Wednesday, June 24, 2015

Dow Theory Update for June 24: Gary Antonacci on stops. Let’ s heed the words of a sage

Trends remain unchanged

There are three names that shine when it comes to (a) investment practical acumen; (b) avoid BS. These names are (in alphabetical order):

1) Antonacci.

2) Moening

3)  Schannep

I have praised Antonacci’s work in the past (here and here). He has recently penned a new article entitled “Momentum and Stop Losses” which proves that stops:

a) slightly raise average returns (please mind that the goal of any trend follower is not to greatly improve buy and hold, but merely, avoid costly drawdowns).

b) Reduce the standard deviation of returns (hence, less likelihood of a killing drawdown).

c) Result in a positive skewness (which is a good thing).

I encourage you to read Antonnaci's article as well as the links he provides. 

I derive two ideas from his article:

a) Stops make sense. If markets trend, then when momentum increases against my position the odds favor that a new trend against my position is being born, and hence, it is sensible to “cut losses short”.

b) The Dow Theory itself is the best “stop”. In essence, the Dow Theory is a breakout strategy. The entries (“bull market signals”) are merely “buy stops” (break up points) and the exit (“primary bear market signal”) is clearly the “stop” that stop us out. However, Dow Theory “stops” are miles apart from “normal” breakout stops. Normal stops are set at a predefined level (i.e. 5% stop, 20 days low), and by implication are parametric (which is not a good thing, as I have explained here). On the other hand, Dow Theory stops include three elements: Time, extent and confirmation (another index should confirm), and its level is not set at a predetermined level (one can have Dow Theory stops ranging from a meager 3% to 10% or even more), as their level adapts to market conditions.  More about Dow Theory stops, and the importance of the time and extent elements, here and here.

Trends for US Stocks, Chinese Stocks, Gold, Silver, their miners ETFs and US debt

If I look at all these markets through Dow Theory spectacles, I see that primary and secondary trends have not changed.

Hence, what I wrote on June 18th, remains fully valid:

The Dow Theorist

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