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Richard Russell continues:
“We're now dealing with October, which historically is both a down month and a bottoming month. As for my position, I continue to believe that the primary trend of the market turned bearish in 2007, and that it is still bearish (although the bear trend has been suspended for awhile due to the Fed's actions).
The VIX, often called the ‘fear index,’ is a forward looking metric (it's actually a measure of the implied volatility of the S&P index over the coming 30 days). The VIX in recent months has been fluctuating in a very low area below 20 (see chart below). Back in June the VIX jumped up to 26.66, then settled back to its low range.
In past history, extended periods of very low volatility have been followed by major upward thrusts in the VIX. The cycles in the VIX tend to be repetitive. Following the recent bouts of extremely low volatility, a period of super-high volatility may be anticipated.
It's been a year since we've seen high numbers in the VIX. Super-high volatility is often accompanied by a collapse in the Dow. Thus, a forthcoming period of a very high VIX (maybe as high as 80) may next be expected. An upward spike in the VIX is usually accompanied by a downward plunge in the Dow.
Back in the 1960s, analysts couldn't wait for the next posting of Barron's so-called Confidence Index (CI). Since then the CI has been largely forgotten. The CI is computed by dividing the yield of the highest-quality bonds by the yield on the medium quality bonds.
When bond traders are worried, they move to the highest quality bonds, in which case the CI declines. When bond traders feel confident they move to the higher yields of the medium quality bonds -- in which case the CI advances. Bond people tend to be more knowledgeable about business and economics than the stock crowd. The CI has a reputation of moving weeks or even months ahead of significant moves in the stock market.
I've followed the moves of the CI for years. Therefore, I was interested to see the CI drop from 66.3 last week to 64.9 this week. One year ago the CI was 70.3. All of which means that bond traders are turning increasingly cautious. In the past, when bond traders turned cautious, it was not a good omen for the stock market.
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A third reason for caution is the fact that Lowry's Selling Pressure Index is now 170 points above their Buying Power Index. When Selling Pressure clearly dominates as now, the market is on potentially thin ice. It takes volume to push stocks up, but with a lack of volume stocks can fall off their own weight.
Thus, I consider the current area of low volume to be bearish for stocks. In fact, any increase in volume seems to be associated in this area with lower prices. Thus, the abundance of distribution days (i.e. days in which the market declines on increasing volume).
Below, gold breaks upward from a nine day consolidation. The next target is for gold to rally into the 1800s. Gold is climbing (RSI) into the overbought zone, but the position of the moving averages has turned bullish.
When everything else is crushed by unsustainable debt, gold (‘the last man standing’) will still represent eternal wealth. When everything else is crushed by compounding debt, a new monetary system will have to be devised. Gold will be a part of any new monetary system.
Investment advice. Sit with your gold coins and your GLD, and be out of common shares.”
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© 2012 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. However, linking directly to the blog page is permitted and encouraged.
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Eric King
Richard Russell - October Stock Plunge, Gold & The Fear Index
The Godfather of newsletter writers, Richard Russell, had a great deal to say about gold, the ‘fear index,’ stocks in October, bonds, and what subscribers should be doing right now. Here is what Russell had to say in his latest report: “The last two weeks saw four distribution days in both the S&P 500 and the NYSE Composite, and three distribution days in the NASDAQ. A distribution day is reported when the market declines on increasing volume. Distribution days are deemed days when institution are selling. Four or five distribution days falling within a two week period are usually enough to send the trend of the market lower.”
© 2012 by King World News®. All Rights Reserved. This material may not be published, broadcast,
rewritten, or redistributed. However, linking directly to the blog page is permitted and encouraged.
October 3, 2012
