Monday, June 10, 2013

Dow Theory Update for June 10: Richard Russell turns finally bullish

Secondary trend of gold and silver miners ETFs (GDX, SIL) turned bullish.

In his last two Dow Theory Letters, Richard Russell, of the “Dow Theory Letters” has turned finally bullish on stocks.

Of course, this is kind of contradictory with his stance a week ago, as I explained in my post “Time to be out of the market?" which you can read here.

One week ago, while acknowledging the evident, namely, that the primary trend is bullish, Russell advised his followers, nonetheless, to be out of stocks.

Of course, as Keynes said, “when things change, I change," so there is nothing wrong with Richard Russell changing his mind and thereby being more in tune with his associate Jon Strebler, whom I praised here.

While his market call can be proven right, and old Russell’s instinct served him well in the past, I see the following problems with his latest bullish stance:

·        He doesn’t nuance the time frame for his call. Is it a long term position in gear with the primary trend? Is it just a speculative position? 

·        As his associate, Strebler has warned, the primary bull market is well advanced. The reward/risk ratio doesn’t favor the opening of a position right now. It is time to ride the existing trend for those that, long ago, decided to go long the market when a primary bull market was first signaled. This Dow Theory blog spotted a primary trend on January 2, 2013, or more than 12% below current prices. That was the sweet point with the proper reward risk ratio as it was explained here. Now, in my humble opinion, is much too risky. Of course, Russell may be right, and in spite of being a mature (not old) primary bull market, still reap some gains. Furthermore, the odds favor Russell’s call. Being the current primary bull market being only ca. 6 months old, it is likely that the current hiatus is merely a temporary interruption of the longer-term  bullish trend. However, this is certainly not a “sweet spot."

·       As a consequence of being “late," Russell gives no indication as to where should be placed a technically effective stop. Here, I gave ample information as to how to place technically effective stops.
·        However, as I wrote here, the Dow Theory offers a second chance for latecomers to jump aboard: the first secondary reaction. A secondary reaction can bring prices down to a level with a decent reward risk ratio. Anyhow as I write right now (Friday, June 7 after the close), prices have not declined enough to offer a sweet point (the lowest point hitherto made during this reaction slightly exceeded 3% for the SPY and not even 3% for the Industrials) The Dow Theory based stop stands at 18.79% below current prices for the SPY (at the last recorded primary bear market lows of mid November 2012). Of course, one can put an arbitrary and narrower stop (i.e. 8% below current prices); however, such a stop is technically defective, and wouldn’t benefit from the extraordinary resilience of the Dow Theory record. This wouldn’t be Dow Theory.

·        Prices should decline more in order to offer a decent reward ratio; at the very least, they should decline by a further 5-6%.

·      Finally, I am a little bit puzzled at Russell’s newfound bullishness, since he has been despising this market (rightfully, by the way) because it doesn’t offer good values. Given that Russell tends to be in some instances an investor along the secular trend (which can last more than 10 years), which fully depends upon the existence of good values, it surprises me to see that suddenly no more talk about poor values is made. Maybe Russell is suggesting a position of more modest time proportions, which is not so value dependent (the shorter the time frame, the more importance of the technical factors). I really don’t know.

Russell makes one point, though, that shouldn’t be neglected. He likens current market action with the one seen in 1951, when after having advanced the stock market 17 of the 20 months into 1951, the market went flat and most people were expecting the start of a new bear market. Russell reminds us that market observers were fooled and, instead of going down, the market resumed its bullish ascent well into 1953. While Russell’s analogy is certainly not a tenet of the Dow Theory (of any “flavor” whatsoever), Russell might not be alone in his thinking. Dow Theorist Schannep, of "" wrote a couple of months ago that he felt that a new secular bull market could currently be under way. If on a secular basis, the trend is bullish, then Russell could be proven right, in spite of poor timing, if he is really meaning a long term position aligned with a secular bull market.  


The SPY, Industrials and Transports closed down. The primary trend is bullish, the secondary trend is bearish.

Today’s volume was lower than Friday’s, which is bullish as volume didn’t expand as prices declined. The overall pattern of volume remains, nevertheless, bearish.

Gold and Silver

GLD closed up, and SLV closed down. The primary and secondary trend remains bearish.

GDX and SIL closed up. The primary trend is bearish, and it seems the secondary trend has turned bullish for the reasons I will explain tomorrow.

Here you have the figures of the markets I monitor for today:

Data for June 10, 2013


Bull market started
11/15/2012 135.7
Bull market signaled
01/02/2013 146.06
Last close
06/10/2013 164.78
Current stop level: Bear mkt low


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

12.82% 21.43% 7.63%

Alternative Schannep's stoploss: 

Highest closing high
05/21/2013 167.17
16% stoploss from highest closing high

Max Pot Loss %



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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