Thursday, February 27, 2020

Dow Theory Update for February 27: In spite of all the turmoil, no primary bear market has been signaled.

Primary and secondary trends unchanged for US stocks, precious metals, and their ETFs miners and US interest rates.

Well, world stock markets are falling in earnest. However, in spite of all the turmoil, no primary bear market has been signaled for US stocks. According to Schannep’s Dow Theory we still need a rally of at least 3% confirmed by two indices and a subsequent pullback which violates the still to be established secondary reaction closing lows. So the “normal” primary bear market signal is not discernible yet.

However, if both the Industrials and the Transports jointly declined more than -16% (from the last primary bull market closing highs) a so-called bear market definition would have been met (for me those bear markets are akin to cyclical bear markets which tend to last more than  primary bear markets). More about the -16% bear market definition and the subsequent decline that normally follows such signals on Schannep’s website.

Hopefully, I can post more tomorrow or on Saturday, as I discern on the charts other alternative primary bear market signals. But we are not there yet.

I get the feeling that we are nearing panic levels which should warrant some kind of bounce (even if it is a dead cat one). One month ago, I was seeing clouds and now we got the storm (even more than I anticipated to be honest). Now, from a strict technical basis, I feel that US stocks should stage some kind of rally and get some kind of respite. I say this because of three reasons:

a)     Capitulation, yes, the famous capitulation indicator which tends to accurately signal market bottoms, could be reached if the NYSE Composite and the S&P 500 get 10% below their respectives 50 days moving averages. As of this writing, the Industrials are already 10% below their 50 days moving average. The NYSE and S&P 500 are close (at. ca. 9%) but not there yet. A final quick decline would result in capitulation.

Here you have the link to my last post on the capitulation indicator:

b)     The gold and silver miners ETFs which hitherto had withstood the selling pressure with modest declines today fell sharply. To me this sound that distressed selling given that the precious metals, especially gold are strong. Here you have an updated chart:

Climatic action in both SIL and GDX

c)     US interest rates ETFs (TLT and IEF) are going up almost parabolic, which seems also indicative of some climatic action. Here you have an updated chart:

The blue ellipse display the almost parabolic action of TLT

All in all, I keep my head cool. Bad things happen sometimes, but the investor who cannot digest a -10 or even -30% short term drawdown does not really belong in the stock market. As simple as that. However, since drawdowns are painful for most (and even for those with a thick skin), my main focus is to achieve drawdown reduction through various means (multiple signals, multiple markets, multiple strategies even if all have a Dow Theory common denominator)

Furthermore, I must say I am kind of happy with the current decline. Why? Because it is like the storm that cleans the atmosphere. A good decline, even a good bear market, would set the basis for the next strong bull market. What better time to buy than March 2009 or November 1987?. Moreover, I have  been planning a new Schannep’s based investing strategy (relative strength-based sector rotation with an absolute trend filter based on Schannep’s Dow Theory which oscillates between stocks and bonds) and I was waiting for the next big decline in order to start (I was not going to start do it close to a market top with the Transports diverging, just common sense!). So my waiting might come soon to an end.

I’d like to close this hastened and somewhat chaotic post with an important thought: Please mind the importance of the Transports. Many deride the inclusion of the Transports to the Dow Theory as a relic of the past. However, the Transports still play an important role under the Dow Theory. Please mind that important declines have always been preceded by a non confirmation or outright divergence of the Transports. Those readers that have been reading me for the last 5 weeks or so know that I was uneasy by the Transports lack of confirmation. Schannep himself escaped unscathed in the past several false signals due to the Transports lack of confirmation (2007 for instance comes to my mind ). The day I find time, I will carry out a compilation of all the occasions Schannep took the right decision by paying attention to the diverging or non confirming Transports. 

By the way, I didn't have time to take a look at Chinese stocks ETFs. I'll try to take a Dow Theory look at them and briefly report. Until then, stay tuned.

Well that was all for today.

One Dow Theorist

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