Can momentum be arbitraged away?
This is the title of an interesting article posted by
Dorsey Wright, which you can find here.
As you will see momentum strategies (and the Dow
Theory is part and parcel of momentum) are very likely to continue performing
in the future because of two reasons:
a)
Momentum tends to reflect the underlying fundamentals (be it of the economy,
for stocks indices, be it of the particular company for individual stocks).
b)
There is a behavioral explanation for the existence of momentum due to the
biased way that investors act on information (in other words, they tend to
under and over react and this is human nature).
I would further add that ego is our first enemy, and
hence most investors will always find repellent to follow an investment
strategy which humbles them, which tells them “your opinions are worth nothing." This is too much to bear for
the average person, and hence momentum, trend following and the Dow Theory will
never become really mainstream because human nature, our ego, our biases are
well ingrained. Furthermore, since most of the money is professionally managed,
the few money managers humble and brave enough to forget their ego and just
follow the trends would be out of a job as soon as the first inevitable
drawdown hits. Their clients wouldn’t tolerate such a fund manager. Most clients
want to hear stories, even though such stories are proven time and again wrong.
It comes to my mind some or two popular money management names (one begins by “H”,
another one begins by “R”, another begins by “G”) who have been proven
repeatedly wrong (and their performance attests to it) but impervious to
reality continue pontificating about what markets “should” do. They merely
cater their ego filled audiences. There is a market (demand) for bullshit and
for being wrong, and, hence, such a demand is met by supply (fundamentally-based
market forecasters).
All in all, the “anomaly” of momentum is very likely
to stay. Personally, I am convinced. And if the economy collapses (something “fundamental”
that might happen), trend following, and more specially the Dow Theory (given
its more accurate timing) will let us know when is time to run for the exits or
for the atomic shelters. However, under such dire (and maybe probable)
circumstances, no investment strategy would work.
US Stocks
The SPY continues making higher highs, which until now
have not been confirmed by the Industrials (in spite of closing up) and the
Transports, which closed down. What I wrote here remains fully valid.
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. Will it survive the fourth one? Confirmed higher highs will let
us know.
SLV and GLD closed up. 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 and GDX closed up.
Do the ETFs miners know
something about their underlying precious metals? I ask this because they are much stronger than silver
and gold. Normally, the miners tend to lead the metals. While the primary bull
market signal has not been flashed yet (more about the setup here) and the
miners remain caught in a primary bear market, they are look much better on the
charts.
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
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