Friday, October 9, 2015

Dow Theory Update for October 9: The primary bull market for US stocks signaled on Oct. 7 unambiguously confirmed

Trends in precious metals unchanged

Yesterday, I acknowledged that a primary bull market had been signaled. However, I acknowledge it grudgingly, as the S&P 500 just exceeded its September 16th closing highs by a hair and the SPY was lagging behind. Based on that, I gave a list of technical reasons that might advocate for caution (namely, wait one day or two, until we see a little bit more strength). I also wrote yesterday that:

“Please mind that if either the S&P 500 had clearly broken up (either in extent, or at least “time," that is being, let’s say, three hours above the critical level) or the SPY had broken up, even by one cent, I would have honored the signal, no questions asked, and no additional technical bullshit would have been given by this blogger truly yours.”

Well, both the S&P 500 and the SPY showed remarkable strength yesterday, so my qualms and my technical bullshit give way to the Dow Theory: The September 16th closing highs have been amply bettered by all indices, ETFs, you name it. Even the lagging Transports have confirmed (and, their confirmation was not necessary under Schannep’s Dow Theory, but, of course, their confirmation lends even more credence to the new bullish market condition.

I don’t know whether this is going to be a failed signal given the somewhat pessimistic technical background I was depicting yesterday. What I know is that the Dow Theory overrides all other technical considerations, and it beats the pants off all other technical devices when it comes to determining the primary trend (1-2 years) of stocks and other assets. Yes, I wrote, “other assets," as Hamilton, one of the fathers of the Dow Theory, wrote in his book “The Stock Market barometer” that the Dow Theory may be applied to foreign stock indices and even to gold and other markets. More about Hamilton’s vital insight here.

The last recorded primary bear market closing lows of 08/25/2015 constitute our “exit” of Dow Theory stop loss. If such lows were jointly violated, a primary bear market would be signaled again. Please mind that this has been a quite narrow setup (which is good, as it contains losses, if the trade is a loser, but also bad, as we have a quite narrow stop more prone to whipsaws), as the closing lows are -6.48% below of the close of October 7th (day of the original Schannep’s Dow Theory signal).

One thing is clear: Once again, you see the ability of Schannep’s Dow Theory to detect a change of trend long before moving averages react. Currently, the S&P 500 is well below the 200 days moving average. Of course, I could be a failed signal, after all ca. 30% of the signals end up with losses, and detractors could say that the Dow Theory was too early. However, we don’t have to look at a single trade. When we look at all the Dow Theory track record (more about it here) we know that the Dow Theory is clearly superior to moving averages. It gets earlier “in” and “out” and it does it with more winning trades and containing losses much better, as explained here.

Here you have a chart depicting the current situation:

Primary bull market for US Stocks

By the way, if you look at the SPY (bottom of the chart), you may see that the primary bull market signal has been given at a level somewhat lower than that of the primary bear market signal of August 20th (red vertical arrows). This implies:

a) A hypothetical short would have made theoretically some money (I am against shorting long term for the reasons given here)

b)  For those exiting at the primary bear market signal, the re-entry price is lower, which translates into small additional profits, and superior drawdown protection, since on August 20th, nobody knew whether the decline was going to be short-lived or it was the harbinger of a big crash.


The primary trend is bearish as explained here.

The secondary trend is bullish, as SLV and GLD are in the midst of a secondary reaction against the primary bear market. Here you have a full explanation of a somewhat difficult secondary reaction.


The primary and secondary trend is bullish as explained here.

The Dow Theorist


  1. Hi Dow Theorist, Thanks for all your updates which I follow avidly. As someone who doesn't really believe in the 'reality' of what passes for the markets, but still respects Dow Theory etc.; I'm interested to know what are the recent lengths of the most recent primary Bull phases of the cycle? i.e., we're still in the very dangerous month of October, when the market could turn on a dime. So, what is the shortest recent Bull market length of time in the cycle, what is the general recent average, and what are the actual most recent few Bull market lengths? I'm sure I could locate this information somewhere in your website (so apologies for not doing so); but I guess this would probably also be of interest to most of your readers, as they weigh up the odds of either investing in this new Bull market, or are just still pondering the odds.... Thanks!

    1. Hi Mike,

      I am currently on travel with time in short supply. When I find time I try to answer you question. As an "intro" we shoud distinguish between "bull market lenght" (extent and duration) from primary bull markets as determined by the Dow Theory.

      Bull market cycles (not the secular ones, please mind) tend to engulf primary bull and bear markets as determined by the Dow Theory. The current bull market phase or cycle started, as per Schannep (and I agree) in 2011, so it is currently aging. Based on Schannep,1/2 of bul cycles that reached 4 years old, managed to reach 5 years old. So now from a "big picture" perspective, the current cycle has a ca. 50% possibilities surviving another year. Thus, we cannot speak of headwind for the current primary bull market signa. Nor of tailwindl. Bull markets do not die so easily. This is why all signals should be taken, as second-guessing will more likely than not result in mistakes. Furthermore, statistics concerning past bull market cycles, do not necessaritly have forecasting power, as things change, whereas the primary bull market signals themselves, not subject to statistics, but to actual price action are more reliable.