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 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 | |||
| 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 | 01/14/2014 | 183.67 | |
| Current stop level: Secondary reaction low | 165.48 | ||
| Unrlzd gain % | Tot advance since start bull mkt | Max Pot Loss % | |
| 8.76% | 16.94% | 2.05% | |
Sincerely,
The Dow Theorist
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