In my yesterday’s post which
you can find here I have made clear that under
Dow Theory both the SPY and GLD are in a primary bull market. Furthermore, I
explained that both markets offered the best risk reward ratio (RRR). In other
words, the stop losses are sufficiently close to the entry points (June 29 for
the SPY and August 22 for GLD).
All this is fine and dandy for those that recognized
the “buy” signal in “real time”. However, those that failed to recognize the
signal may get the feeling of having been left high and dry. Nothing is more
irksome than to recognize a primary bull market and being left out in the cold.
Should the investor “chase” the SPY and GLD? Or should he write off this trade as a lost opportunity?
No. The investor shouldn’t jump aboard right now,
because as you can see from the latest figures posted here the potential loss has almost doubled from the
original entry point. In this post I spoke of a RRR of roughly 6 which
is excellent (this means a potential gain of 40% divided by a maximum loss
between 6-7%). However, after the solid advance we have witnessed since the
Dow Theory signaled the bull market for the SPY and GLD, the markets have gone
up 5.74 and 4.58 respectively. In other words, an entry point at this juncture
would offer a much diminished RRR; barely above 3.
However, it is likely (albeit not a sure thing) that
sooner or later a secondary reaction will correct part of the gains hitherto
made by SPY and GLD. We know that secondary reactions are likely to retrace
from 1/3 to 2/3 of the previous advance. We know that, until now, both markets
have gained more than 12% since the inception of their respective bull markets.
So a secondary reaction bringing down the gains to, i.e. 6% wouldn’t be
uncommon (this would be a 50% reaction). But, what happens if prices go down by
6%? Then, provided the primary bull market doesn’t end up in a fizzle, you have
just found your second sweet entry spot. You would have at your disposal
the same entry prices that were available on June 29 (SPY) and August 22 (GLD).
Of course, if the primary bull market continues, this
would mean your last chance. “The postman always rings twice”, but not
three times. By definition, the next secondary reaction should make higher lows
and, hence, offer you a lower RRR.
Until now we have just had what I’d term the “first
leg” of the primary bull market. For me a “leg” is a full uncorrected move.
This is precisely what we experienced. However, such “legs” (primary
uncorrected movement) tend to last on average ca. 3 months. Thus,
statistically, this “leg” is starting to get old and a secondary reaction might
be due. However, under Dow Theory I don’t see any signs of an impending
secondary reaction yet.
By the way, for those with a greater risk appetite maybe silver is worth a second look. The higher risk (larger Dow Theory stop loss) may be compensated by a larger reward given silver's higher volatility. You can find the most recent figures about silver (SLV) here
Bottom line: When the market undergoes
the first secondary reaction in a primary bull market, you should be happy for
two reasons:
1)
If offers you the last chance to jump aboard
under the same “conditions” (price) as those that recognized the bull
market earlier.
2)
It moves the Dow Theory trailing stop higher
(when the secondary reaction is over) so that you keep your losses short and
let your profits run. More on this here
So keep following these posts in order to see whether
the “Postman will ring twice”.
If you want to know more, you should maybe read my post "Why Dow Theory matters: Outstanding Risk Reward Ratio thanks to the Dow Theory’s trailing stop" which you can find here
If you want to know more, you should maybe read my post "Why Dow Theory matters: Outstanding Risk Reward Ratio thanks to the Dow Theory’s trailing stop" which you can find here
Have a nice evening while the markets are closed.
Sincerely,
The Dow Theorist
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