Tuesday, September 17, 2013

Dow Theory Update for September 17: The SPY makes a higher closing high unconfirmed

Precious metals: Either consolidating or preparing for the next leg down

Debunking value measures

Dorsey Wright has penned another great article. This time on the elusiveness of determining value. While easy on the surface, determining value gets tricky, and, hence, the investor can commit grave mistakes when investing for the long haul based on value considerations.

Once again, we come full circle to the basic truth, namely: Nobody knows the future, and we have to learn to go with the flow.

Furthermore, and while this is the subject for a future post on this Dow Theory blog, I am very skeptical as to the immutability of the yardsticks commonly used to determine value, such as PER or dividend yield or even earnings yield. Thus, while a yield of 3% was indicative of an overvalued market in the nineties' forties, this may not be the case seventy years later due to the increase of the capital stock per capita accrued during this lapse of time. The more “capitalized” a society, the lower capitalization rates will tend to be.

Therefore, if we bear in mind that:

a)    It is not so easy to agree on how to estimate value; in other words, it is not so easy to determine the “input” (i.e. earnings) to our value formulas.

b)     And the very same formulas (yardsticks) are in a state of flux.

We can conclude that determining value is not an easy feat.

Furthermore, even if value could be perfectly determined, why fight against a trend? A stock can remain depressed a long time for reasons that have nothing to do with its intrinsic value such as weak hands who are pressed to sell the stock.

Finally, as I have written other times, value investing forces you to take a long haul (at least 3 years optimistically, as I know value investors that after 4 years in a drawdown still insist that the value of their portfolio will be recognized by the market “soon”, being soon some additional 3-4 years). However, such too long term perspective leaves you exposed to monstrous drawdowns and with no predetermined stops.

US Stocks

The SPY, the Industrials and Transports closed up.The SPY made a higher closing high, hitherto unconfirmed.

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’s volume was lower than yesterday’s, which is bearish as higher prices were not accompanied by higher volume. The overall pattern of volume remains neutral, since bullish and bearish volume days alternate and I cannot discern a clear pattern.

Gold and Silver

SLV and GLD closed very modestly up. 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.

Yesterday, I explained that GLD and SLV set up for a primary bull market signal. However, a setup is not the same as the “real thing," namely the primary bull market; thus, many “setups” do not materialize and until the secondary reaction closing highs are jointly broken up, no primary bull market will be signaled.

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 bearish, which is tantamount to saying that there is an ongoing secondary reaction against the primary bullish trend, for the reasons given here.

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



Bull market started
06/24/2013 157.06
Bull market signaled
07/18/2013 168.87
Last close
09/17/2013 171.07
Current stop level: Bear mkt low


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

1.30% 8.92% 7.52%


Bull market started
06/26/2013 10.59
Bull market signaled
08/14/2013 15.36
Last close
09/17/2013 13.67
Current stop level: Primary bear mkt low
06/26/2013 10.59

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

-11.00% 29.08% 45.04%


Bull market started
06/26/2013 22.22
Bull market signaled
08/14/2013 28.7
Last close
09/17/2013 25.93
Current stop level: Primary bear mkt low
06/26/2013 22.22

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

-9.65% 16.70% 29.16%


The Dow Theorist

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