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
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| 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.
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| 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
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