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.
The Industrials closed up, and the Transports and SPY closed slightly down.
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|
|Bull market started||06/24/2013||157.06|
|Bull market signaled||07/18/2013||168.87|
|Current stop level: Secondary reaction low||165.48|
|Unrlzd gain %||Tot advance since start bull mkt||Max Pot Loss %|
The Dow Theorist
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