Monday, June 16, 2014

Dow Theory Update for June 16: When Dow Theorists lose it. Russell or how to put aside the Dow Theory and miss a bull market.

Trends remain unchanged


Recently, Richard Russell, of the Dow Theory Letters, considered by some as the dean of the Dow Theorists has written:

“A primary bear market in the stock market and the US economy began in 2007. The bear market in the US economy is continuing to this day. But the Federal Reserve stepped in and manipulated the stock and bond markets, eliminating the discounting functions of these markets. The recession which started in 2007 continues to this day…The government and the Fed have lied to us about inflation and the economy and employment. We've been living under an unending stream of lies and propaganda. I think the cork is finally bursting out of the bottle. The surging precious metals market is telling the story. The next step will be the bottom falling out of the dollar. There is a huge short position in silver on the COMEX. I expect these shorts will soon be under pressure to cover. Investors holding large portfolios of stocks must now be in a quandary.”

It really saddens me to see a man whose newsletter includes the name “Dow Theory” to stray from what should be the core of his analysis: The Dow Theory. It pains me even more to see that he used not to be like this in the past (now becoming distant past). He rightfully earned prestige within the Dow Theory fraternity because he made very successful market calls in the past. All of them were based on the strict application of the Dow Theory (either the “secular” or Schaefer’s flavor or the “primary trend” or Rhea’s flavor). He had the ability to successfully apply the Dow Theory and the courage of opinion (which is different of pride of opinion) to stick to his judgment call in spite of the prevailing market mood. I have read most of his newsletters published since the nineties' fifties, and I can see a saddening evolution: From being a strict technician (and a very good one), he has little by little succumbed to rants, politics and fundamentally based market calls. While this kind of stuff will certainly attract readership, as most investors (subconsciously) crave for excitement and not profits, it certainly puts me off. There is a distinct correlation between the amount of pure Dow Theory and performance. And the more Richard Russell has strayed from the Dow Theory, the more his performance (difficult to monitor, as he change of opinion every now and then) has suffered.

Maybe Russell is right (we can technically never know) and we have been in a primary bear market since 2007 which has been manipulated by the Fed. However, one thing is certain: the market has gone relentlessly up since 2009 and the Dow Theory (any flavor whatsoever) clearly has shown the existence of a primary bull market all of the time. What’s the point of fighting the trend with a myriad of fundamental opinions? Eventually his dire predictions (and I agree with them, as fundamentally I am pessimist, but I have eyes to read the charts which, at least for the time being, prove my fundamental instincts wrong) will be on target. However, in the meantime, his bearish stance is costing money to his subscribers, whereas other Dow Theorists like Schannep have contributed to their wellbeing with impressive performance.

As to Russell’s assertion concerning “soaring precious metals," I am still rubbing my eyes in astonishment. “Soaring precious metals”? If he is talking about palladium, then Russell is right. However, I do know Russell well, and he is meaning gold and silver. Anyone who has two eyes can see on the charts that gold and silver are far from soaring. Granted: There has been a rally (which has been particularly strong in GDXJ, as explained here), but such a rally has occurred within a primary bear market, and after the bearish violation of a tight range, and hitherto it hasn’t even managed to break up the secondary bullish reaction highs. Not a very bullish picture, though.

Concerning precious metals, Russell has a clear bias: When they go up (and don’t forget: even during bear markets, there are rallies), he always touts the move as “explosive”, “soaring”, “the birth of a new bull market”, etc. When they go down, then he reaffirms the bullish fundamental case and ignores the declines, while losses mount.

As far as this skeptical blogger is concerned: I stick to the Dow Theory free of “funny-mentals”. 

US Stocks and precious metals.

It has been an indistinct day. All trends (primary and secondary remain unchanged).

The Dow Theorist

1 comment:

  1. I absolutely agree with you 100%. The Dow Theory statistical message is clear. Those who desire to read tea leaves in an attempt to find some other message behind it are wasting their time. Keep up the good work!