Here Comes The "Second Round Of Pain"

Here Comes The "Second Round Of Pain"
After The Rally Could Come A Vicious Collapse

By Richard Russell | 29 January 2010

Recent action in the markets has Richard Russell growing increasingly concerned about the future market performance. He is now warning investors of an impending "second round of pain".

I know of only one rule that always holds true for the stock market. The market will advance to a state of overvaluation and over-enthusiasm, and this will usually identify a top. The top is followed by a long road to a state of over-pessimism and undervaluation and this will identify a bottom. We call the extended and winding travels between these two— bull and bear markets. Most unusual is the investor who can stay invested for the full length of a bull market or the investor who will remain OUT for the full length of a bear market.

Why so? It's because of greed that investors won't stay out of a bear market. And it's because of fear that an investor won't stay in during the full length of a bull market. I've often likened the stock market to a living animal. It's an animal that is scheming and fighting to part us from our money. It's been said that never has anything invented by man been so frustrating to man as the stock market.

The remarkable thing about the stock market is that it contains the sum total of what everybody knows about absolutely everything. It's been said the "everybody knows more than any one person". And that's what I find so fascinating about the stock market. The combined wisdom of hundreds of millions of people are reflected in the action of the stock market every minute and hour of each session.

The trick is to interpret the action of the market and what the action is telling us. I've searched for 50 years trying to find that "pot of gold," and as far as I know, nobody has ever succeeded. It's the eternal mystery, it's the everlasting puzzle. The day that some genius fully understands and beats the market, that day the market will cease to exist.

I note that most analysts are now bullish, and that they are recommending stocks for the "continuing advance". At the same time, most economists are optimistic, arguing that the "longest recession since World War II has ended". Typical— last March everyone was bearish and the market was establishing a temporary bottom. Now that everyone is optimistic, the stock market is topping out and the public (the amateurs) are about to receive their second round of pain.

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After The Rally Could Come A Vicious Collapse

By Richard Russell, Dow Theory Letters: | 9 December 2009

As subscribers must know by now, I haven't liked the stock market. I can't tell with any certainty at this time, but this bear market rally could be in the process of topping out. If it is, I think we're in for a vicious collapse. Remember, rallies in a primary bear market are movements against the main force or tide of the market.

In other words, during a rally, the bear forces have been held back. When a bear market rally breaks up, the market tends to make up for lost time. That means the declines tend to be rapid, violent and vicious. As I said, I can't tell with certainty whether the advance from the March low is breathing its last. But if it is— watch out; it's not going to be pretty.

By the way, IF the advance from the March low is topping out, here are the implications. It would mean that all the Fed's machinations and efforts to halt the deflation have gone to waste. Furthermore, if the March lows are violated (and nobody believes they will be) we will probably be in the final and most costly and frightening leg of this bear market.