### Trends unchanged on stocks and precious metals.

On many occasions, and based on my observations of
Schannep’s Dow Theory primary bull and bear market signals, I have written that
buy signals tend to be signaled at roughly 5-7% from the lows (bottom) and sell
signals at around 5-7% from the highs (top).

I must confess that I didn’t find the time to do the
exact math and I was just giving a rough measure. Maybe I didn’t because I know
that we are just dealing with rough figures and not with mathematical
certainties. I just needed to know that “buy” and “sell” signals tend to come
quite close percentagewise from the bottom/top and that the average primary
bull market swing has enough magnitude to account for the percentage points “lost”
when getting in and subsequently when getting out.

Since we know that the average decline following the
primary bear market signal is around minus 12.85% (more about it here and here),
I always advocated for not second-guessing Dow Theory signals. While we cannot
predict the outcome of any given signal, we know that in the long run the odds
favor a new re-entry (buy signal) at a lower level that our exit price.

The math is simple: If following a primary bear market
signal we can expect the market to further decline ca. 12.85%, and we “buy” at
around 7% from the bottom,

**we are buying “on average” ca. 5.85% lower**(12.85%- 7**%) than our previous exit price**. It is as simple as that.
This is why I always “welcomed” and honored “sell”
(primary bear market) signals. The odds of buying at a lower price (let alone,
escaping big crashes) are on my favor.

I must thank Jack & Bart Schannep of “thedowtheory.com”
for having calculated the exact price level at which “buy” and “sell” signals
are given from the respective “tops” and “bottoms”. I quote from their latest
Newsletter of June 30 (which is a must read as it is packed with valuable
insights. It is in my opinion the best financial newsletter by a long shot):

“The
record over the last 62 years and 36 signals is that the DowTheory for the 21

^{st}Century BUY signals on average start at 7.4% of the lows and the Sells within 7.7% of the tops”
Therefore, while these figures are not carved in stone
and are likely to oscillate in the future as future trades keep changing the
average, we have a rough measure of what to expect when using Schannep’s Dow
Theory.

Please mind that these figures apply only to Schanneps’
Dow Theory and not to the “Rhea/Classical” one. As readers of this blog know
the “classical” Dow Theory due to its using only two indices and needing more
time to declare a secondary reaction tends to react slower than Schannep’s,
and hence the entries and exits tend to be at a greater distance from their
respective bottoms and tops. My rough, very rough estimate, lies at around
9-10%. Maybe one day, I’ll find the time to make the exact calculations.

Cogitate Schannep’s figures in order to convince
yourself of the ability of his Dow Theory to detect tops and bottoms.

Sincerely,

The Dow Theorist

Given the statistics you adduce above, wouldn't it make sense to short the market in some way during Dow Theory sell periods?

ReplyDeleteAnd, as always, thank you for the great work.

Hi Algyros,

DeleteHere I explained why I don't favor shorting:

http://www.dowtheoryinvestment.com/2012/11/dow-theory-special-issue-after-dust-has.html?showComment=1353329374401#c5985484968027532600

Furthermore, given that we know that the average further decline following the primary bear market signal averages ca. -12.5% and given that we know that we lose on average ca. 7% getting in and out of a position (ca. 14-15% total), we can see that "on average" bear market swings lack enough magnitude to be profitable.

Regards and thx for following

Thank you for this post! It answered a question I have periodically entertained since I started reading your blog. Keep up the good work!!!

ReplyDelete