Does momentum investing really work?
If you still doubt it, go and
read my yesterday’s post.
The SPY, Transports and Industrials closed up, and all of them made higher
confirmed closing highs. The bullish picture for stocks continues. Eventually,
trends will change but my Dow Theory readings continue to tell me what they
have been telling me for months: Don’t fight the bullish trend!
It goes without saying that
the market is severely overbought and susceptible to, at least, a mild
correction. However, as followers of the Dow Theory, we are unconcerned with
the timing of secondary reactions. This is noise.
What we do know, is that the
unrealized (please mind the word “unrealized”) profit for our suggested long
position in the SPY according to the primary bull market signal given by the
Dow Theory on July 18, 2013 has reached a very decent 15.70%. We also know that
our Dow Theory stop (more about “Dow Theory trailing stop, here) has locked a sizeable part of our profits (barring a cataclysmic
event, with a -20% overnight gap), since our stop lies at the closing lows of the
last recorded secondary reaction (on January 31, 2014 at 174.17 for the SPY),
which is well above our entry price of 168.87.
Here you have a spreadsheet
with all the relevant data:
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 | 06/06/2014 | 195.38 | |
Current stop level: Secondary reaction low | 174.17 | ||
Unrlzd gain % | Tot advance since start bull mkt | Max Pot Loss % | |
15.70% | 24.40% | None |
Of course, such unrealized
gain corresponds to a “plain vanilla” Dow Theory approach. Schannep himself
does not suggest the SPY as the proper vehicle for investing along the Dow
Theory, as he uses the RSP ETF which is the equally weight S&P, instead of
the capitalization weighted SPY. The RSP tends to outperform the SPY by almost
3% annually. While nobody can make forward assurances of out performance, there
are many well-documented studies (i.e. famed investor Joel Greenblatt “The Big Secret for the Small Investor”),
which show that market cap indices tend to under perform equally weighted
indices.
And if you want to go for the
moon, as I explained yesterday, a momentum-based portfolio of stocks coupled
with a Dow Theory filter can work wonders. I leave to the reader to further
explore such possibilities.
All this is not to brag about.
We never know when a drawdown will hit. However, one thing is clear: The Dow
Theory works, and when the market does not oblige it helps us to contain
losses.
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 up, and GLD closed
down. For the reasons I explained here, and more recently here 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.
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. However, the secondary bullish reaction against such old
primary bear market is also getting quite old. Tie.
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 closed up, and GDX closed down.
I profusely explained that SIL
and GDX set up for a primary bull market signal. You can find all the relevant
information from a Dow Theory standpoint here.
Please mind that a setup is
not the real thing. So the primary trend has not turned bullish yet (or maybe “never”).
The secondary trend is
bullish, as explained here. In spite of short term bullish accomplishments, SIL and GDX are not in a
primary bull market.
The primary trend for SIL
and GDX remains, nonetheless, bearish, as was profusely explained here and here.
The secondary trend is
bullish, as explained here. In spite of short term bullish accomplishments, SIL and GDX 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
No comments:
Post a Comment