Monday, March 30, 2015

Dow Theory Update for March 30: Gary Antonacci, of Dual Momentum, joins the Dow Theory Letters

Primary and secondary trends remain unchanged

I have praised Gary Antonacci, of Dual Momentum, and his book, in the past.

I am very frank to you: If I suddenly forgot all about the Dow Theory, I’d surely follow the approach expounded by Gary Antonacci. He’s clearly a trend follower, and the methods he uses are clearly sound. Very sound indeed. He is BS-free.

On the other hand, you know that this blogger truly yours is clearly highly skeptical with Richard Russell, of the “Dow Theory Letters." The Russell of yesteryear was a great Dow Theorist; however, in recent years (let’s say after 2009) he’s allowed to let his Dow Theory background to be clouded by extraneous theories. His ingrained pessimism has prevented him from participating in the great stock rallies that followed 2009 and to stick to gold in spite of all the negative technical evidence. Result: Successful market calls have gone down the drain, but his gift for entertaining good writing has helped subscribers to put up with dismal performance.

Thus, I see as a very valuable contribution the fact that Gary Antonacci has joined the “Dow Theory Letters." If he sticks to the ideas explained in his book and doesn’t allow the fundamentalist temptation to cloud his judgment (as Russell did), he will certainly account for a great deal of successful market calls. The downside is that he is likely to be less colorful than Russell, and, let’s be honest, the investment masses, want “fundamental gossip," not dry technical information, albeit successful. This is why the majority, prey to their egos, will never manage to follow a pure technical approach, and hence, pure technical writers are not very likely to gather a huge following (which is good). It is much more appealing to rationalize every little move of the market and to lambaste the Fed, the politicos, and whatever. While I have eyes and I don't like many things, I have charts, and I know that opinions just make a nice (or unpleasant) talk around the kitchen table. But money is made by market movements, not by opinions.

General trends

They have not changed. So what I wrote here remains valid.

The Dow Theorist

Wednesday, March 25, 2015

Dow Theory Update for March 25: Gold, silver and their ETF’s miners are setting up for a primary bear market signal.

Is it a secular bull or bear market?

Barry Ritholtz of the “Big Picture” finance blog, has written an interesting article concerning secular bull and bear markets.

He, as this blogger truly yours, withholds judgment and merely portrays the different opinions.  He quotes many names of market observers such as such as Raymond James's Jeffrey Saut, Ralph Acampora, Laszlo Birinyi, which are on the secular bullish side. Others, such as Douglas Ramsey or Joseph Calhoun believe that valuations do not warrant a secular bull market.

My take on it is as follows:

If we are to appraise a secular bull market on a technical basis, then we have to conclude that we are in the midst of a secular bull market (higher highs on a secular basis see to it). Schannep, of “”, whom I consider the best, clearly militates on this camp and believes we are undergoing a secular bull market that began in 2009.

If we are to appraise a secular bull market based on valuations, then we cannot declare a secular bull market, since valuations are high (and were already quite high since the very inception of the alleged secular bull market). No proper secular bull market has started with high valuations.

So we are confronted with a puzzling situation: Technically we have a secular bull market, but valuations tell us that there is long term headwind against higher prices.

From observing the market, I tend to believe that valuations are more important when it comes to evaluating the very long term (i.e. secular markets), whereas the technical makeup of the market rules over the shorter term (i.e. swing trading and even to some extent cyclical bull and bear markets).

However, things can be different this time. I know of “secular bull markets” that have occurred in the absence of compelling valuations. To name two: Weimar Germany and Zimbabue. If the markets anticipate inflation ahead stocks will go up, even on a secular basis, even though valuations are unappealing.

Furthermore, “valuations” are elusive. What if the yardstick used to measure “cheap” and “expensive” 60 years ago has changed? Austrian economists seem to believe that the larger the capital base of a society, the lower the interest rate (discount preference) tends to become. Should we discount earnings at the same rate than in the nineteen century? Don’t you thing that the discount rate should be lower now? Thus, when using valuations (which pertains to the appraisal of secular markets), we risk applying the wrong metrics. So valuations can be elusive when it comes to declaring the existence of a secular bull or bear market.

Furthermore, what if the markets realize that stocks are being the facto “monetized” thanks to the Fed’s largesse? So many rounds of QE (and hidden QE nowadays) may have transmitted investors that a stock is no longer in the antipodes of cash but a surrogate which can be quite easily redeemed into cash, if need be, and the Fed obliges. What level would reach the S&P 500 if tomorrow the US Government would declare US stocks as legal tender? Make this mental exercise. Wouldn’t stocks shoot up?

Of course, all my musings may be sheer stupidity, as I am highly skeptical of all “economic/value-based” explanations of reality, mine included.

If we are Dow Theorists bent on trading the cyclical (1-2 years) bull and bear markets, we know that technical considerations tend to override fundamental ones. We also know (see my studies here and here) that irrespective of the secular market condition (be it bullish or bearish) trading along the cyclical bull markets tends to be profitable. In other words, even in the midst of a secular bear market, the cyclical bull markets have posted positive returns.

Thus, we shouldn’t try to be too smart and “time” our cyclical bull and bear markets according to our perceived secular trend. Like in trading, we just have to trade all cyclical bull markets. Of course, we will make more if ex post facto we happened to be in a secular bull market, but we don’t really know in real time.

All in all, the discussion of secular bull or bear market seems to be counterproductive for Dow Theorists focused on spotting cyclical bull and bear markets.

General trends

They have not changed. So what I wrote here remains valid.

However, gold, silver and their ETF’s miners are setting up for a primary bear market signal. Please mind that “setup” is not the real thing. So trends have not changed (not even secondary ones).

Look at the charts below and you will see:

1) Primary trend bullish.

2) Secondary reaction (pullback) against the primary bull market (orange rectangle at the right of the chart)

3) Rally following the secondary reaction of enough volatility-adjusted magnitude (blue rectangle at the right of the chart).

If the lows of the secondary reaction were violated, a primary bear market would be signaled.

SLV and GLD setting up for a primary bear market signal

SIL and GDX are also setting up for a primary bear market signal

So now we have to monitor subsequent market action in the precious metals arena.

The Dow Theorist.

Wednesday, March 18, 2015

Dow Theory Update for March 18: Primary and secondary trends unchanged in spite of today’s volatility

Another short Dow Theory update.

Today we saw fireworks in the markets.

US stocks, gold, silver and their miners ETFs closed strongly up.

However, when looked through Dow Theory glasses nothing has been accomplished, and no trend has been changed.

Therefore, the analysis I made here, remains unchanged.

The Dow Theorist