Richard Russell's Dow Theory: Is It Still Valid?

Richard Russell’s Dow Theory Signals

Updated March 2023

We still lean toward the argument that there is a better alternative than the Dow Theory; in fact, we think the Dow Theory is somewhat irrelevant today. Regarding the second question we briefly addressed above, and as stated, while the Crowd is not as nervous as it was back in October and early November, the masses are not euphoric. Current sentiment data seems to confirm this outlook. However, the main reason the markets will not crash is that the trend is still up until the trend changes direction; all sharp pullbacks should be seen through a bullish lens.

Alternative Dow Theory vs Richard Russell’s Dow Theory

As we alluded to in the alternative Dow Theory article, the Dow utilities lead the way up and or down.

It looks like the Utilities are coiling up to break out again. This suggests that the Dow industrials will follow in their footsteps. If you look at the utilities, you will see that, in general, it tends to lead the way up and down and is a better barometer of what to expect from the markets than the Dow transports. The utilities are coming out of a correction, so the Dow is likely to experience a correction sometime in the 1^st part of next year before rallying higher. The correction should fall in the 5-10% range. We use the utilities as a secondary indicator. Our primary indicator is the trend; as the trend is up, we would view substantial pullbacks as a buying opportunity.

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Richard Russell Dow Theory: Sell Signal Not Valid?

The masses are still very nervous, and no bull market has ever ended on a negative note, therefore, the most likely path for the market is to trend higher instead of dropping.

The last time we put this data out publicly, the anxiety index was trading close to the Hysteria zone. Granted, it has advanced quite a bit since then, but the gauge is still far from the calm or euphoric zone. The masses have still not embraced this market, and until they do, sharp pullbacks need to be treated as bullish developments.

The number of individuals in the bullish camp has risen compared to the early November and October data, but the combined score of people in the neutral and bearish camps is still higher than those that are bullish. We would only start to get nervous when the number of bulls surges past the 60% mark; until then, the path of least resistance is up. Individuals in the neutral camp are bulls with no cajones or bears with no teeth, and they are just waiting for the perfect moment to take another beating.

Markets rally when Market Sentiment is negative and vice versa.

Yes, this bull market will experience a back-breaking correction one day, but that day is still not upon us. No bull market has ever ended without the masses jumping in; in other words, the masses need to turn euphoric. Some of the most famous and foolish naysayers out there love to use the term “the truth hurts” when talking about the markets. Does the truth hurt; is the truth not supposed to liberate you or set you free?

The most egregious of these naysayers will hide behind such names and come out with fantastic proclamations that make no sense whatsoever and sound more like the ravings of a lunatic. Instead of reacting to such individuals in a negative manner, think of them as the best contrarian indicator out there. This is valuable data for one day, these fools will embrace this market, and when they do, you will know the end is near. Disqus is a good source if you are looking for individuals of such a calibre. When experts start to panic, one should do the opposite and buy.

The Dow utilities are getting ready to break out, and as they lead the way up, it is likely that the Dow will continue to follow in its footsteps. Like the Utilities, the Dow is likely to experience a correction before trending significantly higher, and this is most liable to occur in the 1^st quarter of next year.

The Trend is Bullish: Embrace Strong Pullbacks

The trend (as per our trend indicator) is still bullish and shows no signs of weakening. Until it changes direction, the market is not likely to crash. We can already tell you what will happen when the markets start to pull back. They will sing the same song, something we had already described in past articles when we discussed Brexit, the possibility of a Trump win, etc. The naysayers will rush out again, proclaiming that all hell will break loose.

They are not students of history and refuse to learn from it; instead, they seem almost to take masochistic pride in repeating the same mistakes repeatedly in the hopes that they will be correct. One day they will be right, but anyone who had listened to them would have been bankrupted several times by then.

As the markets drop, the Dr’s of Doom will scream louder and louder; momentarily, these guys will appear to have finally struck Gold. Then the brief period of joy will vanish, and their songs will turn into pain as the market suddenly puts in a bottom and rallies upwards. Like cockroaches, they will disappear in the woodwork, waiting for the next moment to sing the same miserable tune of gloom. Don’t fall for this rubbish; even rubbish has some value; it can be used as compost. Don’t fall into the stock market crash hysteria; expect an extreme Trump Rally.