Dow Theory review for 2015: Silver and Gold miners ETFs

As I did when analyzing 2015 for silver and gold, I, once again, apologize for posting this review so late. Better late than never, though.

Let’s see how fared in 2015 the Dow Theory when applied to the silver and gold miners ETFs (SIL and GDX)

SIL and GDX

SIL:

The year started with an ongoing bear market, and the Dow Theory was suggesting staying on the sidelines. 

Here you have the chart displaying SIL for 2015. The blue rectangles display the time the Dow Theory suggested being in the market.

On January 12, 2015 a primary bull market was signaled. As I explained here, it was not a very clear primary bull market signal as the volatility requirement was barely met (it was not met when the secondary reaction leading to the primary bull market set up was developing, and was only met when we were confronted with the actual signal).

 

However, one has to take decisions under uncertain conditions, and I decided to heed the most recent volatility readings, and hence I considered a primary bull market had been signaled. However, I cautioned to make a subpar commitment. Not only the signal was not clear-cut, but the initial risk (initial Dow Theory stop) was quite large. I make a general observation. Not all trades are created equal. Some have a good risk reward ratio (due to a narrow Dow Theory stop), others don’t. We are not supposed to be batting all the time. At the very least, the size of our commitment should take into account the initial risk. The entry price for SIL was 31.23.

The powerful longer term trend bear market (as determined when applying the Dow Theory to weekly charts) eventually prevailed and at July 1, 2015 a primary bear market was signaled, as was explained here.

The exit price for SIL was 24.75

Hence, this particular Dow Theory trade resulted in a loss of -20.75%.

The Dow Theory suggested staying on the sidelines until the next buy signal which was given on October 5^th, 2015, as explained here.

The entry price for SIL was 22.2

The year ended on December 31^st, 2015 with an open position. In other words, the trade taken on October 5^th, 2015 had not been reversed by a primary bear market signal yet.

SIL price at the end of year was 18.51, which translates into an unrealized loss for this trade of -16.62%

As you can see in the spreadsheet below the compounded loss resulted from the two losing trades (one realized and one unrealized) amounted to -33.92%

Definitely, it was not a good year for the Dow Theory when applied to SIL. The strong “long term or quasi secular” bear market took its toll on both signals. The breakups proved to be prematurely aborted.

How did buy and hold fare?

The year began at 1/2/2015 with SIL at 27.39

And ended at 12/31/2015 with SIL at 18.51

Which amounts to a loss of -32.42% for buy and hold.

In other words, the Dow Theory slightly underperformed buy and hold.

Here you have a spreadsheet comparing buy and hold and the Dow Theory for SIL.

Please mind that in any given year or on any given couple of trades anything can happen. The long term nature of the Dow Theory and the scarcity of trades per annum implies that in any given year (or even longer term period) buy and hold may outperform. Therefore, even though, the Dow Theory managed to almost equal buy and hold, anything could have happened.

We can draw interesting lessons from 2015: We can see that when there is a powerful bear market (on a very long term, almost secular basis) long trades are faced with headwind. Faced with adversity, the Dow Theory manages to contain losses or even not to lose (when being completely out of the market as in 2014). However, losing less or not losing is not tantamount to making money. When there is a huge bear market we can hope, at best, to lose less.

Of course, in real time no one knows whether the powerful bear market is about to end, and hence, one should take all trades, unless the risk/reward is clearly unfavorable (i.e. likely initial risk 50%). Hence, I feel it is advisable to diversify across markets. One never knows in advance in which markets powerful and clean trends will develop

If  we take a longer term perspective and start looking at SIL (and GDX) from 2012 we will see that the Dow Theory has greatly outperformed buy and hold. When I find time, I would like to post a chart showing the time period spanning from 2012 to date, and we will see how outperformance is build upong long term periods. 

GDX

The year started with an ongoing bear market, and the Dow Theory was suggesting staying on the sidelines. 

Here you have the chart displaying GDX for 2015. The blue rectangles display the time the Dow Theory suggested being in the market.

On January 12, 2015 a primary bull market was signaled. As I explained here, it was not a very clear primary bull market signal as the volatility requirement was barely met (it was not met when the secondary reaction leading to the primary bull market set up was developing, and was only met when we were confronted with the actual signal).

 

However, one has to take decisions under uncertain conditions, and I decided to heed the most recent volatility readings, and hence I considered a primary bull market had been signaled. However, I cautioned to make a subpar commitment. Not only the signal was not clear-cut, but the initial risk (initial Dow Theory stop) was quite large. I make a general observation. Not all trades are created equal. Some have a good risk reward ratio (due to a narrow Dow Theory stop), others don’t. We are not supposed to be batting all the time. At the very least, the size of our commitment should take into account the initial risk. The entry price for GDX was 21.49.

The powerful longer term trend bear market (as determined when applying the Dow Theory to weekly charts) eventually prevailed and at July 1, 2015 a primary bear market was signaled, as was explained here.

The exit price for GDX was 17.28

Hence, this particular Dow Theory trade resulted in a loss of -19.59%.

The Dow Theory suggested staying on the sidelines until the next buy signal which was given on October 5^th, 2015, as explained here.

The entry price for GDX was 15.12

The year ended on December 31^st, 2015 with an open position. In other words, the trade taken on October 5^th, 2015 had not been reversed by a primary bear market signal yet.

GDX price at the end of year was 13.72, which translates into an unrealized loss for this trade of -9.26%

As you can see in the spreadsheet below the compounded loss resulted from the two losing trades (one realized and one unrealized) amounted to -27.03%

Definitely, it was not a good year for the Dow Theory when applied to GDX. The strong “long term or quasi secular” bear market took its toll on both signals. As with SIL, the breakups proved to be prematurely aborted.

How did buy and hold fare?

The year began at 1/2/2015 with GDX at 18.03.

And ended at 12/31/2015 with GDX at 13.72

Which amounts to a loss of -23.90% for buy and hold.

Here you have a spreadsheet comparing buy and hold and the Dow Theory for GDX.

In other words, in 2015 buy and hold outperformed the Dow Theory. It is worth bearing in mind that the Dow Theory clearly outperformed buy and hold in 2013 and 2014. If we take a somewhat longer term view, the Dow Theory has done a decent job. When I find time, I would like to post a chart showing the time period spanning from 2012 to date, and we will see how outperformance is build upong long term periods.

 
Sincerely,

The Dow Theorist

Dow Theory Update for October 20: US stocks continue flirting with primary bear market signal

Trends unchanged

I am writing before the close so things might change after the close. So readers beware.

US STOCKS

The primary trend is bullish as explained here and here

The secondary trend is bearish (secondary reaction against the primary bull market) as explained here

According to the “Rhea/Classical” Dow Theory no secondary reaction has been signaled yet, as explained here.

On September 30^th, the Transports managed to rally more than 3% off its September 14^th secondary reaction closing lows, and hence it set up US stocks for a primary bear market signal. Moreover, the Transports made higher closing highs (the primary bull market closing highs of September 8^th were bettered) which was unconfirmed by the SPY and Industrials. The longer the lack of confirmation persists the more suspect the breakout.

Please mind that a setup for a primary bear market is not the actual signal. If the Transports breakout got finally confirmed, the primary bull market would be reconfirmed.

On October 13, 2016 the SPY violated its September 14 secondary reaction closing lows (red horizontal lines on the right side of the chart). However, until now, neither the Industrials nor the Transports have confirmed. Thus, no primary bear market has been signaled yet.

Thus, the market remains in a nowhere's land. The breakup of the Transports (which is bullish) remains unconfirmed, whereas the violation of the secondary reaction lows by the SPY (which is bearish) remains unconfirmed. Tie. 

Here you have an updated chart depicting the current situation:

Violation of secondary reaction lows by the SPY remains unconfirmed

GOLD AND SILVER

The primary and secondary trend is bearish, as was explained here and here.

GOLD AND SILVER MINERS ETFs

The primary and secondary trend is bearish, as was explained here and here.

General observation for US Stocks, gold and silver and their ETF miners

The trend, when appraised by the Dow Theory when using weekly bars, is bearish for all the above mentioned markets.

Sincerely,

The Dow Theorist

Dow Theory Special Issue: Putting the Dow Theory under Stress-Test (VIII)

Dow Theory’s performance under weak cyclical bull markets

This “stress-test” saga has dealt with performance under secular bear markets

Another environment which is detrimental to the Dow Theory is weak cyclical bull markets.

What is a cyclical bull and bear market? I see cyclical bull/bear markets as a long movement which is an order of magnitude less than the secular bull/bear market. The longest movement is the secular bull/bear market. Beneath it we find cyclical bull/bear markets. And beneath them, we have our Dow Theory appraised primary bull/bear markets.

Thus, cyclical bull/bear markets are in both time and extent between secular bull/bear markets and primary bull/bear markets as determined by the Dow Theory.

In my post concerning the “stress-test” under secular bear markets, it was shown that, in spite of secular, headwind, the Dow Theory (especially Schannep’s) was able to remain positive and outperform buy and hold. However, secular headwind took a toll on performance. While positive, it was less than that attained when there was a secular bull market environment.

To begin with, how do we define “cyclical markets”? While there are lots of diverging opinions when it comes to defining them, I’ll stick to Schannep’s definition, which I honestly feel is very accurate and even actionable (albeit with a lesser performance than the Dow Theory itself). According to Schannep a cyclical bull market is one which advances 19% on both the Dow Jones Industrial Average and the Standard & Poor's 500 over any timeframe. A cyclical bear market is one which declines 16% on both the Dow Jones and the S&P 500 over any time-frame. Please go to Schannep’s website “thedowtheory.com” in order to further deepen the concept of cyclical bul/bear markets and its predictive power.

Those really intent on mastering the concept of cyclical bull and bear markets are advised to read chapters 5 to 7 of Schannep’s book “The Dow Theory for the 21^st Century”.

Please find below a graph depicting the relationship between secular, cyclical, and Dow Theory determined primary bull and bear markets.

This post focuses on “weak” cyclical bull markets. What do I mean by "weak". The average cyclical bull market has an extent of 111.1% (median 74.1%). The average duration of cyclical bull markets is 32.9 months (median 25.4 months). Thus, “normal” cyclical bull markets are supposed to be tailwind for the Dow Theory (which operates on a lower time frame, as the average trade lasts only 1.31 years –ca. 15.7 months-, and the average extent of a swing amounts to ca. 46.5%). Please mind that the primary bull markets as determined by the Dow Theory last almost exactly ½ of its cyclical peers. The same applies to time: 15.7 months is almost ½ of 32.9 months. More food for thought: the total number of trades of the Dow Theory roughly doubles the number of cyclical bull markets.

However, there have been several instances of “fibrillation” afflicting cyclical bull markets in which the extent (average ca. 40%) and time (average ca. 3 months) of the cyclical bull market was much lower. Such lapse of “abortive” cyclical bull markets was the norm from a period spanning from 1929 to 1942. Hence, under the then prevailing tough market environment (secular bear market), cyclical bull markets had to face headwind which resulted in smaller swings.

Our question is: How did the Dow Theory fare during such a tough period?

As I explained here, to compare the Dow Theory versus buy and hold, the right way to compare performance is to start at a primary bear market low (start for buy and hold), the “buy” price of the next primary bull signal (start for the Dow Theory) and finish with the last primary bear market sell signal (end for the Dow Theory) and the final primary bear market low following such a bear market signal (end for buy and hold).

Since Schannep’s Dow Theory (which involves the S&P 500) starts in 1953, we have to follow the official “Rhea/classical” Dow Theory record in order to compare performances in the 1929-1942 period. Furthermore, I use the Industrials in order to assess performance.

The primary bear market lows were made on July 8^th, 1932 at a price of 41.22

The first Dow Theory trade started on May 24^th, 1933 at a price of 84.29.

Here you have the table containing all Dow Theory trades during this period:

The last Dow Theory trade was closed on May 13^th, 1940 at a price of 137.5. The final primary bear market low following the primary bear market signal, was made on 6/10/1940 at a price of 111.84.

Thus, buy and hold, made 171% (111.84/41.22 = 171%) during this period spanning from 1932 to 1940 (period when the Dow Theory signaled trades).

The Dow Theory underperformed and only made 101% (see table above).

Hence, as it was seen with secular bear markets, weak cyclical bull markets are headwind for the Dow Theory. However, we see that it did not self-destruct.

Furthermore, as I stress ad nauseam, the Dow Theory shines when buy and hold falters. During the same period of “abortive” cyclical bull markets, there were of course cyclical bear markets. Thus, during the 1929-1932 crash, there were five cyclical bear markets (interspersed with four cyclical abortive bull markets) with hair-curling declines (the smallest -37.4%, the largest -53.6%). During the 1929-1932 period, when buy and hold lost ca. 80%, the Dow Theory was flat. Thus, when making comparisons, we have to be careful. It is true that from 1933 to 1942, when there were trades due to a hesitant bull market condition, the Dow Theory, while making money, underperformed buy and hold. However, if we include in our period of the market crash, the Dow Theory was unscathed by it, whereas buy and hold was killed. By the way, strong cyclical bear markets might also be good for the Dow Theory, as it entails losses for buy and hold, and, more importantly, in all likelihood, it enables Dow Theorists to re-enter the market at a much lower price.

All in all, even under week “cyclical” bull markets, the Dow Theory makes profits.

Sincerely,

The Dow Theorist