Timing the
next primary bear market in stocks
The website
“State of the Markets," run by Dave Moenning produces, in my opinion, one
of the best market commentaries. And their free content is much better than
that offered by other paid subscription sites (Schannep and a few others, excluded, of course, where subscribers
find real value for their money)
The “State of
the markets” managed to get its readers on the right side of the market during
2013 and kept a bullish stance whereas other commentators and market
practitioners were outspoken bears.
Now, when
even the last bears have thrown the towel, as reported by Zero Hedge, the
“State of the Markets” begins to consider the possibility of a serious
correction in 2014. With lots of good sense, the “State of the Markets” deals
with two alternative sell signals that, in their opinion, are worth heeding.
One is based on identifying the
technical health of the market's industry groups, and as Dave stresses, is not
so easy to calculate and implement by the neophyte; the other one is based on a
modest, but effective, 13-month exponential moving average which even an
investment rookie can calculate.
On the other
hand, Zero Hedge has recently stressed that the probability for a stock market
crash is soaring. You can read Zero Hedge well grounded article here.
Thus, it
seems that the odds begin to favor, at the very least, a severe correction or,
why not, even a primary bear market.
So what’s my
take on this?
As to the
likelihood of a severe correction, I simply don’t know, and I don’t care. Why?
Because, when the tide turns, the Dow Theory will sufficiently close from the
top tell us that is time to kiss good-bye to stocks. Instead of wasting my
energy in trying to time the top of the market based on cycles (as the Zero
Hedge article suggests), Fibonacci numbers, value considerations, etc., I think
I am better served by spotting according to the time-tested Dow Theory rules
the actual turn of the tide once it becomes apparent. It has taken many years
to humbly accept that sometimes the hardest thing to do for an investor is to
keep it simple since it tends to be ego-humiliating.
As to the
timing devices suggested by “The State of the Markets," I agree with them,
and surely they will keep the investor on the right side of the market;
however, as you could expect from a Dow Theorist, I personally choose the Dow
Theory as my method of timing. It is simpler and has a longer successful track
record than monitoring the health of industry groups (first timing method suggested);
and is by several orders of magnitude more effective than the moving average
(second timing method suggested for the average Joe). One future post of this
Dow Theory blog will highlight the overwhelming superiority of the Dow Theory
as a timing device over moving averages.
Accordingly,
I feel the Dow Theory is the best timing device because:
1)
It doesn’t require exhaustive work or
access to almost professional data (such as monitoring the health of industry
groups and integrate all the information into one reading). The Dow Theory only
requires a keen understanding of its tenets.
2)
It has the built-in characteristic of
spotting new trends close enough to the top
or bottom (ca.10%); thus, no complaint can be made of its responsiveness,
which outdoes that of moving averages.
3)
And don’t underestimate the +100
years track record.
All in all,
when the turn tides, I am confident the Dow Theory will let me know soon enough
to avoid the carnage.
US stocks
The
Industrials closed up, and the Transports and SPY closed slightly down.
The primary
trend is bullish, as explained here, and more
in-depth here.
The primary
trend was reconfirmed as bullish on October 17th and November 13th,
for the reasons given here and here.
Gold and
Silver
SLV and GLD
closed down. The winning streak of five consecutive “up” closes has come to an
end today. For the reasons I explained here, and more
recently 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 the
gold and silver miners ETFs, SIL, and GDX closed down. The primary trend is
bearish, as was profusely explained here and here. Likewise, the secondary trend is bearish.
Tomorrow I
will publish a 2013 review according to the Dow Theory. We will revisit all the
Dow Theory-based market calls and how we have fared compared to buy and hold. It’ll
be a real tour de force, as you will have before your eyes one full year of
market action.
Here you have
the figures for the SPY which represents the only market with a suggested open
long position:
| Data for
December 30, 2013 |
|
|
|
|
|
|
|
| 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 |
|
12/30/2013 |
183.82 |
| Current stop level: Secondary
reaction low |
|
|
165.48 |
|
|
|
|
| Unrlzd gain % |
Tot advance since start bull mkt |
Max Pot Loss % |
|
|
|
|
|
| 8.85% |
17.04% |
2.05% |
|
Sincerely,
The Dow
Theorist
