Saturday, September 22, 2012

Plain vanilla Dow Theory? Or does Dow Theory come in many flavors? III

 Part III. Jack Schannep and “The Dow Newsletter”

 And the latest addition to the “Dow Theory’s Hall of Fame” is Jack Schannep.

He started in the ninety sixties as a stock broker with Dean Witter in Phoenix. In 1962 he created a market timing letter which was almost privately circulated (to clients of an investment house). After retiring in 1984 he started his newsletter service as we know it now.

Schannep is a seasoned investor with many investment battles behind. He is an investor with profound “hands on” market experience. He runs an advisory service based on the Dow Theory which you can find here

He also published a book; an excellent one, indeed, named: “Dow Theory for the 21st Century” which you can find here

Schannep has a kind of Rhea or “Primary-cyclical Trend flavor” updated and seasoned with some very valuable timing and street smarts. He definitely ignores the “secular” trend and the investments made as per his interpretation of the Dow Theory have an average duration of approximately 2.5 years.

As to values, I’d dare to say that he’s skeptical. This is why I label him as the purest Rhea follower. In his book, the only reference to values seems quite disparaging. He laconically says:

“We all know it is better to buy stocks when they are obviously cheap and sell them when they are obviously dear, but the Dow Theory has no such requirement in its makeup (…) I say let the Dow Theory speak for itself and follow the signals whenever they may occur. Do not let personal preferences interfere”.

Source: “Dow Theory for the 21st Century”, page 50, Wiley & Sons, 2008.

I know that the “secular” flavor Dow Theorists would indict Schannep as heresiarch for his utter disregard of the secular trend and, with it, the need to resort to values. Although, I will develop further this aspect in future posts, the longer the time frame, the greater the need for considering fundamentals and values. On the other hand, the shorter the time frame, the more important is the technical condition of the market. The extreme is found in short term trading (let’s say: 1 week trades and less) were the technical structure overrides all value or fundamental considerations.

However, Schannep’s publicized track record is too good to be excommunicated from the Dow Theory fraternity. After having read his newsletters and book countless times, I can only say that I find more orthodoxy in him than in many self-appointed Dow Theorists who consider themselves the guardians of the Dow Theory orthodoxy. And I defend Schannep not because of his outstanding track record but because I honestly think that his “flavor” doesn’t contradict the work of Hamilton, Rhea and even Russell when Russell sees fit to disregard the secular trend.

Furthermore, Schannep was not caught wrong-footed when the bear market of 2008 started. On February 1, 2008 Schannep went fully in cash, thus proving outstanding timing skills. Those that followed him emerged from the bear market almost unscathed.

His timing skills shined again when on April 2, 2009 he went 100% invested in stocks. Subsequent market action proved again Schannep and his Dow Theory “flavor” right.

But Schannep’s accomplishments go beyond excellent market timing. Schannep has really made a valuable contribution to the Dow Theory. He’s made in depth studies concerning the average duration of bull and bear markets, the gains (losses) that can be expected as a bull (bear) market advances, alternative ways to define primary bull and bear markets, how to appraise secondary reactions, etc. He has honed Dow Theory to make it the closest thing to a science. Personally, I’ve been greatly influenced by Schannep.

As I said, Schannep makes an orthodox application of the Dow Theory, albeit with a strong emphasis on the technical action of the market. Although his newsletter is seasoned with fundamental market data, the final decision as to whether one should buy stocks or sell them relies exclusively on his Dow Theory interpretation, being the fundamental data displayed in each issue of his newsletter a mere dressing or appetizer. He has done groundbreaking work in clarifying the extent and duration of primary bull markets and secondary reactions, thereby providing the Dow Theory investor with a clear roadmap as to what to expect. In other words, he helps put a “figure” to the expected gains and losses derived from taking the buy and sell signals and the most likely time-frame it will take to play out. By doing this, he has expanded the work that was initially started by Rhea.

Furthermore, he has made two additions to the arsenal of the Dow Theory consisting on:

a)     Definition of primary or bear market in the rare instances when under classical Dow Theory market action hasn’t provided a signal yet. As I will write in a future post, there are several kinds of market setups for a primary bull (bear) market signal. In some cases, the market continues to go up (or down) without providing a Dow Theory signal. And here comes Schannep to our help.

b)     Addition of the S&P as an index worth monitoring under Dow Theory. He makes a compelling case in his book about the importance of adding the S&P as the third index to be monitored and taken into account in order to determine the existence of a Dow Theory primary bull (bear) market signal.  The well grounded addition of the S&P addresses a common criticism against Dow Theory that runs as follows: “The Dow Theory is no longer responsive enough because the Transports are not significant anymore”.

If one thinks it over, we can see that Schannep’s additions are not to be labeled as a heresy. They merely reflect the evolution of the markets across time (i.e. the S&P didn’t exist in the times of Dow). I am convinced that Schannep’s additions result in a significant improvement of performance and a concomitant reduction of risk (capital loss) because they increase the responsiveness of the Dow Theory by improving the timing when signaling primary bull and bear markets.

The only addition made by Schannep I don’t buy into, is the “Schannep Timing indicator”. In a similar fashion to Russell, Schannep developed his pet indicator which, together with the Dow Theory, helps him time his buy and sell signals and the amount to invest. While I don’t discuss the merits of the indicator and I consider it as good as Russell’s PTI, I feel leery to entrust my investment fortunes to a “black box” indicator. Even though Schannep makes some work explaining how the indicator works, he doesn’t even come close to a full disclosure and, hence, I discard it as not compliant with the “Dow Theory”. Besides, Schannep’s “flavor” of the Dow Theory is so good that even without resorting to his “Timing Indicator” results keep being very good (and don’t forget: less over fitted). So, personally, I’d rather settle with the 2% lower annual performance that results from strictly applying Dow Theory (with its robust +100 years track record) rather than applying an indicator whose bowels are unknown to me.

Schannep is purely an equities man. His investment advice is geared exclusively to stocks and in this field his proven track record is outstanding (ca. 6.8 % annual exclusive of dividends with reduced draw-downs in the last difficult 10 years is more than an accomplishment). As an investor, Schannep is like a specialist shop. He’s the best in equities; however, if you want to set up a portfolio, you need advise that goes beyond equities. Here is where my value considerations tell me that betting one’s ranch all in stocks may be a dangerous proposition. Personally, I feel better with a mix that includes the precious metals universe and this is why I write a lot about such markets with the aid of the Dow Theory and I also keep an eye on values in the time frame where they really belong. More on values and time frames in a future post.

To be continued.


The Dow Theorist 


  1. Found your blog today and it's very intruiging. You've certainly piqued my interest in the Dow Theory.

    I'm curious as to your opinion on the NASDAQ. Do you think it can it be used as an indicator - similar to SPY?

    1. shinjisakaru,

      You raise a very valid point. So valid that it deserves a post on its own. Should we include the Nasdaq?

      Stay tuned and I'll attempt to have the new post ready during the course of next week.