When fundamental Indicators Break Down, Price Still Leads

 

The LEI and yield curve missed the mark. Price action and margin debt told the real story, and we listened

 

 For decades, investors leaned heavily on two stalwart indicators: the yield curve and the Leading Economic Index (LEI). These tools had an almost mythic reputation for signaling recessions and bear markets.

However, as Jim Paulsen recently pointed out in his piece “Broken Relationships,” both once-reliable guides have lost their mojo.

The LEI, a composite of ten economic indicators, including the yield curve and consumer sentiment, has historically done a remarkable job warning of recessions and, by extension, bear markets. Whenever LEI momentum turned negative, stocks usually followed suit. That pattern held for over 60 years.

Until it didn’t.

As Paulsen notes, the LEI correctly signaled the 2022 bear market. But then something broke. While the S&P 500 bottomed in October 2022 and entered a new bull market, the LEI continued to decline, as shown in the chart below.

That’s unprecedented. The result? Many investors missed out, trapped in recessionary narratives despite clear upward price action.

The other broken relationship Paulsen highlights is bond vigilantism. For years, market watchers feared that rising government deficits would push bond yields higher. That relationship, too, has unraveled. Since the mid-1990s, higher deficits have often been accompanied by lower real bond yields. The vigilantes, if they ever existed, are now ghosts, although I suspect they are about to make a comeback.

As with the LEI, we did not fall prey to the ominous message displayed by a persistent inverted yield curve that lasted more than one year and accompanied the birth of the October 2022 bull market.

What does this mean for us?

It means we must respect history, but we should never become enslaved to it.

At TheDowTheory.com, we’ve monitored the LEI and yield curve throughout 2022, 2023, and 2024. We acknowledged their warnings, but we didn’t fall prey to them. We followed the trend. We followed price action. And it paid off.

Our equity curve says it all:

Here’s the simple truth: price action trumps everything.

If the market is in a bull phase, you act accordingly. You don’t wait for every economic signal to align.

You invest first and ask questions later. That’s not recklessness, that’s responsiveness.

Another indicator we’ve placed consistent trust in and which continues to deliver is margin debt. Unlike surveys or lagging macro data, margin debt reflects real conviction. When investors borrow to increase exposure, it signals bullish sentiment backed by capital. And margin debt trends—especially when rising in tandem with the market—are rarely wrong. Margin investors tend to be more sophisticated, and their actions offer insight that many overlook.

Subscribers to TheDowTheory.com have seen this in real-time. While others fretted over broken indicators, we tracked margin debt trends, watched price action, and remained focused. The result? We did not miss the Bull market that started in October 2022, nor did we miss the one that began on April 8th, 2025.

This is not to say we ignore classic indicators. We keep them on the radar. But when push comes to shove, the final arbiter is the market itself. Fundamentally-based indicators come and go. Narratives break. However, price action is always right.

Sincerely,

Manuel Blay

Editor of thedowtheory.com

 

Two new interviews with Alessio Rastani on Youtube

 

Once again, I was invited by Alessio Rastani to join him in two new videos.

Since I was in my 80% work, 20% vacation mission across Europe, I was not fully equipped, so we had to do an “unplugged” performance. No fancy mic, nor headphones or hi-end speakers on my end. Just my reliable laptop, and the Real Madrid F.C. t-shirt I was wearing at the moment.

We recorded both videos on July 4th.

In the first video, we said that a pullback was looming on the near-term horizon, and I explained why. Spot on!

I also explained that I remain long-term bullish.

https://www.youtube.com/watch?v=qPMQ6SX4BMo&t=786s

 

 

The second video focuses on Bitcoin and the influence of Ethereum in generating signals for Bitcoin. The principle of confirmation works.

https://www.youtube.com/watch?v=GGsp6VNkT_g

 

 Sincerely,

Manuel Blay

Editor of thedowtheory.com

 

 

The Real Problem with Buy & Hold—and What to Do About It

 

Three Smarter Ways to Cut Drawdowns Without Killing Performance

The core issue with buy-and-hold investing is simple: drawdowns. Big ones. They may be inevitable, but that doesn’t make them any less damaging—both financially and psychologically.

To address this, many investors turn to buffered ETFs, hedging with puts, or going short. But there’s a catch: these protective strategies come at a steep price. They can sap performance, require precise execution, and often fail to provide consistent results when you need them most. In short, they cost money—and they typically dilute returns.

Another response is to do… nothing. Just “weather the storm.” After all, markets always recover—right? That’s the theory. But in practice, this approach falters for two big reasons:

1. Most investors drastically overestimate their tolerance for drawdowns. It’s easy to say, “I can handle a 50% drawdown”—until it actually happens. In real life, drawdowns don’t just hurt portfolios—they wreck confidence and cause people to bail out at the worst possible moment.
2. The U.S. market is the exception, not the rule. Historically, the S&P 500 has shown an incredible ability to bounce back from deep losses and hit new highs. But many global markets haven’t. European indices, for example, have gone decades without recovering prior peaks. And who’s to say the U.S. will remain exceptional forever?

So what are investors left with?

You can either:
✅ Weather the storm and risk getting crushed by a massive drawdown,
or
✅ Hedge and accept the long-term performance drag that comes with it.

Neither option is ideal.

That’s why I believe in a third path—one that sidesteps both the psychological toll of deep drawdowns and the performance drag of costly hedging. It’s built on three key pillars:

🔹 Market Timing

When properly executed, market timing is one of the very few strategies that can reduce drawdowns without incurring the costs of hedging—and often with the added benefit of outperformance. While it’s often dismissed, the reality is that trend-following and timing approaches, when grounded in data, are both cost-efficient and effective. My Composite Timing Indicator is a key example of such an approach.

The chart belows show the outperformance and marked drawdown reduction of the Composite:

🔹 Sector Rotation

By dynamically shifting exposure across asset classes or market sectors, investors can sidestep underperforming areas and adapt to changing macro conditions. It adds another layer of diversification that helps absorb shocks without relying on expensive hedges. My Dow Theory + High Relative Strength strategy harnesses this principle by combining market timing with exposure to leading sectors.

🔹 Quantitative Stock Selection

Finally, stock picking doesn’t have to be guesswork. Using a quantitative approach to select stocks with a proven statistical edge enhances the overall resilience and return potential of the portfolio—especially when combined with timing and sector rotation. Portfolio 123 is the tool to build a systematic stock selection process that filters out obvious “lemons” and tilts toward winners.

This is an example of what can be achieved with a good stock picking strategy:

No strategy is perfect, but combining these three elements can provide a robust framework to reduce drawdowns, sidestep prolonged underperformance, and—most importantly—keep you in the game.

Because the real risk isn’t just losing money.
It’s losing the discipline to stay invested when it matters most.

Sincerely,

Manuel Blay

Editor of thedowtheory.com

Bull market for the gold and silver miners ETFs (GDX & SIL) signaled on 6/2/25

 

Overview: The precious metals landscape has turned very bullish. Gold, silver, platinum, and even base metals like copper are trending strongly upward. GDX and SIL are no exception to this new trend.

General Remarks:

In this post, I provide an in-depth explanation of the rationale behind employing two alternative definitions to evaluate secondary reactions.

SIL refers to the Silver Miners ETF. More information about SIL can be found HERE.

GDX refers to the Gold Miners ETF. More information about GDX can be found HERE.

A) Market situation if one appraises secondary reactions not bound by the three weeks and 1/3 retracement dogma.  

As I explained in this post, the trend was signaled as bearish on 12/18/24.

In a clear case of whipsaw, no sooner had the bear signal been triggered than GDX and SIL staged strong rallies, breaking above their previous bull market highs (5/9/25 for SIL at 42.57 and 4/16/25 at 51.91 for GDX). This confirmed breakout occurred on 6/2/25 and shifted the trend to bullish.

The chart below displays the most recent price action. The brown rectangles show the last secondary reaction. The blue rectangles display the rally that set up both ETFs for a primary bear market signal. The red horizontal lines highlight the secondary reaction lows, whose breakdown signaled the end of a primary bear market, and the blue horizontal lines indicate the last recorded primary bull market highs, whose breakup signaled a new primary bull market. The grey rectangles show a bounce that did not meet the time requirement to qualify as a secondary reaction.

So, the primary and secondary trends are bullish.

B) Market situation if one sticks to the traditional interpretation demanding more than three weeks and 1/3 confirmed retracement to declare a secondary reaction.

As I explained in this post, the primary trend was signaled bullish on 3/13/25.

The most recent current drop did not last at least 15 trading days on both ETFs, so there was no secondary reaction, and hence, no change of trend.

Higher confirmed highs have reconfirmed the primary bull market.

Therefore, the primary and secondary trends remain bullish.

Recent price action underscores the importance of analyzing the trend using two alternative time frames. The shorter-term time frame was whipsawed, while the longer-term time frame remained bullish throughout.

Sincerely,

Manuel Blay

Editor of thedowtheory.com

 

 

Gold and Silver in Sync: The Bull Marches On

 

Silver Seals the Deal: Bull Market Reconfirmed 

Overview: On 6/5/25, silver broke above its 10/22/24 highs. It confirmed gold’s previous breakup on 1/30/25. Accordingly, the primary bull market has been confirmed.

By the way, the recent price action of SLV and GLD offers a powerful reminder of how the principle of confirmation can protect you from costly mistakes. If we had focused on SLV alone, we might have been fooled into thinking a new bear market was underway—it was just a fakeout. This post (and the links within) walks you through several real-world examples showing how confirmation helps filter out false signals and adds real value to your trading decisions.

General Remarks:

In this post, I extensively elaborate on the rationale behind employing two alternative definitions to evaluate secondary reactions.

GLD refers to the SPDR® Gold Shares (NYSEArca: GLD®). More information about GLD can be found HERE.

SLV refers to the iShares SLVver Trust (NYSEArca: SLV®). More information about SLV can be found HERE

A) Market situation if one appraises secondary reactions not bound by the three weeks and 1/3 retracement dogma.  

As I explained in this post, the primary trend was signaled as bullish on 4/3/24.

Following the 10/22/24 (SLV) and 10/30/24 (GLD) highs (Step #1 in the table below), there was a pullback until 11/15/24 (Step #2). Such a pullback meets the time and extent requirement for a secondary (bearish) reaction against the still-existing primary bull market. You may find a more in-depth explanation here.

A two-day bounce followed in SLV until 11/19/24, and in GLD until 11/22/24 (Step #3). This bounce met the time (≥2 confirmed days) and extent requirements to set up both precious metals for a potential primary bear market signal.

On 11/27/24, SLV pierced its 11/14/24 lows—unconfirmed by GLD (Step #4). The lack of confirmation meant that no primary bear market was signaled.

The table below displays the price action:

 

On 1/30/25, GLD surpassed its 10/30/24 highs, unconfirmed by SLV. This lack of confirmation meant that the bull market had not yet been reconfirmed, and the setup for a potential bear market signal remained in force. On 6/5/25, SLV finally surpassed its 10/22/24 highs, confirming GLD’s breakout.

Therefore, the current situation is as follows:
a) The primary bull market has been reconfirmed.
b) The setup for a potential bear market has been canceled.
c) The secondary (bearish) reaction against the bull market has been terminated.

The chart below highlights the price action.

• The brown rectangles show the secondary reaction against the bull market.
• The blue rectangles indicate the bounce that set up GLD and SLV for a potential primary bear market signal.
• The red horizontal lines highlight the secondary reaction lows whose confirmed breakdown would have signaled a new bear market.
• The blue horizontal lines underline the bull market highs, whose breakout confirms the ongoing bull market.

So, the primary and secondary trends are now bullish.

B) Market situation if one sticks to the traditional interpretation demanding more than three weeks and 1/3 confirmed retracement to declare a secondary reaction.

I explained in this post that the primary trend was signaled as bullish on 4/2/24.

The current pullback did not reach 15 confirmed days by both ETFs, so there is no secondary reaction against the bull market.

So, the primary and secondary trends are bullish under the “slower” appraisal of the Dow Theory.

Sincerely,

Manuel Blay

Editor of thedowtheory.com

 

 

 

 

Critical Juncture for Bonds: Bear Market Signal One Step Away

Set up for a potential bear market signal for TLT and IEF completed on 5/30/25

Overview: the most recent rally within an extended secondary (bearish) reaction has set up TLT and IEF for a potential primary bear market signal. The trend remains bullish to this day, but if the key prices I show in this post are jointly pierced, a new bearish trend will be signaled.

General Remarks:

In this post, I provide an in-depth explanation of the rationale behind employing two alternative definitions to evaluate secondary reactions.

TLT refers to the iShares 20+ Year Treasury Bond ETF. You can find more information about it here.

IEF refers to the iShares 7-10 Year Treasury Bond ETF. You can find more information about it here.

TLT tracks longer-term US bonds, while IEF tracks intermediate-term US bonds. A bull market in bonds signifies lower interest rates, whereas a bear market in bonds indicates higher interest rates.

A) Market situation if one appraises secondary reactions not bound by the three weeks and 1/3 retracement dogma 

As I explained in this post, the primary trend shifted to bullish on 4/4/25.

Following the highs on 4/4/25, there was a substantial pullback until 5/21/25 for both TLT and IEF. This pullback thoroughly met the time and extent requirements for a secondary reaction.

On 5/21/25, TLT violated its 1/14/25 lows unconfirmed by IEF, so no primary bear market was signaled. Thus, the primary bull market remained intact. The lows of 1/14/25 are the lows of the previous bear market. The lows of the last bear market also serve as relevant price levels to signal a trend change when we don’t have another option at a higher price level.

A rally ensued after the 5/21/25 lows (Step #3), which lasted for >=2 days with IEF exceeding its VAMM. Please remember that we don’t require confirmation for the final rally that completes a bear (or bull) signal setup. More information is in this post.

The table below gives you the relevant dates and prices:

So, now the situation is as follows:

1.  A primary bear market will be signaled if TLT and IEF jointly pierce their 5/21/25 (TLT, at 83.97) and 11/6/24 (IEF, at 93.15) closing lows (Step #2 in the above table).
2. The primary bull market will be reconfirmed, and the setup for a potential bear market signal canceled, if TLT and IEF jointly surpass their 4/4/25 closing highs (Step #1).

The following charts depict the latest price movements. Brown rectangles indicate the secondary (bearish) reaction opposing the ongoing primary bull market. Blue rectangles highlight the recent rally that fulfilled the setup for a potential primary bear market (Step #3). Red horizontal lines mark the secondary reaction lows (Step #2), while blue horizontal lines show the primary bull market peaks. A breach of these peaks would reaffirm the primary bull market, though this scenario appears unlikely in the near term.

Therefore, the primary trend is bullish, and the secondary trend is bearish.

B) Market situation if one sticks to the traditional interpretation demanding more than three weeks and 1/3 confirmed retracement to declare a secondary reaction.

As I explained in this post, the primary trend shifted to bullish on 4/4/25.

The most recent pullback meets the time (>=15 trading days) and extent requirement for a secondary reaction. And the most recent rally has also set up TLT and IEF for a potential primary bear market signal.

In this instance, the long-term application of the Dow Theory aligns with the shorter-term version, resulting in a secondary reaction against the primary bull market. The most recent rally has set up both ETFs for a potential primary bear market signal.

Sincerely,

Manuel Blay

Editor of thedowtheory.com

 

 

Dow Theory signal: Bear Market for Gold and Silver Miners triggered on 5/14/25

 

Overview: The easing of geopolitical tensions, a preliminary truce in the tariff wars, and some forced liquidations have pushed GDX and SIL into a new bear market. In contrast, gold and silver have remained more resilient and continue to trade within a primary bull market.

General Remarks:

In this post, I extensively elaborate on the rationale behind employing two alternative definitions to evaluate secondary reactions.

SIL refers to the Silver Miners ETF. More information about SIL can be found HERE.

GDX refers to the Gold Miners ETF. More information about GDX can be found HERE.

A) Market situation if one appraises secondary reactions not bound by the three weeks and 1/3 retracement dogma.

As I explained in this post, the primary trend was signaled bullish on 3/13/25.

Following the 4/16/25 closing highs (Step #1 in the table below), GDX and SIL dropped for 11 trading days (Step #2). The time requirement for a secondary reaction was met. The pullback exceeded the Volatility-Adjusted Minimum Movement (VAMM), so the extent requirement was also fulfilled. More about the VAMM HERE.

A rally followed (Step #3) that was >=2 days on both ETFs, with GDX exceeding its VAMM. Please remember that we don’t require confirmation for the final rally that completes a bear (or bull) signal setup. More information is in this post.

On 5/14/25 (Step #3), GDX and SIL jointly pierced their respective secondary reaction lows, as shown in Step #2 in the table below. Such a confirmed breakdown shifted the trend from bullish to bearish.

So, the primary and secondary trends are bearish now.

The following charts depict the latest price movements. Brown rectangles indicate the secondary (bearish) reaction opposing the ongoing primary bull market. Blue rectangles highlight the recent rally that fulfilled the setup for a potential primary bear market (Step #3). Red horizontal lines mark the secondary reaction lows (Step #2). The blue horizontal lines show the bull market highs. A breach of these peaks would signal a new primary bull market, though this scenario appears unlikely in the near term. The grey rectangles highlight a pullback that did not meet the time requirement for a secondary reaction, and hence was ignored.

So, the situation is as follows: At the current juncture, a breakup on a closing basis by GDX of the 4/16/25 closing highs and by SIL of the 5/9/25 closing highs would signal a new bull market. Until this breakup occurs, we consider GDX and SIL in a bear market.B) Market situation if one sticks to the traditional interpretation demanding more than three weeks and 1/3 confirmed retracement to declare a secondary reaction.

As I explained in this post, the primary trend was signaled bullish on 3/13/25.

The current drop has not reached at least 15 trading days on both ETFs, so there is no secondary reaction.

Therefore, the primary and secondary trends remain bullish.

Sincerely,

Manuel Blay

Editor of thedowtheory.com