Dow Theory's Richard Russell: Sell Sell Sell!

and batten down the hatches!

Business Insider reports that Richard Russell, famous for his Dow Theory Letters, issued an extremely dire warning to his subscribers:

Dow Theorist Richard Russell: Sell Everything Liquid, You Won't Recognize America By The End Of The Year (Joe Weisenthal, 5/18/2010 Business Insider)

"Richard Russell, the famous writer of the Dow Theory Letters, has a chilling line in today's note:

Do your friends a favor. 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.

Update: By popular demand, here's more on what he sees in the market. The gist is that the markets recent gyrations are telling him that the economy is in trouble:

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!"

Dire warning, indeed. But I have one problem.

Richard Russell clearly thinks this is still a stock market of old, more or less, which is a price-finding mechanism. After what happened on May 6, more and more people have realized that it is no such thing; it is a playground for high-frequency algo bots.

Those bots may or may not be reacting to the real world, but when they seems to be doing so they tend to run to the same side all at once (thus the 'flash crash', as May 6 event is now called). When they are not reacting to the real world, they tend to run to the same side all at once, anyway. And these high-frequency trading firms who account for as much as 70% of daily volume at stock exchanges are paid by the exchanges for putting in a trade.

That kind of reminds me of a website that gives reviews on shops and restaurants, and those shops and restaurants will get favorable reviews or have negative reviews moved down if they advertise on the site.

Just as that site is not an independent, peer review site, this stock market is not a market where information about the companies, the economy, new government regulations, etc. gets priced.

The stock market started ramping up in March 2009 and kept on going nearly a year, while the real economy continued to struggle and the unemployment remained (still remains) high. Russell could point that out and say the market is forward-looking.

I'd say the stock market is not looking anywhere in particular. If anything, it is reactive. What is it reacting to? I'd say the credit market and the foreign exchange market. The stock market by itself doesn't mean much in the age of algo bots.

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