US Stocks
Let’s briefly recap how our
Dow Theory analysis fared in 2015. Did we do a good job at determining the
primary trend of the markets? 2014, as explained here, was a good year for those
applying the Dow Theory to stocks, gold, silver and their miners. 2015 has been
a good year too (by avoiding losses with losers).
Today I focus on US stocks. In
the coming days, I will review how gold, silver and their ETF miners fared when
traded in pursuance with the Dow Theory.
The year began on January 2
with an ongoing primary bull market (more about it, here)
This primary bull market
signal lasted until August 20th, when a primary bear market was signaled, as
explained here and here.
Following the primary bear market signal, the SPY
further declined -8.18% until a bottom was made on 8/25/2015. Please mind
that my reading of the Dow Theory slightly diverged from that of Schannep.
Schannep signaled the primary bear market one day later, on 8/21/2015, and hence,
the subsequent decline until the bottom amounted to only -5.24%.
For the sake of clarification I must say that I
signaled the primary bear market one day earlier that Schannep because I had
identified a secondary (bearish) reaction against the then ongoing primary bull
market in a different fashion than Schannep (I considered the primary bull
market reconfirmed with just confirmation from the Industrials and the SPY; and
from such higher highs I appraised the development of a secondary reaction,
whereas Schannep, by requesting confirmation by the three indices of the
all-time highs, did not appraise a new secondary reaction, and had to wait
until the traditional Dow Theory signaled a primary bear market signal. Yes I
know it is kind of esoteric, and I hope one day I have the time to further
dissect such nuances of Schannep’s Dow Theory). In the spirit of full
disclosure I must say that if I were to apply Schannep’s Dow Theory right now, I would have done it in
exactly the same way than Schannep. Hence, I don’t want to boast that I was one
day earlier or smarter than Schannep. It
was mere luck, because further study of Schannep’s Dow Theory proved me
that Schannep’s requirement of confirmation by three indices in order to
consider the primary bull market reconfirmed (when breaking out above last primary
bull market highs), is a very sound requirement, which I plan to respect to the
letter in the future. In past instances (i.e. 1999 and 2007), and specially
within aging bull markets, Schanneps’ requirement of demanding all three indices to confirm higher
highs, resulted in avoiding false signals, and kept investors on the right side
of the market.
Please mind
that the entry price was at a slighter lower level than the previous exit price,
which is good.
It was a short-lived primary bull market, though, as a primary
bear market signal was signaled on December, 11th 2015, as explained
here.
Please mind that the exit price (SPY at 201.88) was at
a slightly higher level than the entry price (SPY at 199.41). Thus, even though
it was not an outstanding signal (in the sense that it didn’t bear much fruit), it was
certainly not a loser. The pattern of Dow Theory trades resembles that of trading:
Most of the trades tend to be small winners or losers; however, every now and
then we stumble on a big winner (2013-2014 comes to my mind). There is nothing
wrong with small winners provided the losers are kept under control, something
which the Dow Theory manages to do remarkably well.
Here you have a chart displaying 2015, from January
2nd (first trading day) to December 31st. The orange rectangles displays the
periods we were sitting on the sidelines due to primary bear market signals.
 |
| The Dow Theory kept investors on the safe side during 2015 |
Now let's have a look at
profits, as shown in the spreadsheet:
Please mind that the real profits made by the investors are those that I label "capitalised". This is the money you'd have made starting with 100 units, cashing out 98.84 units at the August 20 exit (-1.16% loss) and reinvesting the 98.84 units at the buy signal on Oct 7, and exiting on December 11 (+1.23% profit) for a total gain of 0.056%. As you can see the Dow Theory managed to remain (barely) positive, while buy and hold lost -1.21% during 2015.
Thus, the Dow Theory outperformed buy and hold by +1.27% in 2015.
As I explained here, the Dow
Theory tends to outperform “buy and hold” when the going gets tough. In good
times, there is no need for “timing” as a rising tide lifts all boats. 2015 was
a tough year, though, with sideways movement punctuated by sharp declines and
recoveries that is noise, which tends to kill traders)
.
.
While Schannep’s Dow Theory managed
to outperform by and hold by almost 1.27% in 2015 (which is no meager
accomplishment, given the deflationary environment), we should adjust total
returns by taking into account the maximum drawdown suffered during 2015. If we
do so, then we see the net superiority of the Dow Theory over buy and hold, as
such an outperformance came with less
risk. As you will see on the spreadsheet below, when we adjust for risk, we
sew that buy and hold had a maximum drawdown of -12.28% versus a mere -4.44% for the
Dow Theory. From these figures we can draw two
conclusions:
a) The obvious one: The Dow Theory manages to contain
losses, and to keep investors on the
safe side (cash) when bullish trends subside. It had a maximum drawdown almost three times smaller than that of buy
and hold.
b) The Dow Theory (especially, Schannep’s one), manages
to signal the change of the primary trend
very close to top. It is highly reactive. The two largest drawdowns experienced
by the Dow Theory during 2015 which
coincided with two “sell” (primary bear
market) signals occurred at less than 5%
from the top.
| MAX Drawdown 2015 SPY buy and hold | MAX Drawdown 2015 SPY Dow Theory | |||||||||
| Price | Date | Price | Date | |||||||
| Closing high | 213.5 | 5/21/2015 | Closing high | 213.5 | 5/21/2015 | |||||
| Closing low | 187.27 | 8/25/2015 | Exit | 203.97 | 8/20/2015 | |||||
| Max Drawdown | -0.1229 | Max Drawdown | -0.0446 | |||||||
| Closing high | 211 | 11/03/2015 | ||||||||
| Exit | 201.88 | 12/11/2015 | ||||||||
| Max Drawdown | -0.0432 | |||||||||
Conclusion: the Dow Theory did a good job keeping us all year long on the right side of
the market. Out of 12 months, the Dow Theory had us invested in the market roughly
10 months. The first primary bear market signal helped us avoid a major scare
(the August mini crash), while the second one of December is helping us right
now (January 8 as I write) from another steep decline.
Sincerely,
The Dow Theorist
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