Richard Russell on the Markets

Barron's Confidence Index is the ratio of the yield of best-grade bonds to the yield on medium grade bonds. When the bond crowd gets worried, they move to the best-grade bonds and the CI declines. The latest CI is a shocking 68.0 down from 70..4 last week and down from 85 back in May.

You won't read this anywhere else but that 68.0 on the CI is the lowest CI since the terrible 1940s! Something is scaring hell out of the usually prescient bond crowd. What could it be?

Ah, here's a hint. An NYU export states that as of Sept. 15, 20% of all high-yield debt was in default and another 25% was in distress. That has led to a 9% overall loss for junk bond investments this year. The market for distressed debt totals $490 billion in face value and $279 billion in market value.

Let me put is this way -- the credit situation in the US is moving toward a state of "shambles." Do you wonder why many bank stocks are falling apart along with insurance company stocks?

By the way, the bond market (which is highly sophisticated) tends to lead the stock market. Back in the '60s we used to say that the Confidence Index leads the stock market by two to four months. If that holds true, watch out!

Just went through Barron's and aside from Alan Abelson's column and the statistics, the magazine proved to "out of it," or to put it another way, it proved to be "worthless." With the greatest bear market since the 1930s in force, Barron's front-page cover story is about "The New Fidelity." Pathetic. Bob Bleiberg (former great Barron's editor), where are you?

The S&P has been down for six consecutive months. The S&P has been down on six of the last six weeks.

You'd think the market was oversold. In fact, Lowry's reports that the spread between its Buying Power and Selling Pressure lines is huge (with Selling Pressure dominating). In fact, Lowry's states that current readings qualify as "one of the most oversold levels in the 70-year history of the Lowry Analysis."

Nevertheless, Lowry cautions that the "bottom" may not be here yet. What's missing? What's missing (and I've emphasized this in report after report) is the emergence of PANIC CONDITIONS. Almost every major market decline in history has ended up with something approximating panic. So far, there's been nothing suggesting panic on this current huge market decline.

The most accurate measure of a panic day is a 90% down-day in which downside volume is 90% of upside + downside volume and downside points are 90% of upside + downside points. We have had only one 90% downside day this year, that day occurring on September 3.

Are we going to see the usual series of 90% downside days despite current oversold conditions? Obviously I can't tell, but in my guts I feel the answer is "yes." There's something stupidly arrogant about this market. Day after day, week after week, month after month, we've seen this market decline. We've seen shocking collapses in individual stocks and stock groups. We've seen unemployment rise, we've seen corruption galore, we've seen bankruptcies a-plenty.

And yet an air of complacency seems to reign. It's truly incredible. I've written that the two most deadly phrases in this market are --

"This time it's different," and

"I'm holding for the long term."

Both phrases has so far led to disastrous losses for individuals and costly losses for funds. Investor's Business Daily's Mutual Fund Index (26 leading growth equity funds) as of Friday was down 32.7% for the year. And these are supposed to be the cream of professional managers. Most funds are not doing as well.

As of Friday, the blue chip Dow Industrial Average has lost 35.7% of its peak value. I've stated before that the Dow is now leading this market down, and in my opinion there's no more important leadership than the D-J Industrial Average.

My Primary Trend Index (PTI) recorded a low of 5209 on July 23. As of Friday, the PTI closed at 5212. If the PTI next week breaks below 5209, I believe we could see something nasty result. I've noted in the past that when the PTI breaks below an important previous low, "something seems to give" in the stock market. We'll see.

So the picture is of an oversold market that is on the way to breaking records. Will the current oversold condition be sufficient to set off another bear market rally? Of has the bear decided to "let it all out" and send the market down in a series of 90% down-days. I don't have the answer, but I do advise my subscribers to treat this huge bear market with utmost respect. And if you're still holding stocks "for the long term," this could prove to be one of the most expensive long-terms in history.

I'm amazed by the economists who continue to talk about the "coming economic recovery." And even more ridiculous, the talk about the "disconnect" between the economy and the stock market. There is no disconnect. This market is pointing the way AHEAD. What the market is discounting now, we'll see in the economy a month, three months, six months, even a year from now.

Economist who talk about the "disconnect" are simply showing their ignorance and inexperience regarding the stock market and its discounting ability. I'm afraid that many of them will learn their lesson the hard way -- via pink slips.

I've often said the Wall Street is the first to realize what's going on in both bull markets and bear markets. Wall Street knows because Wall Street benefits hugely from a bull market and its rising volume. And Wall Street gets hurt badly in a bear market as all the volume and all the goodies disappear. Along those lines, note the both Merrill and Morgan Stanley hit new lows last week.

On the tech front once-mighty Cisco closed under 10 last week for the first time in its history.

I continue to like AAA-rated bonds on the thesis that the Fed will bring rates down to 1% if they have to -- to fight the specter of deflation. I continue to like gold because it is the only financial assets that possesses intrinsic value. Gold is pure intrinsic value with no debt against it.

The world is sinking into deflation. Literally every stock market on the face of the globe is down substantially. As the recession moves on, nations will devalue their currencies in their effort to export. These competitive devaluations will ultimately be devaluations against the standard -- gold.

Foresighted investors understand this, and they will want to hold gold or gold shares as insurance against what I see as the ultimate decline of paper money. And if you own a gem-quality diamond ring, don't sell it. It's the next best thing to gold, in my opinion.

At Friday's close the S&P was selling at a still sky-high 29.98 times earnings while paying out a skimpy 1.98% in dividends.

The true (common stocks only) advance-decline ratio for last week was as follows -- Sept. 30 minus 4.54; Oct. 1 minus 4.21; Oct. 2 minus 4.63; Oct. 3 minus 4.78; Oct. 4 minus 5.32.

And that about does it. So be very, very careful, and when in doubt, be even more careful. This is an historic bear market, and it has a long way to go (aside from the periodic corrective rallies).