Richard Russell of the Dow Theory Letters sees distribution days mounting up
In his most-recent Dow Theory Letter, Richard Russell pointed out that distribution days (down days with increasing volume) are mounting. Something similar has been penned on this Dow Theory blog here.
According to Russell this is not a bullish sign as it shows that institutional investors (the big volume movers) want to be out of this market.
While I agree with Russell as to the undisputed existence of distribution days, I am leery when it comes to being fully out of the market, as Russell suggests, for the following reasons:
· Firstly, if my experience doesn’t fail me, distribution days tend to be harbingers of a decline of secondary proportions, not a primary bear market. While one never knows when the next primary bear market will hit, distribution days merely hint at the increased likelihood of a correction of secondary nature. Distribution days are not enough to pinpoint a primary bear market.
· Secondly, if we follow the Dow Theory, we know that, even if a monster primary bear market is in the making, we normally will get advanced warning as to when to get out. We do know that we will not be left holding the hot potato in our hands. Either we will first get a secondary reaction whose lows should have to be violated to declare a primary bear market or, in the absence of such secondary reaction, we have our Dow Theory stop (at the primary mid November 2012 bear market lows) or Schannep stop (-16% from the last recorded highs), which will take care of our long stock position by strictly limiting our losses. If you look at the bottom of this post, you can find the details of the current Dow Theory and Schannep stop losses. I you want to know more about them, I encourage you to read my post “Introducing Schannep's stop loss for the stock market” which you can find here.
· Thirdly, because, as I wrote here, price action is much more important than volume clues:
“I have learned to distrust even my own volume readings; not because they are wrong but for two reasons: Firstly, because volume merely qualifies price actions. Trends are made by prices not by volume. While it is true that supportive volume increases the odds for trend to continue, the final say lays in price action itself. (…) [v]olume modestly increases the probabilities for a trend to continue. Thus, volume is a positive contribution, albeit of moderate proportions. I’d say that we owe 95% of our investment success to successfully reading price and its resulting trends.”
All in all, while Russell's position is perfectly legitimate, I feel that suggesting to be completely out of the stock market does not bode well with a strict reading of the Dow Theory. I feel Russell’s associate, Jon Strebler, is making a more accurate application of the Dow Theory when he unambiguously declares the primary trend as bullish, and with all attendant worries, recommends staying invested in the market.
Richard Russell is rightfully worried about the economy, QE, wars and peak prosperity. So am I. I really mean it. I don’t dismiss such worries out of hand. However, I also know that the market as a whole knows more than I. I also know that trends can last significantly longer than one expects. Furthermore, we should be mindful of unknown unknowns. What if stocks are going up because strong hands or insiders know that big inflation is coming soon? What if some insiders know the USD is going to be devalued against gold? I am not saying this will happen. What I merely say is that there are many unknowns, and that we always have to take decisions under uncertainty. Being aware of my own intellectual frailty, of my deep lack of useful information, makes me philosophically accept the Dow Theory tenets in its integrity, and accordingly, if there is a cyclical bull market, one should stay invested until the trend reverses. Of course, right now is not the right point to enter the market. However, January 2, 2013 or even January 18, 2013 were the sweet spots to enter the market, as explained here and here. If one really dislikes this market, one should sell down to the sleeping point (i.e. by never having more than 50% of one’s assets invested in stocks). However, the sense of uneasiness will greatly diminish with a profound knowledge of the Dow Theory, and more, importantly, its stop losses.
On a side note, I’d say that I worry as much as Russell. However, my worries with the current market tend to focus on return OF capital, rather than return on capital. If a systemic crisis hits, I fear that the whole system might go “MF Global." I fear that the markets may be closed for a while. Thus, current times make me be very cautious as to the legal aspects concerning investing. Are the shares on the street name? Who is the custodian? Now it is time to pay attention to the fine print. On the other hand, I part company with Russell when it comes to the Dow Theory’s ability to spot in time a change of trend and, with it, protect the investor from suffering devastating losses.
Dow Theorist, Jack Schannep, of “thedowtheory.com” clearly identifies a primary bull market according to his reading of the Dow Theory and, accordingly, favors a long position in stocks, even though he keeps his eyes wide open, should the markets reserve its course. I side with Schannep’s view.
The SPY, Industrials and Transports closed down. The Transports made lower lows unconfirmed by the SPY and Industrials. While we are approaching a secondary reaction signal, we still label the primary and secondary trend as bullish.
Today’s volume was lower than yesterday, which has a bullish connotation. The overall pattern of volume is bearish.
Gold and Silver.
GLD and SLV closed down. The primary and secondary trend remains bearish.
GDX and SIL, the gold and silver miners ETF closed down. The primary and secondary trend remains bearish.
Here you have the figures of the markets I monitor for today:
|Data for June 4, 2013|
|DOW THEORY PRIMARY TREND MONITOR SPY|
|Bull market started||11/15/2012||135.7|
|Bull market signaled||01/02/2013||146.06|
|Current stop level: Bear mkt low||135.7|
|Unrlzd gain %||Tot advance since start bull mkt||Max Pot Loss %|
|Alternative Schannep's stoploss:|
|Highest closing high||05/21/2013||167.17|
|16% stoploss from highest closing high||140.42|
|Max Pot Loss %|
|DOW THEORY PRIMARY TREND MONITOR GOLD (GLD)|
|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|
|DOW THEORY PRIMARY TREND MONITOR SILVER (SLV)|
|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|
|DOW THEORY PRIMARY TREND MONITOR ETF SIL|
|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 %|
|DOW THEORY PRIMARY TREND MONITOR ETF GDX|
|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 %|
The Dow Theorist