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.
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.
The Dow Theorist