Friday, May 17, 2013

Dow Theory Update for May 17: Primary bear market re-confirmed for gold and silver

Evaluating the unrealized gains hitherto made in SPY by the current primary bull market signal.


It is time to make a small recap about the current primary bull market signal and the unrealized profit hitherto made by those following the Dow Theory. It is also time to take a closer look at our stop loss (which will be the subject of a separate post).

As you can see in the spreadsheet below, the bull market was signaled on January 2nd, 2013. The SPY stood at 146.06.

On May 17, 2013, the SPY closed at 166.94, which amounts to an unrealized profit of 14.30% (see spreadsheet below for further details).

The word “unrealized” must be stressed, though. No time to get over excited. Thus, if the market corrects, most of this paper profits may evaporate. While it is always tempting to sell out and cash some profits, this is not the proper procedure under the Dow Theory (of any flavor whatsoever). We should not forget that trends tend to last longer than expected and, accordingly, the odds favor the continuation of the trend and, with it, the building up of further profits. Within this context, it bears repeating that we are dealing with a young primary bull market both in duration (only 4 ½ months since it was signaled) and extent (14.30% gain). While nobody can predict the future, we know (as I wrote here) that:

The average duration of each transaction taking according to the classical Dow Theory lasted 712 days. This is slightly less than 2 years.

The median duration amounts to 565 days, which is roughly 1.5 years.

The shortest investment lasted only 60 days (year 1990).

The longest investment lasted 2799 days (secular bull market 1900-1998).

As to the average gain made by following each primary bull market signal, it stands for the classical/Rhea flavor at an average 32.33% (according to the Dow Theory track record since 1897). In a future post, I will provide the followers of this Dow Theory blog with additional details as to the average primary bull market signal gain (with breakdown depending on secular bull and bear market conditions). However, here it suffices to say that if we may reasonably expect to gain 32.33% (average return in the last +110 years), and we have just made less than 15% of unrealized profits, the odds favor a further buildup of gains.

Thus, we can conclude: The current primary bull market signal of January 2, 2013 (or January 18, if the signal is to be determined according to the “classical/Rhea” flavor of the Dow Theory) is still “young." 4 and ½ months versus an average duration of almost 2 years, is clearly a young bull market. The unrealized gain is still less than half the average primary bull signal gain.

Under these conditions, it seems clear to me that we have to have the stomach to endure the coming secondary reaction (one day it will come, as it is overdue) since the odds favor the resumption of the primary bullish trend after the secondary reaction runs its course. Getting out too soon is a dangerous proposal. To avoid devastating losses (or to lock in profits) if the trend suddenly reverses, it is neither necessary, nor advisable to prematurely exit trends, as we have a couple of tools in our Dow Theory arsenal to accomplish this goal. More about such “tools” in a post that I hope to publish this weekend. Readers of this Dow Theory blog stay tuned.


The SPY, Industrials and Transports closed up. The primary and secondary trend is bullish.

Today’s volume was higher than yesterday’s, which is bullish, as higher prices were confirmed by rising volume. The overall pattern of volume remains neutral, as the volume bullish action of the last few days is neutralizing past bearish readings.

Gold and silver

The gold and silver universe rout continues.

GLD closed down. So did SLV. GLD closed below the 04/15/2013 closing lows, thereby re-confirming the primary bear market signals and turning the secondary trend as bearish. Here you have an updated chart that says it all:

Primary bear market re-confirmed in SLV and GDX.

It is pertinent to remember that on December 20, 2012, I first alerted my readers about a primary bear market in gold and silver, as you can read here.

As to GDX and SIL, the gold and silver miners ETFs both closed down and violated their most recent primary bear market lows. GDX and SIL, in their abject weakness, unlike gold and silver, were unable to stage even a secondary bullish reaction against the primary bearish trend. Thus, the primary and secondary trend remains bearish.

Here you have the figures of the markets I follow for today.


Data for May 17, 2013


Bull market started
11/15/2012 135.7
Bull market signaled
01/02/2013 146.06
Last close
05/17/2013 166.94
Current stop level: Bear mkt low


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

14.30% 23.02% 7.63%


Bull market started
05/16/2012 149.46
Bull market signaled
08/22/2012 160.54
Exit December 20
12/20/2012 161.16
Current stop level: Sec React low
11/02/2012 162.6

Realized Loss % Tot advance since start bull mkt

0.39% 7.83%


Bull market started
06/28/2012 25.63
Bull market signaled
08/22/2012 28.92
Exit December 20
12/20/2012 29
Current stop level: Sec React low
11/02/2012 29.95

Realized gain % Tot advance since start bull mkt

0.28% 13.15%


Bull market started
07/24/2012 17.08
Bull market signaled
09/04/2012 21.83
Exit January 23
01/24/2013 21.69
Current stop level: Sec React low
11/15/2012 21.87

Realized Loss % Tot advance since start bull mkt Max Pot Loss %

-0.64% 26.99% 27.81%


Bull market started
05/16/2012 39.56
Bull market signaled
09/04/2012 47.77
Exit January 23
01/24/2013 44.56
Current stop level: Sec React low
12/05/2012 45.35

Realized Loss % Tot advance since start bull mkt Max Pot Loss %

-6.72% 12.64% 20.75%


The Dow Theorist.

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