Ten Thoughts on Trading/Investing

 

Ten Thoughts on Trading/Investing

 

1) Talking about the markets is fine and dandy. However, all investors need to know when to buy and when to sell. Even famed long-term investors sell. Buying without having an idea of the conditions that will trigger a sale is a recipe for disaster.

 

2) Technical Analysis (TA) works. There is also a place for fundamentals (provided one takes a quantitative approach).

 

3) Not all TA methods are equally robust or effective. The less dependent the system is on parameters, the better (I owe this vital insight to Gary Antonacci, author of “Dual Momentum Investing”, a CMT association member and speaker).

 

4) Mean reversion systems work for short-term trades. Trend-following fares better with longer-term trades.

 

5) Short and long term depend on your timeframe. If one uses 5 minutes bars long term will be one day. If one uses daily bars long term will be more than 6 months.

 

6) Most trend-following systems are good at reducing drawdowns (increasing the Sharpe ratio) but not so good at outperforming Buy & Hold (B&H). Basic trend-following techniques like moving averages outperform B&H with a trick: By using monthly bars (which in actual trading is close to untradeable, as they hide the potential for a colossal drawdown, as was evidenced in March 2020). Most trend-following systems underperform B&H when using daily bars. Thanks to the concept of secondary reaction, the Dow Theory outperforms even when using daily bars.

 

7) Any claim made by a technical or fundamental analyst should be backed by a record of the actual trades taken. Cherry-picking trades from a chart and making the “system” look great is easy. To deliver a track record spanning many years under all market conditions is quite another thing. One should insist on records. It irks me when I read a book on TA, and I see lots of charts, patterns, and successful trades, but the author fails to provide the record of all ALL trades taken over a long period.

 

8) Good trend-following methods (as the Dow Theory) coupled with relative strength (that is, buying the asset class with better performance over a determined lookback period) is a great way to reduce drawdowns and further increase outperformance over B&H.

 

9) Your trading system should work across many markets (robustness). This is why even if your focus is stocks, bonds, whatever, you should know that your system lends itself well to being applied to other markets. The Dow Theory passes this test. When it comes to US stocks, Schannep's Dow Theory is the very best.

 

10) Know your system inside out. It is the only way to develop the confidence you’ll need when the unavoidable period of underperformance comes. Mastery is critical to stay the course.

 

Sincerely,

Manuel Blay

Editor of thedowtheory.com

 

 

 

Dow Theory Update for January 10: Primary bear market for US bonds signaled on 1/5/22

US INTEREST RATES

 

General Remarks:

 

In this post, I provided a thorough explanation concerning the rationale behind my use of two alternative definitions to appraise secondary reactions.

 

TLT is the iShares 20 years + Treasury bond ETF. More about it here

 

IEF is the iShares 7-10 years Treasury bond ETF. More about it here.

 

Thus, TLT tracks longer-term US bonds, whereas IEF tracks middle-term US bonds. A bull market in bonds entails lower interest rates. A bear market in bonds represents higher interest rates.

 

A) Market situation if one appraises secondary reactions not bound by the three weeks and 1/3 retracement dogma.

 

The primary trend was signaled as bullish on 11/30/21, as explained here.

 

On 12/3/21, TLT and IEF made their last recorded closing highs. Following such a top, a steady decline not punctuated by a meaningful rally followed. Accordingly, we had a secondary reaction and no setup for a primary bear market signal (absence of a rally). However, I have repeatedly explained that the lows of the last completed secondary reaction are a valid point to be broken down in order to signal a primary bear market (see  here, and here). The lows of the last completed secondary reaction come in handy when, as in the present case, while we make lower lows, we lack any meaningful rally, and hence no “traditional” setup for a bear market develops.

 

 

In our specific market juncture, the decline between 11/9/21 and 11/23/21 satisfied both the time requirement (10 trading days) and the extent requirement (-4.3% for TLT and -1.89% for IEF with VAMM of 2.65% and 1%, respectively. More here) to qualify as a secondary reaction.

 

Hence, the confirmed breakdown of the 11/23/21 closing lows would trigger a primary bear market signal.

 

On 1/3/22, TLT pierced its 11/23/21 secondary reaction lows unconfirmed by IEF. So no primary bear market was signaled. Confirmation came on 1/5/22 when IEF broke down below its 11/23/21. Accordingly, the primary trend was signaled as bearish on 1/5/22.

 

Below you have the updated charts. The brownish rectangles display the “last completed” (the previous one) secondary reaction, which was canceled by higher highs (actually the primary bull market signal). The breakdown of such a canceled secondary reaction entails a primary bear market signal. Here is additional information concerning the “alternative” signals (from a Buy perspective which can be reversed for Sells).

 

 

B) Market situation if one sticks to the traditional interpretation demanding more than three weeks and 1/3 confirmed retracement to declare a secondary reaction.

 

The primary trend was signaled as bearish on 9/28/21. A more aggressive and legitimate interpretation would have signaled the bear market on 9/24/21. The explanations here.

 

In my 12/3/21 post, I wrote that the rallies that had until then developed did not qualify as a secondary reaction. The situation has not changed. IEF made lower lows, and TLT is very close to breaking down its 10/11/21 bear market low. So a not very bullish picture. Below you have updated charts. The red horizontal lines display the last recorded primary bear market lows. A confirmed breakdown of such lows would reconfirm the Bear market.

 

 

 

Sincerely,

Manuel Blay

Editor of thedowtheory.com

 

Dow Theory Update for January 8: Setup for a potential primary bear market in precious metals completed

Primary trend for US interest rates bearish

 

GOLD AND SILVER

 

In this post, I provided a thorough explanation concerning the rationale behind my use of two alternative definitions to appraise secondary reactions.

 

A) Market situation if one appraises secondary reactions not bound by the three weeks dogma.

 

The primary trend was signaled as bullish on November 11^th 2021, as was explained here.

 

Both ETFs have declined off their respective 11/17/21 (GLD) and 11/12/21 (SLV) bull market closing highs. The pullback qualifies as a secondary reaction, as explained here.

 

The final secondary reaction lows were made on 12/2/21 (GLD) and 12/9/21 (SLV). A rally ensued, which met the Volatility-Adjusted Minimum Movement (VAMM). Accordingly, the setup for a potential primary bear market signal was fulfilled. The Table below contains all data:

 

 

The charts below display the most recent situation. The brownish rectangles display the current secondary reaction against the Bull market. The blue rectangles show the rally at the point when the setup for a potential primary bear market signal was met. A joint penetration of the red horizontal lines (secondary reaction lows) would entail a primary bear market signal. If the last primary bull market highs (Step #1 Table above) were jointly broken up, the secondary reaction would be cancelled, and the primary bull market reconfirmed. So now we have to wait and observe.

 

B) Market situation if one sticks to the traditional interpretation demanding at least three weeks of movement to declare a secondary reaction.

 

The primary trend was signaled as bearish on 11/27/2020, as was explained here.

 

The primary bear market was reaffirmed on 9/17/2021, as was explained here 

I reported the existence of a secondary reaction against the primary bear market in my 11/13/21 post.

The setup for a primary bull market signal was completed 12/2/21 (GLD) and 12/9/21 (SLV), as I explained here.

 GOLD AND SILVER MINERS ETFs

A) Market situation if one appraises secondary reactions not bound by the three weeks dogma.

 

The primary trend was signaled as bullish on 11/11/21, as was explained here.

 

The secondary trend is bearish (secondary reaction against the primary bull market), as was explained here.

 

The final lows of the secondary reaction were made on 12/15/21 for both SIL and GDX. SIL broke down below the lows of the previous primary bear market (9/29/21) unconfirmed by GDX. Absent confirmation, no primary bear market was signaled. Following the 12/15/21 lows, there has been a rally that set up both ETFs for a potential primary bear market signal. The table below contains all the details:

 

 On 1/6/22, SIL broke down below its 12/15/21 secondary reaction closing low unconfirmed by GDX. Hence, no primary bear market was signaled.

 

Below the updated charts. The orange rectangles display the ongoing secondary reaction. The grey rectangles on the right side of the charts show small rallies that did not reach the VAMM and hence lacked amplitude to set up GLD and SLV for a potential primary bear market signal. The blue rectangles display the rally that setup both ETFs for a potential primary bear market signal.

B) Market situation if one sticks to the traditional interpretation demanding at least three weeks of movement to declare a secondary reaction.

 The primary trend was signaled as bearish on 8/9/2021, as was explained here. 

I reported about the existence of a secondary reaction against the primary bear market in my 11/13/21 post.

In my 12/14/21 post, I explained that the setup for a potential primary bull market had been co

Overview: The spreadsheet below displays the primary trend in the pairs SLV/GLD and SIL/GDX when we appraise them with either the “shorter-term” or longer-term interpretation of the Dow Theory. Red color displays a primary bear market, and blue displays a primary bull market. 

 

No time to post today concerning US Bonds. When appraised without the 3 weeks constraint, the primary trend turned bearish on January 5th, 2022. More details about the new bear market  soon. 

Sincerely,

Manuel Blay

Editor of thedowtheory.com