Tuesday, December 24, 2013

Dow Theory Update for December 24: Happy anniversary (for those standing on the sidelines): Primary bear market signal in gold and silver grows one year old

 Stocks make higher highs

On December 20, 2012, this Dow Theory blog signaled the existence of a primary bear market in gold and silver, as was explained here.

Well, last Friday December 20, 2013, the primary bear market signal grew 1 year old. So happy anniversary for those that heeded the signal.

On December 20, 2012, we had the following prices for GLD and SLV:

GLD 159.73

SLV 29

On December 20, 2013, one year later, we had the following prices:

GLD 115.94

SLV 18.62

Accordingly, GLD has lost -27.41%, and SLV has lost -35.79% in the year following the December 20, 2012 primary bear market signal.

Here you have the chart that says it all:

A devastating primary bear market for SLV and GLD that was timely signaled by the Dow Theory

I don’t want to brag about the timeliness of last year’s primary bear market signal, and the carnage avoided by those following the Dow Theory as, evidently, not all signals are proven “right." However, those that have followed this Dow Theory blog since its inception can get a glimpse of what it means under the Dow Theory to “be right” and to “be wrong." When we have a failed signal, our losses tend to be contained, as we have our Dow Theory stops in place (more about them here). However, when we are right, our profits (or, more importantly, the losses avoided) are sizeable. Please mind that the beauty of the Dow Theory lies not so much in “beating the market” when there is a smooth sail (which by definition is almost impossible to achieve) but, rather, in avoiding devastating losses when the going gets tough. Last year’s action with SLV and GLD attest to this fact. We outperform markets by slightly under performing in “good” years (that is when markets go up) and greatly outperforming in “bad” years (that is when markets collapse). 

This is why in a year like 2013 when the S&P might even make 30%, it is close to impossible for any trend follower to emulate such performance, since by definition, one always gets in and out too late. However, should the S&P lose 30% next year, then we would see the beauty of the Dow Theory once again. Personally, I prefer a system that acts as a kind of insurance. The premium I pay is slightly lower performance in good market years, while the insurance kicks in bad years through stark out performance (i.e. reduced losses or even marginal profits). The overall performance profile is a smoother one, with fewer bumper years but also fewer devastating losses. I feel such a profile is much better for our mental and cardiac health.  The "Face off" series, which you can find here, highlights the intricacies of the Dow Theory.

US stocks

The Industrials, Transports and SPY closed up; all of them bettered, once again, the last recorded closing highs, which means that the primary bull market remains in good health.

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.

Volume contracted today and was much lower than yesterday’s, which is bearish as higher prices were not joined by expanding volume. However, being Christmas’ eve I wouldn’t ascribe too much value to today’s volume reading. Given the bullish volume pivot we saw two days ago (more about it here) and recent volume readings, I label volume as bullish.

Gold and Silver

SLV and GLD closed up. With today’s close, GLD remains has managed to close above the primary bear market lows of June 27th. SLV remains above such lows,. 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 up. The primary trend is bearish, as was profusely explained here and here. Likewise, the secondary trend is bearish.

Here you have the figures for the SPY which represents the only market with a suggested open long position:


Data for December 24, 2013


Bull market started
06/24/2013 157.06
Bull market signaled
07/18/2013 168.87
Last close
12/24/2013 182.96
Current stop level: Secondary reaction low


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

8.34% 16.49% 2.05%

I wish you all a merry Christmas.

The Dow Theorist


  1. merry xmas dow theorist..im applying it to my forex trading with alot of success!!!