Subsequent advances following a primary bull market signal and what does this means for us now
I am writing before the close of March 28th.
So things might change (unlikely) after the close. So readers beware and do
your own homework.
US STOCKS
On March 1, 2017, the
Industrials, Transports and SPY made jointly higher highs. Since then the
Industrials, Transports and SPY have declined. The decline has hitherto lasted
14 days. The Industrials and Transports have declined -2.67% and -6.91%
respectively. The SPY has declined -2.56% (The S&P 500 – 2-27%).
Under Schannep’s Dow Theory,
at least two indices should decline more than 3% in order to declare the
existence of a secondary reaction (extent
requirement). Hence, given that only the Transports have declined more than
3%, the extent requirement has not been
met.
As far as time is concerned,
under Schannep’s Dow Theory, a secondary reaction must last a minimum of 10
calendar days on 2 of the 3 indices with at least 8 trading days as the average
of all three indices. The Transports have
declined for 14 trading days, whereas the Industrials and SPY have declined for
18 trading days. Hence, the time
requirement has been amply met.
Here you have an updated chart.
 |
| In spite of the recent decline: No secondary reaction yet |
Now let’s move on. While we cannot declare the
existence of a secondary reaction as the extent requirement has not been met,
we can ask ourselves whether the closing highs of March 1st, 2017
are the last gasp of the current primary bull market which was signaled on
November 21st, 2016.
While noting is certain let’s do some maths. As I have
written in the past, since 2009 the US stock market, while certainly advancing
has done so in a “fibrillation”mode, plenty of noise, with many false breakups
and breakdowns. Since I don’t like to make statements not backed by figures, I
wrote in the past the primary bear market signals had in the past significant
(i.e. more than 12% average further decline) follow thru. Since 2010 such
follow thru has been muted and resulted in more whipsaws (average further
decline following the primary bear market signal of ca. -4%, as explained here)
What about subsequent advances following a primary
bull market signal? Well, I also have some hard and fast figures for you. From
1954 to 2008 the average further advance following a primary bull market signal
amounted to 37.98% (median 27.03%). In other words, there was ample bullish
action before the primary bull market signal fizzled out. Since we know
that, on average, following a primary bull market top, the primary bear market
signal (exit) is flashed at ca. 7-8% below the market top, there was an ample
margin (37.98% upswing versus 7-8%
downswing leading to the exit) to have profitable trades.
What has happened from 2009 to date? Well, as with
subsequent declines following primary bear market signals, subsequent advances
following primary bull market signals have been muted. My spreadsheet tells me
that from 2009 to date, the further advance following primary bull market
signals amounted to a mere 12.16%
(median 7.6%). Hence, the subsequent advance has been cut in roughly three
(37.98% versus 12.16%). No wonder we
see “fibrillation”. Sell signals lack follow through and buy signals are
likewise afflicted by the same ailment. This results in:
a)
More whipsaws.
b) Shorter duration of each trade (thus, we are
suffering trades which last only 2-4 months versus
more than 1 year (which used to be usual).
c)
More trades.
However, it is important to note that even under such
sputtering bullish action, further advances following a primary bull market
signal of ca. 12% are sufficient to result in modestly winning trades. We know
that exits tend to be between 7-8% below the top. If following a primary bull
market signal we make 12% and from that point we lose 8% we still have ca. 4%
left. Of course, this is far from stellar returns, and far from the smooth ride
which the Dow Theory tended to give us in the past (less than one trade per
annum, 4% outperformance versus buy
and hold). Now, we have to suffer more trades and subpar performance (though
not losing one’s shirt)
The million question is: Will the market action we
have been seeing since 2009 be the new normal in the future? Or it is just an
aberration? As I wrote here, I feel we are seeing an aberration, albeit a very
painful one in the short run (“short run” for long term trading methods like the
Dow Theory means quite a lot of time, since we are not day trading, and a
couple of bad trades may take quite a lot of time to be reversed) for those not
intimately acquainted with the Dow Theory. Periods of even 10 years of
underperformance versus buy and hold
are not a rare occurrence. Furthermore, I wrote here that on any given year, the
odds favor the Dow Theory underperformance.
We should always bear in mind that the Dow Theory
outperformance is made when buy and hold has bad years. In other words, the Dow
Theory tends to underperform (but not lose) on the “good” years for buy and
hold, and outperforms (by cutting losses short) when the “bad” times begin.
This is why it takes fortitude to stick to any trend following method (Dow
Theory included). When one looks at “track records” one tends to get excited
when looking at the outperformance (in the long run) of ca. 4% and the dramatic
reduction of drawdowns of the Dow Theory (ca. 10% versus 50%) versus buy and hold. However, in real time most of the
time buy and hold “shines” whereas the Dow Theory lags. And “in real time” it
hurts, and investors tend to throw the towel.
Let’s go back to our current trade. Our entry price
was at 220.15 (SPY on November 21st, 2016). The March 1st
closing highs were 239.78. This is a further advance following the primary bull
market signal of 8.9%, which is not that far from the average market advance
seen since 2009. Furthermore, such an advance is greater than the mean of 7.6%
seen since 2009. All in all, if the “new
fibrillation normal” seen since 2009 is to be applied to this trade, I fear
that soon we will see a new secondary reaction which, regretfully, may end in a
new primary bear market signal.
If, on the other hand, we were back to the “old
normal”, with generous further advances of ca. 37.98%, then the odds would favor no primary bear signal in sight.
There are two contradictory factors which advocate for
opposite outcomes. The primary trend when appraised by the Dow Theory by using
weekly bars is bullish. Such trends based on weekly bars have lasted many years
in the past. Thus, the weekly chart is strongly bullish which is tailwind for
the current trade.
On the other hand, the current cyclical bull market
(more about them and their definition on Schannep’s website, “thedowtheory.com”
and my own analysis here) is getting really old (it got started on 2011). While
in “real time” in is very difficult to predict the demise of the current
cyclical bull market, as “in real time”, there is ca. 50% odds for the cyclical
market to continue some extra months, it is clear that a -16% confirmed decline that kills the current cyclical market
is more than overdue.
Thus, and I make no pretense of being omniscient, we are under a very complicated technical
situation. The Dow Theory (both Schannep’s and the “Rhea/Classical”) are
bullish. If we apply the Dow Theory to weekly bars, we also get a bullish
reading (tailwind). However, the cyclical bull market is very old, and if past
market patterns (fibrillation) are to continue for the current trade, we may
have likely seen all possible advance following the primary bull market of
November 21st, 2016.
Personally, I live and die by the Dow Theory applied
to daily bars. I wouldn’t qualify the ancillary technical information I have
given as a distraction (it can be useful for some traders and gives some sense
of perspective), but, for me, and in order to pull triggers (buy/sell) I just
need Schannep’s Dow Theory and the courage to stick to it. Too much detail, too
much information in many instances is counterproductive (at least for me). Too
many degrees of freedom.
GOLD AND SILVER
The primary trend is bearish,
as was explained here and here. The primary bear market was signaled on September
30rd, 2016.
The secondary trend is bullish
(secondary bullish reaction against the primary bear market), as explained here.
As was explained here, SLV and GLD have set up for a primary bull market
signal. Please mind that "setup" is not tantamount to the actual
signal. If the last recorded primary bear market lows were jointly revisited,
the primary bear market would be reconfirmed.
In the last few days we
have seen a confirmed rally. Nonetheless, such rally hasn’t changed the
technical picture.
As an aside, it is worth
mentioning that the primary trend when using weekly bars is bearish, which
tends to be headwind for any meaningful bullish action.
GOLD AND SILVER MINERS EFTs
The secondary trend is bullish
as explained here
As was explained here, SIL and GDX have set up for a primary bull market
signal.
If the last recorded primary bear
market lows were jointly revisited, the primary bear market would be
reconfirmed.
In the last few days we have seen a confirmed rally. Nonetheless, such rally hasn’t changed the technical picture.
As an aside, it is worth
mentioning that the primary trend when using weekly bars is bearish, which
tends to be headwind for any meaningful bullish action.
Sincerely,
The Dow Theorist
