Primary bear market for stocks was signaled on October 10
I am writing before the close. But the final close won't affect my veredict.
My apologies for neglecting this Dow Theory blog during the last few days. My time is in extremely short supply and, after all, this is a free service without a subscription fee, so no obligation on my side to be “online” permanently, since I prioritize the businesses that feed me.
My charts tell me that on October 10th, the SPY and the Transports violated the last recorded secondary reaction lows of August 7, 2014 (red rectangles on the left side of the charts). Such confirmed violation of the last secondary reaction lows, signaled a primary bear market. On October 13th, the Industrials did also confirm, although their confirmation was not necessary for the primary bear market signal to exist.
It is true that the current secondary reaction (now requalified as the ongoing first leg of the new primary bear market) is still “ongoing” and hence the 3% rally off the lows which would setup stocks for a primary bear market signal has not occurred yet.
However, a primary bear market signal can also be signaled by a violation of the preceding secondary reaction closing lows when, after making higher highs, stocks start to fall and no intervening +3% rally occurs in any one index. This is exactly what has happened this time. We have an ongoing secondary reaction that goes lower and lower, and no index has hitherto managed to rally by +3%. As per the “stardard” primary bear market signal, we cannot declare the existence of a primary bear market yet, because the current secondary reaction hasn’t manage to put a +3% rally. Of course, adhering strictly to just this set up means that stocks could go down by 16% and we still would be declaring the primary bull market alive and well (why the decline of 16% as an alternative signal to declare the existence of a primary bear market? The answer here)
Now is when the wisdom of Rhea comes in handy. I quote from his book “The Dow Theory” (Fraser Edition, page 77):
“When declines in a primary bull market result in violating the lowest points encountered during the last major secondary reaction of that market, it may generally be assumed that the primary trend has changed from bullish to bearish” (emphasis added).
In other words, we have to always keep an eye on the lows of the last completed secondary reaction. If they get violated (by at least to indices) a primary bear market has been signaled. As you can see a primary bear market can be signaled in four alternative ways:
a) The “classical”.
b) The -16% decline.
c) The lows of the last completed secondary reaction.
d) The primary bear market lows (when a new primary bull market has been born, and no secondary reaction has developed yet).
Cogitate these 4 primary bear market signals, and you’ll greatly increase your odds of being on the right side of the market. Please mind the words of Rhea: He doesn't talk certainties but probabilities. Take your time in studying the four signals, as it took me deep reading of Rhea and Schannep to be able to systematize, digest and understand the deep meaning of these 4 signals.
Here you have the chart that says it all:
|The lows of the last completed secondary reaction (left) have been violated: Primar bear market signaled|
I don’t attempt to forecast how deep or how long will this primary bear market last. This is not our business. It is better, to run for the exits. Maybe stocks bill bounce, I don’t know. But if they do, then soon a primary bull market will be signaled. So, instead of theorizing; we strictly comply with the instructions given by the Dow Theory and remain on the sidelines.
In a future post, I will provide you will calculations as to the realized profit of the last primary bull market signal (which I can see has been clearly profitable)
The Dow Theorist