Richard Russell (Dow Theory Letters): Characteristics of secondary reactions

Monday, May 25th, 2009

Richard Russell, author of Dow Theory Letters, offers wisdom on price movements, explaining the nature of upside moves, particularly, bear market rallies.

“The most difficult and puzzling study of the stock market is that which deals with secondary reactions against the primary trend. Because we’re in a bear market, I’m going to limit the following discussion to (upward) reactions in bear markets.

“Over the weekend I pulled out my volume of Robert Rhea’s ‘The Dow Theory’. I went over some of Rhea’s comments on secondary reaction in bear market.

“‘For the purpose of this discussion, a secondary reaction is considered to be an important advance in a bear market, usually lasting three weeks to as many months, during which interval the price movement generally retraces from 33% to 66% of the primary price change since the last preceding secondary reaction.

“‘Those who try to place exact limits on secondary reactions are doomed to failure, just as surely as would be the weather man who forecasted a snowfall of exactly three and one half inches within a specified time.

“‘In a bear market steady liquidation of securities by those who prefer or need cash reduces quotations day after day, with professionals, realizing there is more room on the bottom than on the top, hastening the decline with short sales. Eventually, the market is forced to a lower level than is warranted by conditions. The short interest is perhaps too extended, with wise traders sensing the fact the liquidation has, for the time, at least, run its course.

“‘Quiet, weak spots in bear markets are generally good ones to short, as they generally develop into serious declines.

“‘In a primary bear market the rallies are apt to be violent and erratic, and always occupy less time than the decline, which they partially recovery. Often the primary movement of several weeks is retracted in a few days.

“‘Rallies in a bear market are sharp, but experienced traders wisely put out their shorts again when the market becomes dull after a recovery.

“‘In bear markets, primary movement has an average duration of 95.6 days, whereas the secondary movement averages 66.5 days or 69.6% of the time consumed in the preceding primary movements.’

“All the above pertains to the price action during rallies in bear markets. But what about business conditions during bear market rallies? My studies show that bear market rallies are technical phenomenons which do not necessarily reflect on business. I’m looking at a chart of the great 1929 to 1930 rally which occurred after the 1929 crash. The Federal Reserve Index turned down in late-1929, and despite the great bear market rally, the Fed Index continued lower into early 1932.”

Source: Richard Russell, Dow Theory Letters, May 18, 2009.

Hat tip: Investment Postcards

Tags: Bear Market, Bear Markets, Decline, Declines, Dow Theory Letters, Exact Limits, Failure, Few Days, Interval, Liquidation, Market Rallies, Nature, Quotations, Rallies, Richard Russell Dow Theory, Robert Rhea, Short Interest, Snowfall, Stock Market, Weather Man, wisdom
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BRICs, Canada Showing Relative Strength

Monday, May 25th, 2009

It appears that the countries with either the healthiest banking and financial systems, or strongest economic growth fundamentals, or large commodity complexes, or or all of the above, are enjoying a stronger recovery in equity markets than those with significant exposure to the current financial crisis that sank the G7 economies.

It looks as though global investors are focused on Canada as the standout from G7, with its strong financial system and significant commodity complex, despite its trade exposure to a crippled US consumer, and the BRICs with their strong consumer/producer pairings. All of the BRICs have sound fiscal positions, substantial forex reserves, many years of current accounts coverage, little or no direct exposure to the West’s financial and credit crisis, and billions of underlevered consumers. There seems to also be a recognition of the comparative underindebtedness of emerging markets’ companies and their resilient domestic consumption supports.

“With global equity markets still in rally mode, below we highlight
the year to date performance of the major indices for 83 countries
around the world. After nearly every country was down earlier in the
year, 62 out of the 83 are now up in 2009.

“Peru is up the most at 72.92%, while Costa Rica is down the most at
-39.94%. And the BRIC (Brazil, Russia, India, China) countries are
significantly outperforming the developed G-7 countries. Russia, India,
and China rank 2nd, 3rd, and 4th in terms of year to date performance,
and Brazil isn’t far behind in 10th place.

“Canada has been the best performing G-7 country with a gain of
12.62% in 2009, but it ranks 35th out of 83. The rest of the G-7
countries are bunched up in the 0%-5% range, which is closer to the
bottom of the list than the top. And the US is the worst of the seven
with gains of less than 1%. While the markets here in the US have
rallied nicely off of their March lows, most other countries have
bounced back even more 2009.”

Source: Bespoke, May 19, 2009.

Tags: Banking And Financial Systems, Bottom Of The List, BRIC, Bric Brazil, BRICs, Canada, Countries Around The World, Credit Crisis, Current Accounts, Domestic Consumption, Emerging Markets, Fiscal Positions, Forex Reserves, Global Equity Markets, Global Investors, India, India China, Lows, Major Indices, Place Canada, Rally Mode, Relative Strength, Standout, Year 62
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