Saturday, November 9, 2019

Dow Theory Update for November 9: Primary bear market for gold and silver signaled on November 8th, 2019



Likely secondary reaction in US treasuries


This is going to be a long post. It took time and dedication to write it, and to fully apprehend its implications (especially for precious metals and interest rates), one should take also time to read it. No pain, no gain.
 
US STOCKS

The primary and secondary trend turned bullish on October 25th, 2019, as was explained here and here

 GOLD AND SILVER

The primary trend (and secondary one) turned bearish on November 8th, 2019

As was explained here following a secondary reaction against the then existing primary bull market, the setup for a primary bear market was completed (rally shown with blue rectangles). On November 7th, 2019 GLD violated the secondary reaction closing lows, and on November 8th SLV confirmed, and hence a primary bear market was signaled.

Here you have an updated chart. The orange rectangles depicts the secondary reaction which followed the last recorded primary bull market highs. The blue rectangles show the rally that followed and which set up both precious metals for a primary bear market. The red horizontal lines display the secondary reaction closing lows which had to be jointly violated.



The now defunct primary bull market has lasted almost one year (since it was signaled), as the primary bull market was signaled on 12/24/2018. The total bull market swing has lasted more: From 11/13/2018 for SLV (starting point of the swing) and 08/16/2018 for GLD.

Here you have the charts displaying all the market action since the 12/24/2018 (date of the primary bull market signal) to date. As you can see (orange rectangles on the middle of the charts) there was a secondary reaction which did not result in a primary bear market as higher highs ensued. 



This trade has been a winner. From the date of entry (12/24/2018) to the date of exit (11/08/2019) SLV has made 13.19% and GLD 14.47%. Here you have the calculation on the spreadsheet below:



By the way, I always insist that the on source of outperformance for the Dow Theory is the further decline following a primary bear market signal. If following a primary bear market signal, there is no further decline, we can remain profitable, but we will never outperform buy and hold. More about this vital insight here


Hence, in order to really determine whether the trade closed yesterday has really outperformed buy and hold, we have to wait until we know when this new bearish swing comes to an end. Now we have a “winning” trade, but we don’t know whether it has outperformed buy and hold yet. To know this, we have to wait until the next primary bull market signal which will establish the final primary bear market lows.

Thus, the following calculations do not relate to the outperformance of this trade, but serve to keep track of the important issue of “further declines following a primary bear market signal”.

Well, let’s go back in time to assess whether the preceding primary bear market signal (not this one, the preceding one) did have follow through. That primary bear market was signaled on 07/07/2017. The spreadsheet below displays the decline that followed the primary bear market signal of 07/07/2017. 



Let’s look at SLV. On the one hand, the decline that followed the primary bear market signal was quite OK (-10.73%). This was lost to buy and hold, and “won” by trend following (Dow Theory). Furthermore, you can see in the charts that the entry price (12/24/2019) was at a lower level than the previous exit price due to the bear market signal (07/07/2017). Moreover, SLV has made an absolute gain (exit minus entry price) of 13.19%, which is a very good trade for slightly less than one year time.

GLD had a more modest further decline following the primary bear market signal of just -3.63% (nonetheless, this adds to the “outperformance” side). Given that the “further decline” was modest the entry price on 12/24/2019 was at a higher level than the previous exit price. This notwithstanding, GLD managed to win 14.47% on this trade.

Since one never knows in advance which of the two precious metals is going to result in better performance, my piece of advice is to split 50% the trading funds to each of the ETFs. If we had done so, our average performance SLV+GLD would have been of 13.83%.

All in all, a winning trade. Furthermore, and I hope to give more precise figures in the future, the Dow Theory has been particularly good at outperforming buy and hold during the long secular bear market that plagued precious metals since 2011. While, of course, it is difficult to extract positive performance when the secular tide is bearish, the Dow Theory has clearly outperformed buy and hold. In the past, I did yearly appraisals of the performance, which you can find here, here and here


However, due to lack of time, and more specifically because I feel that to truly determine whether the Dow Theory really works we need to take a longer perspective (at least 5 years), I discontinued such annual analysis (even though the Dow Theory tends to outperform buy and hold in most years). When time allows, I plan to make an assessment of how the Dow Theory versus buy and hold since I started the blog in 2012.

As an aside, the much longer term trend when appraised with weekly bars is bullish. Yes, on 07/01/2016 the primary trend (appraised with weekly bars) turned bullish. To this date it has not been reversed. This implies that, it is quite likely that we will not see lots of further decline following the current primary bear signal. Time will tell. However, as I’ve written in the past, I trade based on the signals arising out from daily bars (closing prices), not on trends discerned when plotting weekly bars. However, it is always informative to have a bigger timeframe. The bigger picture tells us that the trend is bullish. Below the weekly charts for SLV and GLD

The trend when appraised using weekly bars: Bullish

 
GOLD AND SILVER MINERS ETFs


The primary trend is bullish since 12/18/2018 as explained here. No changes. 

On 09/04/2019 SIL and GDX made its last recorded primary bull market closing highs. From that date both ETFs declined and the secondary trend turned bearish  (secondary reaction against the primary bull market) as explained in-depth here.

On 10/25/2019 the setup for a primary bear market has been completed as explained here


US INTEREST RATES

While US interest rates is not the main focus of this blog, it should be so if I had more time. I have written in the past that interest rates are even better suited to the Dow Theory (or trend following in general) than even US stock indices. I’d further add that given that US interest rates tend to fluctuate slowly, the daily volatility of interest rates ETFs (especially for those in the short term spectrum) tends to be substantially lower than that of US stock indices. It is my contention (derived from my short term trading) that the lower the volatility, the less likely is to experience whipsaws (and hence the more profitable will be trend following versus fading the trend). Thus, interest rates are less prone to reversals which, in more volatile markets, can lead to false Dow Theory signals. Of course, the relationship between volatility and the Dow Theory is a subject to be dealt with in a future post of this Dow Theory blog.


Well, TLT and IEF have had a beautiful bull run. Depending on the way I appraised the secondary reaction leading to the setup for the primary bull signal, the bull market was signaled either on 11/19/2018 or 12/18/2018. From those dates there has been a bull run that wasn’t even interrupted by a secondary reaction.

However, on 11/08/2019, I feel that one could conclude that a secondary reaction has been signaled. The time requirement has been amply met. We have had more than two months of declining prices. As to the extent requirement, TLT has retraced ca. 36% of the bull market swing that started at the primary bear market lows of 11/02/2018.

IEF has roughly retraced 27.5% of the bull market swing that started at the primary bear market lows of 10/05/2018. So IEF has not managed to retrace the famous 1/3 alluded to by Robert Rhea. However, as even Rhea himself suggested (page 61 of his book “The Dow Theory”, Fraser Edition 1993) the definition of secondary reaction is not carved in stone. Furthermore, as I wrote here, I feel that the more “time” we have, the less “strict” (but be cautious!) we can be with the extent requirement.


In this specific instance, we have had more than 2 months of declining prices which greatly exceeds 3 weeks. Furthermore, we have had almost a year (since the signaling of the primary bull market) without a secondary reaction (which is not normal, as bull market swings get often interrupted by secondary reactions). Hence, when I consider all factors, I consider that the current decline may be qualified as a secondary reaction. One option for the actual trader of IEF and TLT could be to split its capital. One half considering that a secondary reaction has been signaled (which might lead to a primary bear market signal in the future) and one half as if nothing has been signaled (waiting for the 1/3 retracement on a confirmed basis). Readers of this blog also know that I am a firm believer in generating many trades in order to reduce drawdown duration. Hence, in doubtful cases, such as this secondary reaction, there would be nothing wrong with trading ½ of capital in different ways.One half assuming that there is right now a secondary reaction (which might be followed by a bear signal); the other half waiting for more declines in IEF so that the 1/3 retracement requirement is also fulfilled.

Here you have an updated chart. The orange rectangles on the right side of the chart display the current secondary reaction. The darker orange rectangles within the lighter and larger rectangles depict the first decline that did not manage to fulfil the time requirement for a secondary reaction.

US interest rates. A primary bull market which after ca. one year advancing seems to be under its first secondary reaction
 

Sincerely,
The Dow Theorist

Thursday, October 31, 2019

Dow Theory Update for October 31: Dissecting the new primary bull market signal for US stocks




Setup for primary bear market completed for precious metals and their ETF miners


US STOCKS

The primary  and secondary trend turned bullish on October 25th, 2019, as was explained here


Stocks were under a primary bear market (more about it here). Such a primary bear market did not have long legs and no sooner had been signaled, a secondary reaction against the primary bear market started. That secondary reaction finished on 09/13/2019 for the Industrials, on 09/11/2019 for the Transports, and on 09/12/2019 for the S&P 500 (blue rectangles in the middle of the charts). From those dates a pullback got started. The first index to decline more than 3% was the Transports (orange rectangle, after the blue rectangle of the middle chart) on 09/20/2019 followed by the other two indices. Hence, on 09/20/2019 the setup for a primary bull market had been completed.


On Thursday 24th, 2019 the S&P 500 broke up above its secondary reaction closing highs. The Transports confirmed on Friday 25th, 2019, and hence a primary bull market was signaled (under Schannep’s Dow Theory we need the S&P 500 and either the Industrials or the Transports confirming so that we get a signal). As of this writing the Industrials have not confirmed yet. However, under Schannep’s Dow Theory we just require two indices confirming each other (and the S&P 500 always present). We don’t need three indices confirming. Hence, unambiguously there is a primary bull market under Schannep’s Dow Theory.

Here you have charts of the Industrials (top), Transports (middle) and the S&P 500 (bottom) which depict the developments since 07/16/2019 to date. The orange rectangles on the left side of the charts show the secondary reaction that got started against the then existing primary bull market. The red arrows display the violation of the secondary reaction lows and primary bear market signal. Thereafter follow the blue rectangles (secondary reaction against the primary bear market) followed by the blue arrow on the right side which signal the primary bull market. 

Primary bull market for US stocks signaled on 10/25/2019 (blue horizontal lines broken up by 2 indices)


It goes without saying that the last primary bear market signal has been a whipsaw, as the re-entry (current primary bull market signal of October 25th) has been at a higher price than the exit, which is not normal (but can happen). More specifically, the entry price for the S&P 500 (close of October 25th, 2019 day where the Transports confirmed) was 3022.55 whereas the “exit” price due to the primary bear market signal of 08/14/2019 was 2840.6, which implies that our entry price has been 6.41% higher than our exit. This is performance lost, even if the current signal ends up being a winner. As I have repeatedly written, the Dow Theory outperformance is due to just one variable: The further decline following a primary bear market signal. Absent such a further decline, even if we can remain profitable, we will not outperform buy and hold. For an in-depth study of this issue, please go here.


GOLD AND SILVER


The primary trend is bullish since 12/24/2018 as explained here. No changes. We finally got a secondary reaction on 4/16/2019 when GLD violated its 03/07/2019 closing lows (and confirmed SLV which had done so some days ago). More about the entrails of such a secondary reaction here and here.

On 09/04/2019 SLV and GLD made its last recorded primary bull market closing highs. From that date both ETFs declined and the secondary trend turned bearish (secondary reaction against the primary bull market) as explained in-depth here.


From the 09/30/2019 closing lows there has been a rally which has had enough magnitude to setup SLV and GLD for a primary bear market signal. On 10/25/2019 (last date when I performed a measurement), SLV had rallied 6.09% and GLD 2.29% (high made on 10/09/2019). SLV exceeded the minimum volatility-adjusted movement which stood at 4.90% on 10/25/2019. GLD, on the other hand, was below the minimum volatility, as you can see from the spreadsheet below. However, it merely suffices one index to rally above the minimum volatility to set up the ETFs for a primary bear market. Furthermore, with date 10/31/2019 the rally has made higher highs, and, thus, there is no doubt about the setup.



Please mind that a setup for a primary bear market signal does not imply that we are under a primary bear market. The secondary reaction closing lows (red horizontal lines) have to be jointly violated for a signal to be given.

Here you have updated charts



GOLD AND SILVER MINERS ETFs


The primary trend is bullish since 12/18/2018 as explained here. No changes. 

On 09/04/2019 SIL and GDX made its last recorded primary bull market closing highs. From that date both ETFs declined and the secondary trend turned bearish  (secondary reaction against the primary bull market) as explained in-depth here.

From the 10/15/2019 closing lows there has been a rally which has had enough magnitude to setup SIL and GDX for a primary bear market signal. On 10/25/2019 (last date when I performed a measurement), SIL had rallied 8.37 % and GDX 5.92 %. SIL exceeded the minimum volatility-adjusted movement which stood at 7.37% on 10/25/2019. GDX, on the other hand, was below the minimum volatility, as you can see from the spreadsheet below. However, it merely suffices one index to rally above the minimum volatility to set up the ETFs for a primary bear market. Furthermore, with date 10/31/2019 the rally has made higher highs, and, thus, there is no doubt about the setup.



Please mind that a setup for a primary bear market signal does not imply that we are under a primary bear market. The secondary reaction closing lows (red horizontal lines) have to be jointly violated for a signal to be given.

Here you have updated charts




Sincerely,
The Dow Theorist