Russell Reluctant Bull

Peter Brimelow, who covers newsletters for MarketWatch, writes today about two letters that foresaw the 2008 panic -- and are not bullish now. Interesting stuff, but later in the piece he moves on to Richard Russell, who has been penning Dow Theory Letters since the late 1950s:

"OK, today I got three important bull signals, the great tide of the stock market has turned to bullish on the three counts I've been waiting for. The Dow closed at 10733.70 -- at last above the critical 10725 level. This is a new high for the Dow, and it means that the Dow has finally confirmed the new high for the move on the part of the Transports. A Dow Theory bull signal -- the primary trend of the market is bullish. At the same time, the great arm of the Dow has swung back above the 50% level. The Dow is now back in the bull zone above 10725. At the same time there were 627 new 52-week highs on the NYSE, a new high-total and well above the 523 new highs of January 11....An all-round historic day."

But Russell adds: "What am I personally going to do about it? Honestly, nothing. Stocks are generally overvalued in this area."

His reasoning: "Actually, the market is priced to produce losses over the years, particularly if you factor in inflation, commissions, dangerously low dividends and rising taxes."

I find Dow Theory intriguing, but don't employ it in my investing decisions. But I have enormous respect for Richard Russell and always find his comments time well spent.

I, too, think the market overall is overvalued. That's one reason I haven't been doing much lately. Since the New Year I bought a special situation -- Geeknet (LNUX). And I took the plunge and established four gold mining stock plays -- Newmont Mining (NEW), Goldcorp (GG), Agnico-Eagle Mines (AEM) and the Market Vectors Gold Mining ETF (GDX). In a way, they are special situations as well, since I view gold miners as the next beneficiaries of the gold bull market.

Of course, if I'm wrong about the gold bull I'll end up with egg on my face. Lots of it. Yet as I type this I feel really good about my gold stake (remember I also hold the SPDR Gold ETF -- symbol GLD -- that is the single largest position in my portfolio).

For now, I'm not selling my other stocks. One reason is because the portfolio is long-term money -- truly long term -- that I won't be touching anytime soon.

Comments

[armin sternberg]

re dow theory forcasts, its sounds like "russell" is turning his back on his years of experience with the dow theory saying but this time its different. Ive seen this before and I m sticking with the dow theory,.

With regard to your gold stocks, if you like gold I dont know why you wouldnt love silver, its as rare as gold and has more industrial use at least at present.

[Philbert]

I know you don't take requests on reviewing individual stocks, but I was wondering if you might do a post on your philosophy regarding when to sell a stock.

I recently sold enough of a position (FTP on the TSE) to get my original investment plus a bit out and then I'm letting the rest ride. The stock has increased from $7 when I bought it to $19.50 when I sold it today. It's a great company with great prospects, but I wanted to have some cash lying around for opportunities and i wanted to get my original investment back. Though I may kick myself later when it doubles from where it is now.

[John]

@armin: I've thought about silver, and even platinum. Right now I've got around 30% of the portfolio in gold and gold miners, which may be too much. We'll see what happens.

@Philbert: Wish I had a set philosophy! My only hard-and-fast rule is that I'll sell half a position once it doubles in price -- that way I get my original capital back and it becomes a free ride. Two examples for me are Fairfax and DTV. I think you did a smart thing with FTP.