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....so bearish that can be bullish in the very short term |
Volume is bearish because:
- We have had 4 bearish volume days in a row.
- Yesterday was a bearish pivot low.
- 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 | |||
DOW THEORY PRIMARY TREND MONITOR SPY | |||
SPY | |||
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 | 161.27 | ||
Realized gain % | Tot advance since start bull mkt | Max Pot Loss % | |
8.91% | 17.22% | None. | |
DOW THEORY PRIMARY TREND MONITOR GOLD (GLD) | |||
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 | ||
0.39% | 7.83% | ||
DOW THEORY PRIMARY TREND MONITOR SILVER (SLV) | |||
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 | ||
0.28% | 13.15% | ||
DOW THEORY PRIMARY TREND MONITOR ETF SIL | |||
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 % | |
-0.64% | 26.99% | 27.81% | |
DOW THEORY PRIMARY TREND MONITOR ETF GDX | |||
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 % | |
-6.72% | 12.64% | 20.75% |
Sincerely,
The Dow
Theorist
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