More Dorsey Wright on debunking buy and hold.
Yesterday I quoted Dorsey Wright's article
debunking the myths of buy and hold. The article is so profound, and
encapsulates in a short space so much wisdom, that it is worth quoting the
closing paragraph of the article, which you can find here.
“Every strategy, including buy and hold, has risks and opportunity costs. Every transaction
is a risk, as well as an implicit bet on what will happen in the future. The
outcome of that bet is not known until later. Every transaction, you make your
bet and you take your chances. You can’t
just assume buy and hold is going to work forever, nor can you assume it
will stop working. Arguments about any strategy being correct because it
worked over x timeframe is just a good example of hindsight bias. Buy and hold
doesn’t promise good returns, just market returns. Going forward, you just
don’t know—nobody knows. Yes, ambiguity is uncomfortable, but that’s the way it
is.
That’s the true state of knowledge in financial markets: no one knows what
will happen going forward, whether they pretend to know or not (emphasis in original)”
This quote
should be carved in the heart and mind of every investor. There are no
certainties (not even for the Dow Theory); the only certainty, though, is that
I have better chances of surviving financially if I am not willing to overstay
declining markets. To accomplish this you need market timing skills. To acquire
such market timing skills (i.e. through mastery of the Dow Theory) takes effort
and humility (accept that “no one knows
what will happen going forward”); there are no shortcuts. The likely,
albeit not guaranteed, reward for successful market timers is, firstly,
avoiding killing draw downs, and, secondly, under a propitious market (i.e. the
US in the last 200 years) even a modest outperformance with reduced risk
(variability of returns). Under less favorable environments (i.e. European
markets decimated by the WW I and II), the investor derives at least clues as
to when to get out and look for greener pastures.
Stocks
The SPY, the Industrials and
Transports closed up.
The secondary is bearish, which implies an ongoing secondary reaction
against the primary bullish trend, as explained here.
Today’s volume was smaller than yesterday’s, which is
bearish as higher prices were not confirmed by higher volume.
Gold and Silver
Yesterday I hinted that the recent pullback underwent
by SLV and GLD might setup the precious metals for a primary bull market
signal. Let’s recap. The primary trend is bearish. Now there is an ongoing
bullish secondary reaction against the primary bear market. In the last few
days both SLV and GLD experienced a pullback. However, under the Dow Theory not
all pullbacks are the same and, hence, qualify for a setup. Thus, when dealing
with US stocks, the Dow Theory requires a pullback of 3% or more in at least
one index. As I have repeatedly explained, when dealing with other markets, the
amount of the pullback should take into account the greater or lesser
volatility of the markets under study.
In this post I conducted and in-depth study of SLV and
GLD’s volatility. Accordingly, SLV should undergo a pullback of at least ca. 9%
and GLD ca. 5.6%.
SLV
|
GLD
|
|
Sec Reac high
|
23.59
|
136.75
|
Pullback low
|
22.13
|
131.74
|
Pullback Pct
|
-0.061890632
|
-0.0366362
|
So we can see that neither GLD nor SLV’s pullback
qualifies under the Dow Theory to set up the metals for a primary bull market
signal. Thus, we have to wait.
Therefore, the situation now remains as follows (see
chart below):
![]() |
SLV and GLD in nowhere's land |
If SLV and GLD jointly
breakup the blue horizontal line (secondary reaction highs preceding that last
primary bear market swing), we get a primary bull market signal.
If SLV and GLD jointly
violate the red horizontal line (last recorded primary bear market lows), we
get a primary bear market signal.
SLV closed up, 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.
As to GDX and SIL I wrote than maybe a new secondary
reaction against the primary bull market had been signaled. After careful
analysis I conclude that both ETFs have been declining for 10 days. Thus the
first requirement for a secondary reaction has been meet. However, after
measuring the amount retraced from the highs, neither ETFs has completed a “qualified”
pullback under the Dow Theory. According to the volatility adjustments SIL
should have declined by 12.28% and GDX by 14.01%. This hasn’t happened yet.
SIL and GDX closed up. 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 | 11/09/2013 | 169.4 | |
Current stop level: Bear mkt low | 157.06 | ||
Unrlzd gain % | Tot advance since start bull mkt | Max Pot Loss % | |
0.31% | 7.86% | 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 | 11/09/2013 | 14.91 | |
Current stop level: Primary bear mkt low | 06/26/2013 | 10.59 | |
Unrealized gain % | Tot advance since start bull mkt | Max Pot Loss % | |
-2.93% | 40.79% | 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 | 11/09/2013 | 26.79 | |
Current stop level: Primary bear mkt low | 06/26/2013 | 22.22 | |
Unrealized gain % | Tot advance since start bull mkt | Max Pot Loss % | |
-6.66% | 20.57% | 29.16% |
Sincerely,
The Dow Theorist
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