Friday, June 21, 2013

Dow Theory Update for June 21: Primary bear market for stocks signaled today

 People long stocks should get ultra careful

Let’s give my readers the “meat” straight away, as today the Dow Theory spoke once again.

The Transports by closing below its June 5 lows have just signaled a primary bear market. Yesterday, the Industrials and the Transports violated their respective June 5 lows, and for the reasons stated in my yesterday’s post, I was reluctant to declare the existence of a primary bear market. Today’s action leaves no margin of doubt: The primary trend has turned bearish.
Here you have the chart that says it all:

There is no doubt: A primary bear market has been signaled

The Industrials closed up, and the SPY closed down. The primary and secondary trend of the market is bearish.

Today’s volume was much higher than yesterday’s, which is bearish, although it looks kind of climatic. In the very short term, I wouldn’t be surprised to see one or two up days. However, such climatic volume tend to confirm the prevailing trend for the days ahead. Accordingly, the overall pattern of volume is bearish, as you can see in the chart below:

Volume is bearish that can be bullish in the very short term

 Volume is bearish because:

  1. We have had 4 bearish volume days in a row.
  2. Yesterday was a bearish pivot low.
  3. Today's monster volume confirms the prevailing bearish trend (even though it tends to show a very short-lived exhaustion of the bears of one or two days).

I hope to write later today or shortly before tomorrow’s open an assessment of the implications of the current primary bear market signal, and how fared those followers of the Dow Theory that went long on January 2, 2013 in pursuance of the primary bull market signal of that date (more about such an entry signal here)

Here it suffices to say that the SPY has made 8.91% since the primary bull market was announced (dividends, slippage and commissions not included) on January 2, 2013. If we bear in mind that this percentage gain has been made in less than 6 months, it is quite remarkable. More about this successful signal, later today.

And what about the current market situation as per the “Rhea/classical” Dow Theory?

According to the “classical” Dow Theory, we are not in a primary bear market because not even a secondary reaction has been signaled yet. For a secondary reaction under the classical Dow Theory to exist, it is necessary:

a)   More than 3 weeks of declining prices (15 trading days). This requirement has been fulfilled.

b)   More than 1/3 of the previous advance has been erased. This requirement has not been fulfilled. As I write the Industrials should still decline an additional ca. 2% and the Transports ca. 3% so that 1/3 of the previous bull market swing (from the Nov 15, 2012 lows) is erased.

So under the “classical” Dow Theory we are still far from a primary bear market signal.

While some market observers will claim that this is good because, the “classical” Dow Theory tends to signal fewer signals, and thus avoid whipsaws, I am highly skeptical as to this claim for the following reasons:

·    As I will shortly show, the empirical record proves beyond any shade of doubt that Schannep’s version is more effective in getting investors out of trouble (that is in spotting primary bear markets in a timely fashion) than the “classical” one.

·        I am very leery as to overstaying a falling market. Even if it were proven that the classical Dow Theory outperforms by 3% Schannep’s (which is not the case), I wouldn’t feel comfortable with the inherent danger of overstaying, even though draw downs may be temporary, one never knows. Furthermore, even if the draw down turns out to be temporary, its consequence can be devastating psychologically and financially for the unprepared. Rule number one for any investor is to avoid unnecessary losses. Avoid losses, avoid drawdowns, and you will survive to make money when brighter times come. Be negligent cutting your losses short, and your days as an investor are eventually numbered.

Thus, while the classical Dow Theory does a much better job than moving averages or, God forbids, buy and hold, I firmly believe that Schannep’s flavor is a much better way to avoid blowing up one day. Past samples, even though they span +115 years (as the Dow Theory record) might not contain the final “blow up” event (Taleb’s Black Swan). Thus, humbly bearing in mind that the worse case is not contained in my sample, I will always aprioristically and rationally choose the system that errs on the side of caution and cuts losses short quickly. This is not subject to negotiation to me.

Gold and Silver

GLD and SLV closed up in what amounts to a dead cat bounce. Technically, we are very far from a primary bull market. The primary trend is bearish, as explained here and reconfirmed bearish here; the secondary trend remains bearish too.

GDX and SIL closed up in an equally dead cat bounce fashion. The primary trend is bearish, as explained here and reconfirmed bearish here; the secondary trend remains bearish too.
Eventually, one of these primary bear market re-confirmations will be proven false. In the meantime, it is better not to fight the trend.

Here you have the figures of the markets I monitor for today. As you can see, now I talk of “realized gain” for the SPY as the trade has been closed today. My reading of the Dow Theory tells me to be flat in all markets: GLD, SLV, GDX, SIL and now the SPY. Time to sit on cash (being mindful of the dangers stalking cash in order not to be cyprused).

Data for June 21, 2013


Bull market started
11/15/2012 135.7
Bull market signaled
01/02/2013 146.06
Last close
06/21/2013 159.07
Current stop level: Sec reaction lows


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

8.91% 17.22%      None.


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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