Monday, September 10, 2012

Dow Theory update for Sept 10. S&P, Gold and Silver: Both primary and secondary movement bullish.

Today it was time to take a breather. The stock market and the precious metals universe (including miners) went all down. What has the Dow Theory in store for us today? Not much.

According to Dow Theory no technical damage has been made. Thus, the primary trend remains bullish as well as the secondary movement. Furthermore, none of the markets I closely monitor has registered a 3% decline from their last recorded highs which is the minimum threshold for a movement to be meaningful under Dow Theory and no previous lows (even minor ones) have been broken.

However, I’d like to make some pertinent observations as to what was the best market to invest according to Dow Theory when the bull market signal was issued.

If you follow this blog you know that as per Dow Theory gold, silver, their miners and the stock market are solidly in bullish territory (go here to know more). From the investor’s perspective one should ask? Which market offers to the investor/trader the lower risk and the best reward? In other words, what market offers us the best RRR? Gold, silver, the miners, the SPY? Which one?

In my morning’s post “Why Dow Theory matters: Outstanding Risk Reward Ratio thanks to the Dow Theory’s trailing stopwhich you can find here, I explained that one of the beauties of the Dow Theory is that it provides us with trailing stops thereby helping us to cut our losses short in case the trend reverses. However, and depending on price action, not all such “Dow Theory stops” have the same amplitude. If the Dow Theory signal was given after a modest rally, then our “stop” will be close enough to offer us a significant reward (big price advance pertaining to most primary movements) with concomitant narrow stop (small risk in case of a trend reversal). Please re-read the post, to gain more insight into this important issue.

Therefore, not all Dow Theory primary bull market signals are born equal. As you can glance from the tables below, market action has resulted in substantially different entry points (bull market signaled per Dow Theory) and hence different stop levels (the previous bear market low until we survive the first secondary reaction which will establish new lows)

If you peruse the tables you will se that the winner is…..

Yes, the winner is the SPY with a narrow stop loss of only 6.25% (and a likely reward as I explained in other post of ca. 40% if things play out “average”).

However, gold comes near. The Dow Theory stop represents a mere 7.41%. If we consider that gold underwent almost a 1 ½ year bear market (if we follow Dow Theory, it was a cyclical bear market, in spite of the secular bull market we are in), then it is to be expected a significant rebound. In Fofoa’s blog, which I highly respect and recommend for any serious gold observer, they talk of a 50% movement. You can find the relevant Fofoa’s post here.
While a 50% movement in gold sounds impressive, it is nothing uncommon by Dow Theory standards. Of course, and barring a world hyperinflationary collapse, such price gain takes time to materialize, the time that precisely needs a primary trend to play out. 

Therefore, as an investor I'd diversify into both the SPY and GLD. It is always good to split the risk and GLD's stop at 7.41% is low by any standards. 

Our conclusion is as follows: When you spot a Dow Theory primary bull market signal, instead jumping aboard blindly, look at the risk involved. Where does the Dow Theory stop lie? By definition in a new trend this means checking the last recorded bear market low. You more or less know the reward: Your average gain, while not carved in stone, and if +100 years history is to serve us as a guide, is to average ca. 40 or more. With this tentative reward, then you can plug in your “risk” which is given by the Dow Theory. If the resulting RRR is good, then you know you should invest.

I hope that this post helps you give “structure” to what looks as a confusing market.  

Here are the tables:


Bull market started 06/04/2012 128.1
Bull market signaled 06/29/2012 136.1
Last close
09/10/2012 143.51
Current stop level: Bear mkt low

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

5.44% 12.03% 6.25%


Bull market started 05/16/2012 149.46
Bull market signaled 08/22/2012 160.54
Last close
09/10/2012 167.29
Current stop level: Bear mkt low

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

4.20% 11.93% 7.41%


Bull market started 06/28/2012 25.63
Bull market signaled 08/22/2012 28.92
Last close
09/10/2012 32.29
Current stop level: Bear mkt low

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

11.65% 25.99% 12.84%


Bull market started 07/24/2012 17.08
Bull market signaled 09/04/2012 21.83
Last close
09/10/2012 22.67
Current stop level: Bear mkt low

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

3.85% 32.73% 27.81%


Bull market started 05/16/2012 39.56
Bull market signaled 09/04/2012 47.77
Last close
09/10/2012 49.48
Current stop level: Bear mkt low

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

3.58% 25.08% 20.75%

Now you might ask: "What should I do if I missed the Dow Theory bull signals for the SPY and GLD?. I time allows me to do so, tomorrow I plan to give you the answer. In the meantime, I advise you to wait and read my tomorrow's post. 

The Dow Theorist.

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