Saturday, September 29, 2012

Plain vanilla Dow Theory? Or does Dow Theory come in many flavors? IV and final



 Part IV. Recap and main tenets of my own “flavor”

Continued from this post:



All in all: If you want the best advice, follow both Russell and Schannep. Both are great Dow Theorists and both are alive. Take advantage of it!

Is any one of the Dow Theory “flavors” we have hitherto analyzed to be excommunicated from the Dow Theory fraternity? Personally, I think that all of them loosely fit under what we can define the basic Creed of the Dow Theory. Some styles place greater emphasis on the secular trend and values; others focus on riding the primary trends and are more technical in nature.

However, from the preceding discussion we can see that it is important to know what kind of flavor we mean. The investment results (and drawdowns to be endured) accruing to an investor riding the secular (10-14 years) trend will differ substantially from those affecting an investor following the cyclical bull and bear markets (whose median duration is ca. 2.5 years). In another post, I’ll dissect the advantages and disadvantages of each method. Here it suffices to say that, while not disparaging any of such “flavors”, it is important to know were we stand and what do we mean when we say “bull market under Dow Theory”. What is a bull market: 3 months (secondary trend), 2 years (primary trend) or 14 years (secular trend)? Our wording and definitions are important.

My conclusions are as follows:

·        There isn’t just one “right” or official Dow Theory.

·        There are some flavors which, provided they respect the basic tenets of the Dow Theory are acceptable. Each “flavor” has its own pros and cons and its use depends on the temperament and personal circumstances of the investor (more on this in another post in this blog).

·        The basic tenets of the Dow Theory, which all acceptable “flavors” have in common, are the belief in trends, the existence of primary and secondary movements (even though there is some disagreement as to the duration of each), the importance of previous highs and lows (although there is also disagreement in determining which highs or lows are the relevant ones) and the principle of confirmation for a signal to be valid. This is the basic “Creed”.

·        Together with the acceptable “flavors” of the Dow Theory co-exist real heresies which deny the basic “Creed”. Heresiarchs are those that deny the principle of confirmation, that apply Dow Theory principles to short term trading (as the main strategy), those that say that the Transports should fell into oblivion, or those that bluntly say that the Dow Theory doesn’t’ work any longer. As we advance in this blog I will expose some of these adulterated dow theorists (with lower case). It is because of these heresies that the real Dow Theory gets occasionally bad press.

·        My personal “flavor” of the Dow Theory is deeply influenced by Russell and Schannep (and indirectly by Rhea). I define “primary” and “secondary” movement very much in the sense of Rhea which results in investments with an average duration of ca. 2 years. I keep an eye on values and fundamentals but I’m extremely demanding as to what constitutes “good values” and "useful fundamentals" (versus "funny-mentals") and extremely skeptical as to my ability (or anyone else’s, by the way) to accurately determine “values”. More on “values” and fundamentals in a future post. Borrowing from the world of trading and its obsessive quest to look for the best risk reward ratio (RRR) trades, I place special emphasis in finding good RRR investments. Risk must be commensurate with potential gain. All these aspects are vital to succeed as an investor and will be further developed in this blog.

·        However, I part company with Russell or Schannep in that I rely exclusively on the Dow Theory to determine a buy or sell signal. I don’t want to use extraneous black box indicators which, albeit useful, are not endowed with the 112 years track record of the Dow Theory. I am convinced that, if one is well prepared and works diligently, investment results can be more than satisfactory by simply applying the Dow Theory. I’d rather prefer to be proficient in just one thing (Dow Theory) than dabbling with many indicators.


All the articles concerning this saga of “Dow Theory flavors” will be included in a new page named “Dow Theory flavors”, since I think it is vital for the investor and Dow Theory follower to know our premises and where we stand. 

Sincerely,

The Dow Theorist

Friday, September 28, 2012

Dow Theory update for Sept 28: Markets down with no technical consequences



It was Charles Dow, father of the Dow Theory, who said that in the world of investing you have to “exercise enough patience for six men.” He meant by this that the markets don’t accommodate our wishes and even the best laid out investment plan may take time to materialize. The Dow Theorist investing along the primary trend will always find plenty of opportunities to bore themselves. This is not day trading and many boring days deprived of technical significance go by. It is no wonder that success in investment requires, first and foremost, patience. Charles Dow knew his trade well. These boring days should be used to hone your investment skills and to analyze the market or read a blog like this. Don’t be tempted into action.

We are in a situation that requires patience. In this blog we will exert patience.  On the one hand, we would like to see a clear secondary reaction to occur which would be great for latecomers and for us to raise our trailing stop in order to lock in some unrealized gains. If you think I’m nuts for welcoming a secondary reaction, maybe you should read this and this.

Today all markets closed slightly down. The three stock indices we monitor and gold, silver and their miners ETFs.

In the stock market we had a bearish volume day. On a down day volume was higher than yesterday’s which has a bearish connotation. We have had 4 bearish days in the last 6 days; including the monster bear volume of last Friday 09/21/2012.

I will try to finish the saga of “Plain Vanilla Dow Theory or does Dow Theory come in many flavors?” this weekend. I repeat again, the real good follower of the Dow Theory should invest more time instructing himself about the markets than playing them. A weekend reading may be a good opportunity for us all to hone our skills.

Here you have the figures for today of the markets I monitor.

 
Data for September 28, 2012





DOW THEORY PRIMARY TREND MONITOR SPY



SPY
Bull market started 06/04/2012 128,1
Bull market signaled 06/29/2012 136,1
Last close
09/28/2012 143,97
Current stop level: Bear mkt low
128,1




Unrlzd gain % Tot advance since start bull mkt Max Pot Loss %




5,78% 12,39% 6,25%




DOW THEORY PRIMARY TREND MONITOR GOLD (GLD)



GLD
Bull market started 05/16/2012 149,46
Bull market signaled 08/22/2012 160,54
Last close
09/28/2012 171,89
Current stop level: Bear mkt low
149,46




Unrlzd gain % Tot advance since start bull mkt Max Pot Loss %




7,07% 15,01% 7,41%




DOW THEORY PRIMARY TREND MONITOR SILVER (SLV)



SLV
Bull market started 06/28/2012 25,63
Bull market signaled 08/22/2012 28,92
Last close
09/28/2012 33,48
Current stop level: Bear mkt low
25,63




Unrlzd gain % Tot advance since start bull mkt Max Pot Loss %




15,77% 30,63% 12,84%




DOW THEORY PRIMARY TREND MONITOR ETF SIL



SIL
Bull market started 07/24/2012 17,08
Bull market signaled 09/04/2012 21,83
Last close
09/28/2012 24,9
Current stop level: Bear mkt low
17,08




Unrlzd gain % Tot advance since start bull mkt Max Pot Loss %




14,06% 45,78% 27,81%




DOW THEORY PRIMARY TREND MONITOR ETF GDX



GDX
Bull market started 05/16/2012 39,56
Bull market signaled 09/04/2012 47,77
Last close
09/28/2012 53,69
Current stop level: Bear mkt low
39,56




Unrlzd gain % Tot advance since start bull mkt Max Pot Loss %




12,39% 35,72% 20,75%


Have a nice weekend.

Sincerely,

The Dow Theorist.

Thursday, September 27, 2012

Dow Theory update for Sept 27: Bull markets don’t die easily




Gold and Silver on the verge of breaking out prior highs


Today all markets I monitor closed up. What else can I say? The primary bull market remains intact and the long awaited secondary correction (which would be a good opportunity for latecomers to be long stocks and precious metals as you can read here) fails to gain traction.

Primary bull markets normally die of old age and ours is still a young one (started on June 4 and was signaled by the Dow Theory  on June 29). If you are new to this blog, you can find more details as to the primary bull market signal for stocks here

Market action has been quite impressive since all the stock indices I monitor as well as gold, silver and their miners closed up. Such breath is usually a bullish sign.

The only bearish shadow on this bullish landscape was volume. NYSE volume was today lower. Since today was an up day, this has bearish implications short term. Hence, we have had 3 bearish volume days in the last 5 days. We should not forget that last Friday’s was a monster volume day, thereby having more bearish importance. So the patter of volume continues to deteriorate short term. Here you have an updated chart of the SPY and volume. The red arrows depict a bearish volume day and the blue arrows a bullish volume day.

As per Dow Theory volume is slightly becoming bearish short term

 The precious metals universe closed up for the day. No exceptions. Also a bullish sign short term. Gold and silver are within striking distance of breaking above the highs registered on 09/21/2012. If this happens, under Dow Theory, it clearly confirms the continuation of the primary bull market that was first signaled on August 22.

All in all: Latecomers should still stay in the sidelines until the markets give us a decent secondary reaction.

Here you have the figures of the markets I monitor for today:

Data for September 27, 2012





DOW THEORY PRIMARY TREND MONITOR SPY



SPY
Bull market started 06/04/2012 128,1
Bull market signaled 06/29/2012 136,1
Last close
06/27/2012 144,68
Current stop level: Bear mkt low
128,1




Unrlzd gain % Tot advance since start bull mkt Max Pot Loss %




6,30% 12,94% 6,25%




DOW THEORY PRIMARY TREND MONITOR GOLD (GLD)



GLD
Bull market started 05/16/2012 149,46
Bull market signaled 08/22/2012 160,54
Last close
06/27/2012 172,34
Current stop level: Bear mkt low
149,46




Unrlzd gain % Tot advance since start bull mkt Max Pot Loss %




7,35% 15,31% 7,41%




DOW THEORY PRIMARY TREND MONITOR SILVER (SLV)



SLV
Bull market started 06/28/2012 25,63
Bull market signaled 08/22/2012 28,92
Last close
06/27/2012 33,58
Current stop level: Bear mkt low
25,63




Unrlzd gain % Tot advance since start bull mkt Max Pot Loss %




16.11% 31.02% 12,84%




DOW THEORY PRIMARY TREND MONITOR ETF SIL



SIL
Bull market started 07/24/2012 17,08
Bull market signaled 09/04/2012 21,83
Last close
06/27/2012 25,07
Current stop level: Bear mkt low
17,08




Unrlzd gain % Tot advance since start bull mkt Max Pot Loss %




14,84% 46,78% 27,81%




DOW THEORY PRIMARY TREND MONITOR ETF GDX



GDX
Bull market started 05/16/2012 39,56
Bull market signaled 09/04/2012 47,77
Last close
06/27/2012 53,89
Current stop level: Bear mkt low
39,56




Unrlzd gain % Tot advance since start bull mkt Max Pot Loss %




12,81% 36,22% 20,75%












Sincerely,

The Dow Theorist