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.


  1. Manuel-- Really great piece! Thanks..

    1. thx for following. I have corrected several typos.

  2. Hello Manuel,

    when you have time you might comment on this:
    according to Schannep: “The longer it takes for the market to reconfirm a bull trend, the more suspect that trend becomes.”

    1. I agree with Schannep. However, neither Schannep nor I act on "suspect trends", we act on the actual signal. So, like Schannep, I believe we are still in a primary bull market. The trend is suspect, but the sell signal will be given when the secondary reaction lows are broken. Until then, we wait and see.