Tuesday, January 14, 2014

Dow Theory Update for January 14: Stocks close up, albeit they fail to make higher closing highs

Trends persist in all asset classes.

Followers of this Dow Theory blog know that I am fond of the research of Dorsey Wright. Recently, they have posted an interesting article explaining that trends are not an isolated phenomenon for stocks. Trends exist in all asset classes. What is even more important is that trends persist. Once you spot them, it is not too late to jump aboard, as there is price persistence. Accordingly, a very simple strategy based on buying last year #1 or #2 (or both) best performing asset class would have largely outperformed the S&P's performance. You can find Dorsey Wright article here.

It is really humbling to see how extremely simple systems based on a sound premise, namely that trends exist, outperform many intricate investment strategies. Off course, to successfully implement such a trend following strategies requires:

a)     Deep belief in the existence of trends. How to nurture such faith in trends? Maybe what I wrote here is helpful to you:

“Trends do exist, and to the academics' dismay, prices are not random. Empirically trends exist. And aprioristically it makes full sense for trends to exist. Success tends to beget success, and failure begets failure. A good country is more likely to get better in the near future than to get worse. A successful company is more likely to continue successful than to blow up without prior notice. The odds favor that a good student will continue to outperform laggards or those playing hooky in the near time. Of course, there can always be exceptions. A successful company can unexpectedly disintegrate; a successful student can suddenly suffer one stroke. This is why trends eventually die, but until they end, the odds clearly favor that success, and failure will continue. Trends are a fact of life.

Those still skeptical are well advised to read Michael Covel’s book “Trend Following." The book provides a wealth of information as to the existence of trends. “

b)     The humility to accept that we do know nothing and nobody does for this matter. It forces you to look dumb; to eschew dandy and intelligent financial talk and if you have clients, even get angry clients who feel that your commissions are not justly earned, as there is no deep intellectual work involved. People are in love with narratives, and it is difficult to sell your clients a product that entails no hard work (if we measure “hard work” as pontificating about things we really don’t know).


All in all, trend following is worth following (pun intended). Of course, the Dow Theory is just a subset (and a very successful one) of trend following.

US stocks

The SPY, the Industrials and the Transports closed up. However, no index managed to better the last recorded closing highs (December 31). The longer price action remains below such highs, the higher the odds for a secondary reaction to develop. However, it is too early to signal a secondary reaction (as no index declined more than 3% from its respective market tops. Furthermore, the secondary trend of Chinese stocks is clearly bearish, which implies headwind for US stocks.

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. 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. The Dow Theory is close to signaling a secondary reaction against the primary bearish trend. However, we still need some more bullish action so that our minimum volatility requirements are met.

Data for January 14 , 2014


Bull market started
06/24/2013 157.06
Bull market signaled
07/18/2013 168.87
Last close
01/14/2014 183.67
Current stop level: Secondary reaction low


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

8.76% 16.94% 2.05%

The Dow Theorist

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