Dow Theory Update for September 10: Setup for primary bear market in stocks even clearer today

 

Precious metals fall out of bed

Dorsey Wright debunks buy and hold

The blog of Dorsey Wright money management has posted a brilliant article highlighting the risks of buy and hold. The basic argument runs as follows:

·       1.  The US and UK are the only countries that had the privilege of not seeing their stocks markets go to zero. Thus, Americans fall prey to some sort of hindsight bias. There is no guarantee that the future is going to be as benign as was the past. 

·     2. Even if the US stock market managed to avoid a devastating loss in the future, individual investors can ill afford the long term perspective necessary to “survive” buy and hold and its inherent draw down. As Dorsey Wright says “Individual investors have time frames. We only live so long. A buy and hold retiree in 1929 or 1974 might be dead before they got their money back.”

·       3. . Rejecting buy and hold does not entail missing bull markets. The beauty of trend following (and, of course, of the Dow Theory) is to allow us to participate in strong trends. Thus, if markets make higher highs, we will be aboard.

On a more cynical note, and at the risk of being too sincere, I would add that I don’t want to be the “nice” guy being left holding the proverbial hot potato in my hand. We need “buy and holders” so that we can unload our stocks on them without provoking a crash. The very day all people come to believe in market timing, then market timing would be dead. So we do need people who follow the “buy and hold” cult. 

Go here to read the whole article. It will only take 2 minutes of your time, so it is worth the reading. 

Stocks

The SPY, the Industrials and Transports closed up.

The primary trend is bullish, as explained here, and more in-depth here.

The secondary is bearish, which implies an ongoing secondary reaction against the primary bullish trend, as explained here.

Today, the SPY, which closed at 168.87, managed to rally more than 3% from the August 27^th lows (163.33). Yesterday, the Transports, which closed at 6460.43, managed to rally more than 3% from the August 30^th lows (6249.88). Today, the Transports by closing at 6585.26 extended the rally against the secondary reaction. All in all: we have a clear and unambiguous set up for a primary bear market signal, for the reasons I explained yesterday.

You can see on the chart below the setup as it stands right now. The red rectangles display the ongoing secondary reaction against the primary bullish trend. The ellipses (middle and bottom of the chart) display the current +3% rally in the Transports and the SPY. The red horizontal lines display the relevant levels to be violated (secondary reaction lows) for a primary bear market signal to be signaled. Take your time and study the chart.

A clear setup for a primary bear market signal.

So now is the moment of truth for stocks. If they go down and violate the secondary reaction lows (red horizontal line) a primary bear market will be signaled. If they breakup the last recorded primary bull market highs, the bull market will be reconfirmed.

Gold and Silver

I lack the time to carry out an in-depth study of the chart patterns I see on both the precious metals and their miners. But at a first glance, I think we could have:

a)     A relevant pullback under Dow Theory that would set up GLD and SLV for a primary bull market signal.

b)     A secondary reaction against the primary bull market in GDX and SIL.

Please take the above two statements with a grain of salt, as I have to perform my volatility adjustments in order to come out with a verdict. I hope to find some time tomorrow. In any instance, time is of no essence, since we are not talking of a change of the primary trend. 

SLV, and GLD closed down. For the reasons I explained here, I feel the primary trend remains bearish. Here I analyzed the primary bear market signal given on December 20, 2012. The primary trend was reconfirmed bearish, as explained here. The secondary trend is bullish (secondary reaction against the primary bearish trend), as explained here.

SIL and GDX closed down. SIL and GDX, unlike GLD and SLV, are unambiguously in a primary bull market under the Dow Theory, as explained here and here. The secondary trend is bullish as well.

Here you have the figures for the SPY, GDX and SIL which represents the only markets with suggested open long positions.

  

DOW THEORY PRIMARY TREND MONITOR SPY
			SPY
Bull market started		06/24/2013	157.06
Bull market signaled		07/18/2013	168.87
Last close		10/09/2013	168.87
Current stop level: Bear mkt low			157.06
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
0.00%	7.52%	7.52%

 

DOW THEORY PRIMARY TREND MONITOR ETF SIL
			SIL
Bull market started		06/26/2013	10.59
Bull market signaled		08/14/2013	15.36
Last close		10/09/2013	14.76
Current stop level: Primary bear mkt low		06/26/2013	10.59
Unrealized gain %	Tot advance since start bull mkt	Max Pot Loss %
-3.91%	39.38%	45.04%
DOW THEORY PRIMARY TREND MONITOR ETF GDX
			GDX
Bull market started		06/26/2013	22.22
Bull market signaled		08/14/2013	28.7
Last close		10/09/2013	26.57
Current stop level: Primary bear mkt low		06/26/2013	22.22
Unrealized gain %	Tot advance since start bull mkt	Max Pot Loss %
-7.42%	19.58%	29.16%

Sincerely,

The Dow Theorist