.  On May 1, 2012 the Dow was at 13,279.  The Dow today is at 12,573.  How it got here from 14,164, is probably a mystery to most people.  Yet here we are, with the Dow down over 1500 points from its high.  This is one very subtle and deceptive bear market.  Don’t lose sight of the big picture.  A number of analysts are still insisting that we are in a bull market.  Are they checking their portfolios?  Remember, the bear will do anything it has to — to keep you in the market, happy, and hoping.”

*This information is solely a highlight of the opinion of a third-party publication and is incomplete.  Please subscribe to this publication for the full and timely opinion of the author and call a Monex Account Representative for any additional up-to-date information. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.

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