Dow Theory Investment: 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 25^th, 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 24^th, 2019 the S&P 500 broke up above its secondary reaction closing highs. The Transports confirmed on Friday 25^th, 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 25^th) 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 25^th, 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.