Monday, June 23, 2014

Dow Theory Update for June 23: We shouldn’t be cocksure, mindless technicians

Trends unchanged

In the last few days, I have written several posts disdaining fundamentalist myopia (for example, here and here). I could even look cocksure about the infallibility of technical analysis (and especially the Dow Theory), and, hence, as myopic as the very fundamentalists I criticize.

So, yes: I have my fundamentally-based fears. Of course, the time-frame of any fundamentally-based fear is of secular nature. Fundamentals, even when they happen to work, are for the long pull, not for timing.

I fear to see that the world is heading towards wars. I see the economy, even the US economy, tanking in the future. I see an energy problem. I even see a kind of monetary/debt reset (which could be tomorrow or in 10 years or never) that could wipe out many people savings and against which no technical tool would be effective (what if a 50% devaluation of the USD, and the EUR against gold happens overnight?).

So far the US has lived minor disturbances (even the two World Wars, were “minor” as the US emerged economically almost unscathed). The Korean War, Vietnam, the inflationary crisis of the nineties' seventies and even the 2008 meltdown, were not followed by the disintegration of the system. In retrospect, the US is a clear example of survivorship bias, since many other countries (in fact, most of them), have “disintegrated” many times over. Would technical analysis save you if you happened to be in Hitler’s Germany, and your savings were confiscated? Would it now help if you happened to be in Syria? Would technical analysis have helped you if your Dow Theory signaled a primary bear market in Spanish stocks in July 1936 (when the Civil war about to begin) and you happened to have your cash in the communist zone? (pesetas, the currency unit, in the “red” area became worthless or directly confiscated ). What would have been the difference between being invested in a falling stock market or sitting on the sidelines with cash becoming worthless by the minute?

When systems disintegrate or reset, when a wave of wealth destruction sets in, nothing is going to help you. Neither the Dow Theory, nor, (even less) fundamental analysis.

Since I am not a US citizen (my English betrays me), I know that becoming affluent, that surviving on the investment arena can be much more difficult than Americans think. Try to survive financially in Kosovo or now in Iraq.

This is the only kind of “fundamental” analysis I allow to myself: “catastrophe-scenario" fundamental analysis. Of course, it may (hopefully) never materialize in our life-times, but our investment process should consider (even if it looks remote) this possibility (whose solution is to physically escape, if still possible, rather than sitting idle).

Would your cash be safe if a primary bear market is signaled because GDP went down by 50% due to war with Russia, fracking is over and oil imports have been suspended? Would you feel “clever” because the Dow Theory properly timed a monster bear market, and accordingly all your cash sits on your bank? Do you trust your bank under such circumstances? And your broker? Would your cash be safe?

Of course, against this scenario, there is little defense, and this is why, I tend to ignore such dire scenarios (not because they are irrational, but because there is almost no defense against them) and focus on the current technical picture of the markets. However, and here I risk being labeled “gold-bug”, I feel that it is always wise to have some percentage of your wealth in physical gold (please mind the word “physical”). Securitized gold is not going to help you if everything falls apart. However, even physical gold is not going to help you if a meteorite hits the earth or a solar flare engulfs the Earth.

Thus, my bottom line investing is:

a) Put most of your energy in becoming a good technician.

b) Unless you are short-term trading (which is not a vehicle for wealth preservation, but for wealth or income creation), try to register your shares on your name, not the street’s. Be very mindful of the legal aspects surrounding your stock holdings. 

c) Keep your fundamentally-based predictions to really worst-case scenarios; and pray that they don’t happen. Better to be proven wrong, and be alive than being the cleverest corpse in the cemetery.

d) Devote 80% of your wealth and energy to trading the markets (this includes the Dow Theory).

e) Just in case, devote some 20% of your energy and wealth to prepare for a worst-case scenario and hence have some 20% of physical gold.

f) Pray that the worst-case scenario doesn’t materialize, because on an earth ravaged by war or famine (and this happens every now and then in many countries around the world) you cannot eat your stocks, nor your Dow Theory and not even your gold.

All in all, once again, I grudgingly concede 20% of my thoughts to the fundamentally-based scenario; not because fundamentals are not important, but because we can do little about those fundamentals that really matter. I pity those who devote 100% of their time to such a petty endeavor.

US Stocks, gold and silver and their miners

Today was an indistinct day. No trends have changed.

The Dow Theorist