Where is the stock market now as per Dow Theory? Bull or bear? II

The market is in a primary bull market since June 29, 2012

Well, we know from yesterday’s post that the primary movement remain bullish.

Today, we will further study the other two vital indices (Transports and S&P) and we will derive the implications for the investor of a primary bull market movement.

I said yesterday that neither the Industrials nor the S&P have had a pullback (decline) exceeding 3% from the last recorded highs: 


LAST HIGH DOW INDUSTRIALS: 13275.20 . Date: 08/17/2012

LAST HIGH S&P (SPY as a proxy): 142.19.   Date: 08/17/2012

The following tables summarize the current situation

DOW INDUSTRIALS
Last primary movement up
LAST HIGH	13275.2	08/17/2012
PRIOR LOW	12101.46	06/04/2012
Amount primary	0.0969916
movement
Correction until Sept 4,  2012.
LAST HIGH	13275.2	08/17/2012
Last low recorded	13000.71	08/30/2012
pullback down	-0.0206769	doesn't qualify as a correction.
		Less than 3%
total points leg up	1173.74
total points correction	274.49
% secondary
corrected	0.23385929

SPY  (proxy for S&P)
Last primary leg primary movement up
LAST HIGH	142.19	08/17/2012
PRIOR LOW	128.1	06/04/2012
Amount primary	0.10999219
movement
Correction until Sept 4, 2012.
LAST HIGH	142.19	08/17/2012
Last low recorded	140.19	08/30/2012
pullback down	-0.01406569	doesn't qualify as a correction
		Less than 3%
total points leg up	14.09
total points correction	2
% secondary
corrected	0.14194464

Thus, we can see that the current pullback of both the Industrials and the S&P doesn’t qualify as a correction under Dow Theory by any standard. This is not to say that the current pullback may develop into a full blown correction. But under Dow Theory, the primary trend remains bullish.

A look at the chart helps us visualize the current situation. The first blue arrow on the left highlights the Dow Theory bull signal of primary nature. The next four arrows show higher lows (and higher highs) which is always a bullish sign.

The reader may ask: How long and how much can reach this primary movement? One of the tenets of the Dow Theory is that neither the duration nor the extent of a primary movement can be foreseen. We have to humbly take what the market gives us. However, empirically, we know than in many instances the market tends to go up at least one year after the onset of a bullish signal. Of course, it is not a linear advance, but rather a roller coaster, which will always try to unnerve us. But here lies the beauty of the Dow Theory, armed with the knowledge of being in a bull market we can better ride the storm and not sell our stocks in panic at the worst moment (that is at the end of a secondary reaction).

We also know that most “bull markets” tend the produce an average gain exceeding 40% during the first year. So, by all measures, the current bull market is still a “young bull market”. The S&P has just gained 10.9% since the inception of this bull market. So, while everything could happen, the +100 years track record of the Dow Theory is telling us that it is more likely than not that further gains are in store for the patient investor.

Furthermore, while always of lesser importance, volume seems to show that the bullish side still holds the upper hand. As you can see in the chart on 08/31/2012 the market was up on higher volume than on 04/09/2012 when the market was down on lower volume. In another post, I will further expand on the implications of volume.

Sincerely,

The Dow Theorist