Are Chinese stocks under a bear market?
Even though all trends (primary and secondary remain
unchanged), today’s been an interesting day.
Recently, Zero Hedge posted an article entitled “Chinese Stocks enter Bear Market Following 2 More Defaults Overnight”. As per Zero
Hedge, Chinese stocks have declined more than 20% and, hence, they entered a
primary bear market. I beg to disagree on three counts:
a)
Because Chinese stocks have higher
volatility than US Stocks (at least the relevant indices) and hence when taking
benchmarks like 20% we should compare apples to apples.
b)
Because the “famous” -20% benchmark
to declare the existence of a primary bear market, is an arbitrary measure and
has no strong predictive power whatsoever (even for US stocks where such a
benchmark was developed). Schannep has done considerable research on this
matter (Chapter Six of his excellent book: “Dow Theory for the 21stCentury”) and proves that for US stocks there are more accurate benchmarks.
c)
Because under the Dow Theory no
primary bear market signal has been flashed yet. Chinese stocks remain under a
primary bull market, albeit there is an ongoing strong secondary reaction.
If I find time, I’ll try to write a short post
explaining more in-depth the Chinese situation under the Dow Theory. Let’s hope
for the good of the economy and even word-wide peace that a primary bear market
signal is not signaled. In the meantime, I give the benefit of doubt to the
existing primary trend which is bullish.
US Stocks
The SPY, Industrials and Transports closed down on
enormous volume (which was not seen since December 20, 2013). The SPY briefly
exceeded its most recent highs and from that point reversed with violence on
high. This tends to be a bearish sign (of short term consequences, though).
The primary trend was
reconfirmed as bullish on October 17th, 2013, and November 13th,
2013 and March 7th, 2014, for the reasons given here, here and here.
So the current primary bull
market signal has survived three secondary reactions.
Gold and
Silver
SLV closed
unchanged, and GLD closed up. For the reasons I explained here, and more
recently here, and in
spite of all the bullishness than now surrounds gold and silver, the
primary trend remains bearish.
For the
primary trend to turn bullish, SLV and GLD should jointly break above the secondary (bullish) reaction highs. As a
reminder, the secondary reaction closing highs were made on August 27th,
2013. From such highs the market declined without jointly violating the June 27th,
2013 primary bear market lows.
By the way, I
alerted that the secondary trend turned bullish long ago (on July 22, 2013),
when most market pundits were solidly bearish, as you can read here.
Now, those very pundits are very bullish as only the sky was the limit. I take
the middle road based on the Dow Theory: Since July 22, 2013 there was
technically good reason not to be so bearish; on February 14th, 2014, there is
no reason to be long term so bullish.
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.
On a
statistical basis the primary bear market for GLD and SLV is getting old. More
than one year since the bear market signal was flashed has elapsed. However, I
am extremely skeptical as to the predictive power of statistics. I prefer price
action to guide me, and the Dow Theory tells me that the primary trend remains
bearish until reversed.
Furthermore,
the June 27, 2013 lows remain untouched. The longer this situation lasts, the
higher the odds that something might be changing. But I wait
for the verdict of price action.
As to the gold and silver miners ETFs, SIL and GDX
closed up. GDX is exceeding the last recorded secondary reaction highs
whereas SIL is failing to do so.
The secondary
trend is bullish, as explained here.
In spite of short term bullish accomplishments, SIL and GLD are not in a
primary bull market.
The primary
trend for SIL and GDX remains, nonetheless, bearish, as was profusely
explained here
and here.
Here you have
the figures for the SPY which represents the only market with a suggested open
long position:
The secondary
trend is bullish, as explained here. In spite of short term bullish accomplishments, SIL
and GLD are not in a primary bull market.
The primary
trend for SIL and GDX remains, nonetheless, bearish, as was profusely
explained here
and here.
Sincerely,
The Dow Theorist
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