Dow Theory forecasts a Wall Street Crash

Richard Russell, the famous author of the Dow Theory Letters, has joined the growing band of leading forecasters expecting a stock market crash: Robert Prechter (click here), Harry S. Dent (click here), Gerald Celente (click here) and Bill Bonner (click here).

ArabianMoney has been beating this drum since last August as the US economic recovery seems nothing like enough to justify current stock market levels and the outlook is a W-shaped or double dip recession, or more likely something shaped like a lightening bolt.

Misleading analysis

Just look at the US housing data that is trumpeted as a recovery in starts this week. Building permits actually fell by double digits on an annualized basis. Consumer spending is still weak. US auto sales are held up by China whose economy is also now turning down. US unemployment rose from 9.7 to 9.9 per cent last month.

But consider what Richard Russell has to say, and we see no point in editorializing this any further:

Tell them to ‘batten down the hatches’ because there’s a HARD RAIN coming. Tell them to get out of debt and sell anything they can sell (and don’t need) in order to get liquid. Tell them that Richard Russell says that by the end of this year they won’t recognize the country. They’ll retort, ‘How the dickens does Russell know — who told him?’ Tell them the stock market told him.

And I ask myself, ‘Am I seeing things?’ The April 26 high for the Dow was 11205.03. The Dow is selling as write at 10557 down 648 points from its April high. If business is even better than expected, then why is the Dow down over 600 points? And why, if there were 674 new highs on the NYSE on April 26, were there only 20 new highs on Friday, May 14? And if my PTI was 6133 on April 26, why is it down 17 points since its April high?

The fact is that I’ve been seeing deterioration in the stock market ever since early-April, and this in the face of improving business news. The D-J Industrial Average is composed of 30 internationally known top-quality blue-chip stocks. These are 30 of America’s biggest companies. If Barron’s is so bullish on the future of America’s biggest companies, then why isn’t the Dow advancing to new highs?

Clearly something is wrong. But what could it be? Much as I love Barron’s, I trust the stock market more. If I read the stock market correctly, it’s telling me that there is a surprise ahead. And that surprise will be a reversal to the downside for the economy, plus a collection of other troubles ahead.

About Dow Theory — First, we saw the recent April highs in the Averages. Then we saw a plunge in both Averages to their May 7 lows — Industrials to 10380.43, Transports to 4298.12, next a short rally. If ahead, the two Averages turn down and violate their May 7 lows, that would be the clincher. Such action would signal the certain resumption of the primary bear market.

Just as for years I asked, cajoled, insisted, threatened, demanded, that my subscribers buy gold, I am now insisting, demanding, begging my subscribers to get OUT of stocks (including C and BYD, but not including golds) and get into cash or gold (bullion if possible). If the two Averages violate their May 7 lows, I see a major crash as the outcome. Pul – leeze, get out of stocks now, and I don’t give a damn whether you have paper losses or paper profits!

Conclusion

Sell, sell, sell! The German ban on short selling late last night is just the kind of market disruption likely to send the Dow below the key support levels outlined by Dow Theory, and in that case we really are very close to the edge of the precipice now.