I don’t like stock’s action as per the “Classical Dow Theory”
Breakout systems, moving averages and the Dow Theory:
Hamilton wrote that the Dow Theory could also be
applied to any asset traded in an organized (and free) market. This is why when
I started this blog some 7 years ago, I decided to appraise the trends of
precious metals and their ETFs as per the tenets of the Dow Theory. I hope to
publish soon the comparison between buy and hold and the Dow Theory for
precious metals over the last 7 years which is a reasonable period. From
eyeballing the charts I see that the Dow Theory is likely to be the winner versus buy and hold.
Furthermore, I am planning to toy with several pairs
of ETFs (i.e. big cap ETF with small cap; value/growth, etc.). Some days ago, I
took USO (crude oil ETF) and XLE (Energy Select Sector), and applied the
classical Dow Theory (I cannot use Schannep’s as I only had two indices) to
that pair. I was astonished at the results. Outperformance of ca. 1.5% p.a. and
a huge, really huge, drawdown reduction versus buy and hold. Hence
risk-adjusted performance much better. I hope to pen a post as soon as I have
time. It is pity that I have some many occupations and so little free time available, as the more I know the Dow
Theory, the more I unearth its net superiority over all trend following methods.
I know firsthand of trend following futures funds (mostly based on breakout
systems) that are having a very tough time with deep (ouch!) and long (double
ouch!, as time decimates one’s psychological makeup more than depth) drawdowns.
In spite of all the praise bestowed upon breakout systems, it is my contention that it is a very inefficient way to follow the trend. Of course, a rising tide lifts all boats, and when there are clean (please mind the word “clean”) trends (as those seen, i.e. in the 70’s and part of the 80’s) people tend to get fascinated with such primitive ways of trend following. However, we should know that markets are not always “clean” and obliging to brute force trend following. Markets can be range-bound or even trend full of noise (reversals which results in whipsaws) and they can stay in that noisy state longer than you can stay solvent. I wonder why nobody in the investment trend following community has ever attempted to launch a Dow Theory based fund. This is why, little by little, I plan to explore how it would have performed the Dow Theory when applied to many asset classes. I plan to compare it to breakout systems and moving averages (we already tentatively know that the Dow Theory beats the pants off them, as explained here and here)
In spite of all the praise bestowed upon breakout systems, it is my contention that it is a very inefficient way to follow the trend. Of course, a rising tide lifts all boats, and when there are clean (please mind the word “clean”) trends (as those seen, i.e. in the 70’s and part of the 80’s) people tend to get fascinated with such primitive ways of trend following. However, we should know that markets are not always “clean” and obliging to brute force trend following. Markets can be range-bound or even trend full of noise (reversals which results in whipsaws) and they can stay in that noisy state longer than you can stay solvent. I wonder why nobody in the investment trend following community has ever attempted to launch a Dow Theory based fund. This is why, little by little, I plan to explore how it would have performed the Dow Theory when applied to many asset classes. I plan to compare it to breakout systems and moving averages (we already tentatively know that the Dow Theory beats the pants off them, as explained here and here)
US STOCKS
The primary and secondary
trend turned bullish on October 25th, 2019, as was explained here and here
If we appraise the trend under the “Rhea/classical”
Dow Theory, the primary trend is bullish since April 1st, 2019, as
was explained here
The secondary trend is bearish, as there is an ongoing
secondary reaction against the primary bull market. The orange rectangles display
the secondary reaction. On 06/20/2019 the Industrials bettered their secondary reaction
closing highs unconfirmed by the
Transports. On 08/27/2019 the Transports violated their secondary reaction
closing low unconfirmed by the
Industrials, and, hence, no primary bear market was signaled.
The Industrials has continued making higher highs and
the Transports have been badly lagging behind unable to break up above their
secondary reaction closing highs. The longer it takes for confirmation to
occur, the more suspect the primary trend becomes. We should not forget that
the failure to jointly better the secondary reaction highs entails that we
cannot declare the secondary reaction as extinguished, and hence the secondary
trend remains bearish.
Here you have an updated chart:
However, we live and die by the actual signals.
Reality is that as per Schannep’s and the “classical” Dow Theory the primary
trend is bullish. There are some clouds on the horizon but clouds are not
signals to be acted upon them.
GOLD AND SILVER
The primary trend and secondary trend is bearish as
was profusely explained here
I also explained that I’m doubtful as to whether this
particular primary bear market will have long legs, as the trend, when
appraised using weekly bar (longer time frame) is bullish. The resistance of
the gold and silver miners ETFs to signal a primary bear market seems to
confirm my qualms.
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
Sincerely,
The Dow Theorist
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