Friday, June 6, 2014

Dow Theory Update for June 6: Industrials, Transports and SPY make higher closing highs

Does momentum investing really work?

If you still doubt it, go and read my yesterday’s post.

US Stocks

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:


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


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 remains bullish, as explained here, and more in-depth here

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.

The secondary trend is bullish too, as explained here and here.

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.

The Dow Theorist

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