Richard Russell's Daily Notes

Richard Russell's Daily Notes

July 6, 2007 -- I've said that in basically strong markets, corrections can take the form of extended sideways movements. While the item under correction moves generally sideways, its moving averages move higher as they close the distance between the MAs and the item under correction.

I've posted three charts below, and the first two charts illustrate the sideways correction phenomenon. Chart number one is a line chart -- it's a monthly chart of gold connecting only the monthly closes of gold. The blue line is a 21-month moving average. Back in May 2006 gold hit a high of 728, although gold closed the month at 642.

This end-of-the-month chart shows a most interesting sideways pattern. Note that on a month-end basis, the correction that began in May 2006 has simply moved sideways. It may not have felt that way to you, but the chart doesn't lie. Gold at the end of June 2007 was just about where it was at the end of May 2006. Lots of action and frustrations, but really excellent action on the part of gold. In other words, we've seen gold correct for over a year, but on a month-end basis, the metal simply moved sideways.

This is important -- note that while gold was moving generally sideways, its 21-month moving average was constantly closing in on the price of gold. This is the essence of the sideways correction.



The next monthly chart traces the month-end action of HUI, the "gold-bug's" gold average, along with its 21-month MA. Here we see the same phenomenon as gold above, HUI is moving sideways while its 21-month MA rises, thereby closing and correcting the distance between the index and its MA. Again, considering HUI's previous major rise, I consider this sideway corrective action to be highly bullish. Important -- note that the monthly histograms are beginning to contract bullishly toward zero.



Now let's check out the end-of-the-month chart of the Dow. RSI tells us that the Dow is overbought, and note how far the Dow is above its 21-month MA. Of course, the Dow could correct by moving down toward its MA. But the other possibility is that the Dow could move generally sideways while its 21-month MA advances to close the distance between the Dow and its MA.

This is what I want to monitor in the period ahead. I would not be surprised to see the Dow do exactly that -- move sideways as its 21-month MA rises to close the distance.

Question -- Russell, what are the chances that the Dow could continue to advance, thereby widening the spread between the Dow and its MA?

Answer -- Ah, that's the big question. The Dow and the market are overbought as you can see at RSI. But we're now entering the third speculative phase of this bull market, and selling pressure remains low. So yes, the Dow could be part of an international bull market third phase -- and stocks around the world could run wild. We could be entering an "anything goes" phase of this bull market.



I want to draw attention to a stock that I have recommended many times. It's the world's largest mining company, BHP Billiton, an Australian giant with rumors of a possible takeover. BHP is in every area of mining from aluminum to uranium to gold to copper. The stock has recently taken off to the upside, and like so many other stocks it is now overbought. Note that BHP has broken out from a symmetrical triangle in a very powerful fashion. In this case the triangle was a continuation pattern, meaning that after a rise, the triangle formed an area of consolidation and correction. But the upside breakout was simply a violent continuation of the prevailing bull trend.

BHP may indeed head higher, but I'd hesitate to buy it at its current overbought state, although the stock is still one of my favorites.



Question -- Russell, I know that you're writing for over 10,000 subscribers and you have to be careful about what you say. But c'mon, drop the blasted caution -- pretend you're talking to a tight-mouthed friend, and it's off the record. Where do you really think we're heading?

Answer -- Off the record? OK, here goes. We're sort of insulated here in the US. The average American doesn't realize what's happening in Shanghai, in India, in Asia, in Australia, in Turkey. I believe we're moving into a worldwide, inflationary boom of unprecedented proportions.

Almost every central bank on the planet is now boosting its money supply.-- nobody wants an "expensive" currency. Commodity prices in general are booming. Oil prices are surging. Populations that never owned cars before are buying cars hand-over-fist. Airline orders are in backlog. Defense orders are surging. The luxury business is running wild. Housing prices the world over are heading north.

Stock markets here in the US have had a big move; they're overbought and have been resting. Yet, consider this -- the S&P hasn't even bettered its year 2000 record high. It will.

I'm watching gold, a gold breakout may be the trigger that lights up the US markets. Here's what I'm watching for. On my P&F chart a price of 670 on spot gold would be a big gold bull signal. On GLD, the gold ETF (again P&F) the bull signal will come at a price of 69.

HUI has turned bullish and it's upside P&F "count" is 420. GDX, the gold-share ETF will issue a bull signal at a price of 44.

Question -- Russell, why are you targeting gold and gold stocks as the trigger that will set off the boom?

Answer -- Gold has been held back for 14 months. Rising gold is something the public understands. It's a psychological phenomenon. When gold breaks out to new highs and heads north, it sets investors' hearts beating faster. It's something in the DNA of mankind. That's why I'm using gold and gold shares as a sort of "trigger." Long-time subscribers probably remember this one -- "There's no fever like gold fever."

TODAY'S MARKET ACTION -- My PTI was up 2 to 5920. Moving average was 5884, so my PTI remains bullish by 36 points.

The Dow was up 45.84 to 13611.68. No movers in the Dow today.

Aug. crude was up 1.00 to 72.81. Fears about Nigeria and its rebels. Nigeria is a huge source of oil for the US.

Transports were up 25.62 to 5231.29.

Utilities were down 1.63 to 505.16.

There were 1946 advances on the NYSE and 1275 declines. UP volume was 70.9% of up + down volume

There were 259 new highs and 53 new lows. My 5-day high-low differentials rose from yesterday's plus 635 to today's plus 779.

Total NYSE volume was 2.33 billion shares.

S&P was up 5.04 to 1530.44.

NASDAQ was up 9.86 to 2666.51.

My Big Money Breadth Index was down 2 to 802.

Dollar Index was down .09 to 81.43. Euro was up .22 to 136.21. Yen was down .36 to 81.04.

Bonds were lower. Yield on the 10 year T-note was 5.19%. Yield on the long T-bond was 5.28%. Yield on the 91 day T-bill was 4.79%.

CRB Commodity Index was up 2.24 to a new high of 416.07.

Aug. gold was up 4.20 to 654.80. July silver up 17 to 12.75. July platinum up 7.30 to 1311.10.

GDX up 1.28 to 40.53. HUI up 9.43 to 352.61.

ABX up .69, AEM up 1.16, GG up 71, NEM up 2.30 and PAAS up .83.

Gold shares leading the way higher. Good action for the universe of gold this week.

STOCKS -- My Most Active Stocks Index was up 7 to 614.

The five most active stocks on the NYSE today were -- MU up .65, F down .04, TGT up 3.89, GE down .06, TWX down .15.

Also on the most active 15 list -- NEM up 2.20, XOM up 1.30.

The VIX was down .20 to 14.72.

CONCLUSION -- A good week all around for the market. Dow closed only 28 points from its record high. Almost all the world's stock markets were higher and some like China, Taiwan, South Korea, Hong Kong are surging to new highs. Asia is literally on fire.

Oil stocks strong, but you can sense that the oil shares are wondering whether oil can continue to hold above 70. My bet is that it will. XOM, SU, COP, SUN -- I like 'em all.

I'll see you Monday, at which time we should go back to a "normal" week.

The Russell man.

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DENVER, July 5 /PRNewswire-FirstCall -- Newmont Mining Corporation today announced the elimination of its entire 1.85 million ounce gold hedge position, establishing the Company as the world's largest unhedged gold producer. Newmont also announced plans to monetize components of its royalty and equity portfolio in the next twelve months, resulting in the discontinuation of the Company's Merchant Banking Segment as a separate business unit.

Commenting on the Company's strategic initiatives, newly appointed Chief Executive Officer, Richard O'Brien, said, "With the elimination of our gold hedge book, we have renewed our commitment to maximizing gold price leverage for our shareholders. In addition, we are focused on delivering improvements in our operating performance and cost structure going forward. We intend to realize the value from a significant portion of our non-core, Merchant Banking portfolio and use the proceeds to fund the development and growth of our core gold business."

During June 2007, the Company spent $578 million to eliminate its entire 1.85 million ounce price-capped forward sales contracts. The Company will report a pre-tax loss of approximately $531 million on the early settlement of these contracts, after a $47 million reversal of previously recognized deferred revenue.

In addition, as a result of the Company's decision to discontinue its Merchant Banking Segment and monetize components of its equity and royalty portfolio, the carrying value of the Merchant Banking Segment goodwill was impaired as of June 30, 2007. Consequently, the Company expects to incur a non-cash impairment charge of approximately $1.7 billion, to be recorded as part of discontinued operations, in the second quarter of 2007. The Company has engaged financial and legal advisors to evaluate alternatives to maximize the realized value of the discontinued Merchant Banking portfolio. Potential alternatives include, among others, a public offering and/or private sale transactions.

Commenting on the Company's path forward, Mr. O'Brien said, "These transactions form the foundation of a renewed focus on our core gold business. Looking forward, we intend to maximize gold price leverage for our shareholders, establish a sustainable and reliable production base at competitive operating and capital costs, maintain our financial strength and flexibility, and capitalize on our exploration portfolio and land position."

Russell Comment -- Way to go, good deal!

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Dear Russell,

I respect & like your views and opinions, though of course I don't blindly follow every line I read. I am another student of the market and certainly learn a lot from your vast experience and insight.

This is the first time I am writing to you. It is with reference to something important you said in your remarks today (July 5th) about how the market is smarter than us all and how it discounts all the good & bad news already. With that logic, you say that it has already discounted the possibility of oil prices spiking up OR interest rates spiking up, etc.

What I don't understand is that if that were the case, then why does the market react violently by correcting down when interest rates spike up OR oil prices cross the $70 mark, etc. If the market has already discounted that real possibility, then it should not be reacting in any significant manner by moving down.

I would agree if you say that the market discounts every news that comes out, for example the monthly employment report, inflation figures, oil inventory figures, etc. But it doesn't know the future any more than you or me. For example, at this point nobody knows for sure if 10 year interest rates will say spike above 6% or even 7%. If that is true, then how can you say that the stock market has already discounted the worst potential in the housing situation or the subprime situation?
Your clarification/comments on this will be highly appreciated.
Thanks,
Narendra Mu

Russell reply -- The stock market is always adjusting and discounting news and situations. The old adage, "News known is news discounted" is true. In general, as I keep repeating, the news may or may not be significant, but from an investment standpoint it's the market's REACTION to the news that is important.

If the market likes the news, it may rally. If the market has fully discounted the news, it will probably do nothing. If the market dislikes the news, it may sell off. If the news is a complete surprise, the market will immediately adjust to the surprising news depending on whether the news is a positive or a negative for the market. As I said, the stock market is seldom surprised by the news -- surprises do occur, but they're rare.

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