Saturday, September 8, 2012

The price of not heeding the Dow Theory: 6.05% from 06/29/2012 to date

I frequently visit “The Big Picture” to be updated on financial matters. It is a wonderful website.

Yesterday I found this post entitled “Sell Side Indicator” which you can find here

 The gist of the post is a chart that shows the extreme bearishness of asset managers and analysts. In other words, since the Dow Theory signaled the inception of a new primary bull market movement on June 29, most professionals stood on the sidelines. Why? Because they are no friends of the Dow Theory or, worse yet, because they follow some kind of “decaf” dow theory (this one with lower case) which is plagued with errors.

Of course, if we trade or invest (choose the word of your fancy) according to fundamentals there are plenty of reasons why we should avoid this market. Even I, the quintessential passionate lover of the Dow Theory have eyes and ears and find every day countless grounds advocating for an immediate collapse of the stock market. But the market went higher. Higher it went! Stocks always climb a wall of worry.

Since I first dabbled in stocks 20 years ago, when I bought the stock of a near bankrupt bank, there always seem to be plenty of reasons suggesting us why we should stay out of stocks. I am not blind and I know firsthand these are very challenging times. But what if high inflation or, God forbids, Hyperinflation (with capital “H”) is in store for us? What if the economy, inadvertently to me, is really starting to get better? The market as a voting mechanism may know something I don’t know.

Thus, the “Big Picture's” post highlights why it is so difficult to make money in the markets. 

By definition markets should tease the greatest number of investors and have them on the wrong side. If it was easy to identify a trend, and more importantly, stick to it and get out of it in a timely fashion most investors would be successful. But they aren’t. The markets are always a teaser when lived in “real time” and not through the perusing of old charts or stale news. Hence the usefulness of the Dow Theory that provides us with a framework with which we can separate the wheat from the chaff. 

Since the bull market started on June 4, the S&P has gained 12.67%.

And since the Dow Theory “detected” the primary trend and told us to jump aboard on June 29, the S&P has gained 6.05 %. 

In the next post, to be published on Monday 10 before the open, if time constraints allow me to do so, I will further explain the amazing implications of this “meager” 6.05% unrealized gain.

Does this mean that it is guaranteed that the stock market will continue its ascent? No, of course not, but we know that according to Dow Theory the odds clearly favor the continuation of the existing trend. As the great Dow Theorist Schaefer wrote “the basic trend of the stock market itself [...] has an amazing ability to forecast the future movement of its own primary movement” (Source: How I Helped more than 10,000 investors to profit in stocks, Prentice Hall, 1960, page 4). Schannep has done a wonderful work in categorizing primary movements in both time and extent. You can find the link to his book here 

I’ve personally checked the accuracy of Schannep’s claims (which by the way are quite in line with those made by Rhea in the early ninety thirties) and if the +100 year empirical track record of the Dow Theory is to serve us as a guide, we can only conclude that we are still early in the primary bull market and that it would not be uncommon for the stock market to make a further gain of 30% in the coming year.

We will have nerve wrenching corrections, but, until a Dow Theory bear signal is given, we have to assume that the primary trend remains bullish.

But what if, in spite of all the Dow Theory reassurances, the market falls?  Don't worry. The Dow Theory accounts for its occasional failure and its well prepared to handle it. More on this next Monday.

Have a wonderful weekend.

The Dow Theorist

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