Tuesday, October 25, 2016

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 5th, 2015, as explained here.


The entry price for SIL was 22.2

The year ended on December 31st, 2015 with an open position. In other words, the trade taken on October 5th, 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 5th, 2015, as explained here.


The entry price for GDX was 15.12

The year ended on December 31st, 2015 with an open position. In other words, the trade taken on October 5th, 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

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