Before Investing in Stocks, Find Out Who You Are

 

There Is No Perfect Investment Strategy. Find the One That Fits You

Recently, a young man who is starting a family and beginning to build his wealth asked me about the best way, and the secrets, to succeed in the stock market.

My answer was probably not what he expected. I did not tell him which stocks to buy, which sector will be the next winner, or how to find the next tenbagger. Instead, I talked to him about something much more basic.

Before deciding how to invest, you need to know where you invest, who you are, and what your personal circumstances are.

1. Choose Your Jurisdiction Carefully

This is an issue that, in my opinion, does not get enough attention.

No matter how good an investor you are, the jurisdiction where you live and invest can have a huge impact on your ability to build wealth.

The first issue is taxation of your investment gains and, even more importantly, your ability to compound them.

Investing from the United States is not the same as investing from Spain, just to give one example. Some countries provide much better vehicles for accumulating capital over long periods of time. In the United States, for instance, certain accounts such as 401(k) plans allow capital to compound on a tax deferred basis for many years. In other countries, the possibilities are much more limited.

This matters enormously because compounding works best when you can keep as much of your profits as possible invested and working for you. Two investors can achieve exactly the same investment performance before taxes and end up with very different amounts of wealth simply because one operates in a more favorable tax environment.

But there is a second issue that comes after you have successfully accumulated that wealth.

Some jurisdictions may tax not only the money you make, but also the wealth you have managed to build. Spain, for example, has wealth taxation, whereas the United States has no federal wealth tax.

This creates an additional obstacle to compounding. First, you have to earn the money. Then you have to preserve and reinvest as much of those profits as possible. And once you have successfully accumulated substantial wealth, a wealth tax can take a portion of that accumulated capital year after year.

So jurisdiction matters twice: while you are building your wealth and after you have built it.

For a young person who is starting to create capital, choosing the right jurisdiction may therefore be one of the most important financial decisions he will ever make.

2. Before Choosing a System, Find Out Who You Are

The second piece of advice I gave him was probably the most important: before you start speculating in the stock market, take an inventory of your own values and personality.

Are you, by nature, a long term person, or are you someone who needs relatively quick results?

The answer will greatly influence the holding period of your stocks and, therefore, the type of strategy you will be comfortable following.

But there is another question that may be even more important.

Do you have faith in other people’s opinions? And perhaps even worse, do you have faith in your own opinions? Do you believe you know enough to predict what is going to happen in the future?

Your answer should also determine your approach to the markets.

In my particular case, I am completely agnostic when it comes to the opinions of any human being. I don’t care how intelligent that person is or how impressive his credentials are.

Nobody knows anything.

This is precisely why technical and quantitative analysis fit my personality much better. I prefer decisions to be based on prices, indicators, fundamentals treated quantitatively, and statistical relationships processed by a computer, while minimizing human opinion as much as possible.

3. How Much Time Are You Willing to Devote?

The third factor is much more practical: how much time do you have?

If you have a job, a family, and a life to live, and you don’t want to spend your entire day glued to a screen, I would not recommend stock picking unless you subscribe to a service that you have good reason to believe really works, or invest through an investment fund with a solid stock picking approach.

Managing a portfolio of individual stocks is very different from buying one or two ETFs.

Stock picking is not about having one good idea. And having even one genuinely good idea is difficult enough.

You need many good ideas.

Furthermore, you need many good ideas about when to buy, and then comes the most difficult part: deciding when to sell. Buying is something even a fool can do. The difficult part is knowing when the right time has come to kiss your stocks goodbye.

In my opinion, you should have at least 20 stocks to achieve reasonable diversification, so that no individual position represents much more than 5% of the portfolio. That way, if something goes terribly wrong with one company, that stock does not kill your portfolio.

And those 20 stocks have to be found, analyzed, monitored and, when the time comes, sold and replaced.

All this requires time and a process.

For somebody who does not have that time, or simply does not want to systematically devote it to managing a stock portfolio, it probably makes much more sense to use ETFs and keep things simple with vehicles such as SPY, QQQ, and similar broad market ETFs.

4. What Works for Me Does Not Necessarily Work for You

After explaining all this, I summarized my own values for him. Not because I believe they are the “right” values, but precisely to illustrate that the investment system should fit the person, not the person the system.

My first characteristic is the one I have already mentioned: I am an agnostic. I don’t believe that anybody, no matter how smart they appear or how impressive their credentials, can consistently predict the future.

My second characteristic is that I am short term oriented.

I know it, and I accept it.

I probably would not be very good at creating a company based on a 20 year business plan. To me, tomorrow almost does not exist because things change too quickly. Quite often, by the time the ink has dried on an excellent business plan, the environment has already changed and some of the assumptions upon which that plan was built are no longer valid.

This makes me short term oriented by nature.

I am not a day trader. In fact, I don’t even consider myself a trader. But when it comes to stocks, any investment whose time horizon goes much beyond one year starts making me uncomfortable. Real estate is different. But with stocks, more than one year feels like a very long time to me.

5. I Trust Statistics More Than Opinions

My third characteristic follows directly from the first one.

Since I don’t place much faith in the predictive ability of human opinions, I place much more faith in data.

Prices, technical analysis, sentiment indicators, fundamentals used quantitatively, and any other information that can be processed statistically and by computer are much more convincing to me than the opinion of any individual, no matter how intelligent that person may appear.

Not because a computer knows the future. It doesn’t.

But because it allows us to identify and exploit statistical relationships while minimizing the intrusion of our emotions, opinions, and biases into the process.

6. My Personal Circumstances Allow Me to Pick Stocks

Finally, there are my personal circumstances.

For many years, I have devoted myself full time to the markets. Therefore, I have enough time not only to invest through ETFs but also to maintain a diversified portfolio of individual stocks.

I can devote time to programming, understanding risk, finding good stocks, buying them, monitoring them, and selling them when appropriate.

But this works under my personal circumstances.

Another person may share exactly the same beliefs I have about markets and yet have a job that takes up ten hours a day, a family to take care of, and no desire whatsoever to spend the evening analyzing stocks.

For that person, my approach would probably not be appropriate.

There Are Many Ways to Succeed, and Many Ways to Fail

This was ultimately my answer to the young man.

There is no single way to succeed in the stock market. There are many.

And there are also many ways to fail.

The key is not to find the perfect system. The key is simply to find one of the systems that works and, just as importantly, one that fits your personality, values, beliefs, and personal circumstances.

Even an excellent investment system can become a bad system if the person who is supposed to execute it cannot live with it.

So, before asking yourself what you should buy, perhaps you should ask a much more important question:

Who am I as an investor?

Sincerely,

Manuel Blay

Editor of thedowtheory.com

Bull market for the gold and silver miners ETFs (GDX & SIL) signaled on 8/25/26

 

Overview: According to Dow Theory, the gold and silver miners ETFs, GDX and SIL, have turned bullish again. Gold and silver themselves, however, remain in a bullish secondary reaction and are still relatively far from triggering a new bull market signal. Nevertheless, my research shows that miners tend to lead the underlying metals, making their renewed strength a potentially encouraging sign.

General Remarks:

In this post, I provide an in-depth explanation of the rationale behind employing two alternative definitions to evaluate secondary reactions.

SIL refers to the Silver Miners ETF. More information about SIL can be found HERE.

GDX refers to the Gold Miners ETF. More information about GDX can be found HERE.

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

As I explained in this post, the trend was signaled as bearish on 6/9/26.

Following the 7/20/26 lows there was a secondary (bullish) reaction against the bear market.

The rally was so strong that, without any meaningful pullback, it surpassed the previous secondary reaction highs (deep blue rectangles on the left in the charts below).

The rally was so strong that, without any meaningful pullback, it surpassed the previous secondary reaction highs (deep blue rectangles on the left in the charts below).

According to Dow Theory (Rhea’s book The Dow Theory, page 77), the breakup of the highs of the last completed secondary reaction serves as an alternative way to signal a new bull market (and, alternatively, the lows of the last completed secondary reaction serve as the relevant prices to monitor for a new bear market). You can get more information about this alternative signal HERE, HERE, and HERE.

The charts below show the most recent price action: the deep blue rectangles on the left display the previously completed secondary reaction. Their respective closing highs, highlighted by the blue horizontal lines, were the hurdles both ETFs had to surpass for a new primary bull market signal. The light blue rectangles show the secondary reaction against the bear market, which, without any meaningful pullback, pushed higher until breaking above the highs of the previous secondary reaction. The thick red horizontal lines on the right of the charts show the last recorded bear market lows, which, if pierced by both ETFs, would signal a new bear market.

The table below gives you the relevant prices whose joint violation would signal a new bear market.

So, the primary and secondary trends are bullish.

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.

As I explained in this post, the trend was signaled as bearish on 6/9/26.

In this instance, the longer-term application of Dow Theory yields the same result: the trend shifted to bullish on 8/25/26.

Sincerely,

Manuel Blay

Editor of thedowtheory.com

 

 

 

 

 

To Stop or Not to Stop: The Controversy

 

A Practical Framework For Managing Risk In Your Portfolio

A recent thread on X.com about stop losses turned into a small controversy, as this topic tends to do, because it quickly polarizes people. Here is the link to my post:

https://x.com/ManuelBlay3/status/2085467290200625336

 

On one side are those who insist you need a stop and that skipping one is simply reckless. On the other are those who consider a stop a tool for people who end up getting run by algorithms and market makers, placed exactly where everyone else’s stop already sits. What follows is a distillation of that back-and-forth, an attempt to bring some clarity to when a stop genuinely makes sense and when it does not, which depends entirely on your personal approach to trading and the strategy you are actually running.

Path One: Protection Through Breadth, Not Through Stop-Loss

If your edge is fundamental, meaning you are buying businesses because of earnings power, balance sheet quality, or a mispriced cash flow stream, a mechanical price stop is often the wrong tool. Fundamentals move slowly. A drawdown in a sound business is frequently noise rather than signal, and a rigid stop turns a temporary markdown into a realized loss right before the thesis has time to play out. The logical alternative is to buy on good fundamentals, give the trade time, and sell only when those fundamentals deteriorate. Applying a price-based stop in that context is not caution; it is self-sabotage.

The protection here comes from position count and position sizing, not from a stop loss rule. A portfolio of twenty stocks or more, reasonably sized and not concentrated in a single sector, already absorbs company-specific risk the way an index does. One name can fall sharply, and the portfolio survives.

This is also the honest answer to the sharpest objection raised in the discussion: whether rejecting stops means accepting a catastrophic loss from a surprise event such as a bad offering or an accounting scandal. It does not, provided the position was sized correctly in the first place. A severe loss on a name that was four or five percent of the portfolio is painful but survivable. A severe loss on a name that was the entire position is a different problem altogether, and no stop loss discussion fixes bad sizing after the fact.

There is a practical problem hiding inside this path, though, and it deserves to be said plainly rather than assumed away. Twenty stocks is the minimum for proper diversification, yet finding twenty genuinely attractive fundamental ideas through discretionary judgment alone is no easy task. How do you consistently decide what is good and what is bad? How much weight should be given to earnings, quality, value, momentum, or any of the other factors that matter? Most investors, working through annual reports, model one company at a time and run out of high conviction ideas well before they reach twenty. Depth of research and breadth of names pull against each other, and something usually gives: either the position count shrinks below what real diversification requires, or the quality of research per name thins out to fill the roster.

But if building a portfolio of twenty high-quality ideas is difficult, deciding when those same twenty stocks should be sold is even more challenging.

Buying is only half the battle. A company rarely goes from attractive to unattractive overnight, and determining when its fundamentals have deteriorated enough to justify a sale is often a matter of judgment rather than a clear-cut decision.

And this is precisely where human nature becomes dangerous.

I was reminded of this while reading the latest “Market Wizards” book. One trait appears again and again among even extraordinarily successful traders: learning to control risk was difficult. It wasn’t simply a matter of knowing that stops or exit rules were necessary. Even when traders had them, the temptation to override them was often there.

I recognize the problem because I experienced it myself. When I started trading, a stock could hit my stop, and I would think: let’s give it a little more room, it will recover. And the dangerous thing is that this often worked, maybe eight times out of ten. But the other two times, the stock didn’t recover. The loss kept compounding and eventually became enormous. Those few disasters could wipe out much of what had been gained from all the occasions when overriding the stop appeared to have been the correct decision.

The problem, therefore, is not merely designing an exit rule. The problem is obeying it.

The solution I have settled on is what I call “quantamentals”. The underlying inputs are still fundamental: growth, value, quality, profitability, earnings revisions, the same building blocks any fundamental investor would recognize, but they are processed on a quantified, computerized basis rather than judged name by name through memory, instinct, and conviction.

This approach solves two problems at once. First, it makes genuine diversification practical. Instead of developing twenty separate high-conviction narratives, the computer evaluates the entire investment universe using the same rules and ranks each stock accordingly. I don’t need twenty compelling stories. I need twenty stocks that objectively score better than the alternatives.

The second advantage may be even more important: quantification imposes discipline on the sell side. Every rebalance produces stocks that deserve to enter the portfolio and stocks that no longer deserve to remain in it. If five better-ranked stocks need to come in, cash must be raised by selling stocks whose rankings have deteriorated. That completely changes the psychology of selling.

There is no “let’s wait another week.”

No “maybe it will come back.”

No emotional attachment to the original thesis.

The rule for selling is not a price level; it is a rank-based exit. A position is sold when its “quantamental profile” deteriorates past a defined threshold, not when the story I originally told myself about the company stops feeling true. That distinction matters more than it sounds. A stock held because of a narrative gets defended long after the evidence has changed, because human beings are remarkably good at finding new reasons to defend an old decision. A stock held because of a quantified score has no story to defend. It has a ranking, and when that ranking deteriorates sufficiently, it goes.

I have come to think of the portfolio almost like the shelves of a supermarket. Shelf space is scarce. If some oranges are deteriorating while fresher, better merchandise is waiting to take their place, the supermarket owner does not become emotionally attached to the old oranges. He clears the shelf and replaces them.

A quantitative portfolio works much the same way. Capital is scarce shelf space. A stock does not need to become a disaster before it deserves to be sold. It merely needs to become less deserving of that scarce capital than the alternatives. This is a subtle but crucial difference: I am not necessarily selling because something terrible has happened to the company or because its price has crossed an arbitrary line, but because better opportunities now exist relative to the rest of the investment universe.

This is why, in a diversified quantitative strategy, risk management does not have to mean placing a mechanical stop beneath every position. Risk is controlled through small position sizes, diversification across sectors, systematic ranking, and the disciplined replacement of deteriorating holdings. The computer does not hope. It does not fall in love with a stock. And, most importantly, it does not second-guess the sell signal.

Jim Simons and Renaissance Technologies built the most successful track record in the industry, largely without discretionary stop-losses on individual positions. Their protection came from an entirely different architecture: thousands of small, statistically independent bets, each with a modest edge, held briefly, sized so that no single position could meaningfully damage the fund, and diversified across so many uncorrelated signals that the portfolio behaved closer to an insurance book than to a stock picker’s book. Risk was managed at the level of the whole system through position sizing, correlation control, and turnover, not at the level of any single trade’s exit price.

But some of you may still think that a stop loss would add an additional layer of protection to an already well-diversified portfolio based on “quantamentals”. I am sorry to disappoint you. The addition of stops to such strategies always results in a sharp degradation of performance.

The image below shows one of my quant strategies without a stop-loss. A nice equity curve with an annual performance of 32.98% and a -42% drawdown.

Now, if we add a 15% stop-loss, we effectively ruin the strategy, as the chart below shows. Performance is nearly halved, falling to 15.24%, while the maximum drawdown improves by only 31%, declining to 29.35%. This relatively modest reduction in drawdown comes at far too high a cost in performance.

The deterioration in risk-adjusted returns is equally striking: the Sharpe ratio falls from 1.36 without a stop loss to just 0.79 with the 15% stop.

Furthermore, turnover explodes to 736%, adding substantial transaction costs and slippage and making the strategy extremely difficult to trade in practice.

Therefore, if one invests based on “quantamentals”, one should steer away from using stop-losses.

Path Two: Protection Through The Stop-Loss

If instead your edge is technical, such as buying breakouts, moving-average crossovers, price patterns, or swing trading, and, to make things worse, you have few positions open at the same time, a stop is not optional. Furthermore, such “technical” traders tend to have a very concentrated portfolio, often with fewer than 5 positions. In such a case, a stop-loss is a vital tool for survival.

But not all stops are equal, and this is where many traders get it wrong. There are dummy stops and intelligent stops.

Dummy stops

A dummy stop is an arbitrary number applied uniformly across every trade, most commonly a fixed percentage such as ten or fifteen percent below the purchase price, regardless of the stock, its volatility, or the chart. It is easy to implement, and it is also blind. A fixed percentage means almost nothing on a stock that regularly swings eight percent in a week, and it means far too much on a stable low-volatility name where that same move already signals something has genuinely broken.

Intelligent stops

An intelligent stop is derived from the security itself and/or context rather than imposed on it. Three layers are worth building, in increasing order of sophistication.

Structural or chart-based stops. A more discerning trader places the stop beneath a level that has actual meaning on the chart, a prior base, a broken resistance that should now act as support, or a key moving average such as the 50-day, the 150-day, or the 200-day line, chosen depending on the entry pattern. The logic is simple. If price falls back through the exact level that justified the trade, the original reason for owning the stock is no longer valid, and the position should be closed on its own merits rather than at an arbitrary distance.

 

One objection worth answering directly is the claim that placing a stop at an obvious technical level is pointless because everyone else’s stop sits at the same price, and that level gets run before the real move happens. There is truth in it. Round numbers, prior lows, and textbook moving averages are exactly where liquidity clusters, and price can and sometimes does push through a crowded level before reversing. The correct response to that is not to abandon technical stops; it is to stop placing them exactly on the obvious number. A volatility buffer below the structural level, or the confirmation requirement described above, both exist specifically to avoid being the easy liquidity at a level everyone can see on the same chart.

Volatility-based stops. Instead of a fixed percentage, the stop is set as a multiple of the stock’s own average true range or realized volatility, giving the best of both worlds, avoiding a premature exit on a normally noisy name while still keeping risk genuinely managed. A volatile name gets more room, a quiet name gets a tighter leash.

Confirmation-based stops. This is the most refined layer and the one closest to classical Dow Theory thinking. A single instrument breaking a significant technical level can be a fakeout, a stop run, or noise driven by low liquidity. Requiring confirmation from a related asset filters out a meaningful share of false signals. If the stock breaks its level but the related asset holds firm, the break is more likely noise. If the two assets break together, the signal is real, and the exit should follow without hesitation. This is the same principle that governs price and Advance Decline line confirmation in classical Dow Theory, applied here at the level of a single position’s exit rule.

The image below, whose full explanation you may find in this post, provides an excellent example of stops based on the principle of confirmation. The piercing of SLV (silver ETF) at a relevant low, unconfirmed by GLD (gold ETF), proved to be a fakeout.

The Third Path: The No Stop Fallacy For Day Traders

A different objection surfaces often in these threads: the claim that day traders do not need stops at all because closing every position before the close removes overnight gap risk entirely. This is true as far as it goes, and it is also close to the most unhelpful answer people give to the stop question, because it treats day trading as a fixed strategy rather than a capacity-constrained one.

A day trader working with a modest account is right that flattening at the close solves the gap problem, and there is nothing wrong with building a living around that approach. But day trading does not scale the way the argument implies. Executing meaningfully large size within a single session, without moving the price against yourself, becomes progressively harder as the deployed assets grow, because intraday liquidity in any single name is finite and a large order worked in a few hours leaves a visible footprint. The trader who is right to skip stops at a modest account size is not automatically right once that account reaches real scale, not because the logic about gaps changed, but because pure day trading stops being available at that size. Growing an account seriously eventually forces a longer time frame, and a longer time frame is exactly where the gap risk the argument dismissed comes back, along with the need for a genuine stop discipline.

Furthermore, day traders who trade without stop losses often overlook the fact that a stock can collapse dramatically even within a single trading session. If you run a highly concentrated portfolio, which is often the case with only three or four positions, a single stock falling 30% intraday can inflict catastrophic damage on your overall portfolio. In other words, the absence of overnight risk does not eliminate the need for risk management. Even over the course of a single day, concentrated positions can produce losses large enough to jeopardize an entire trading account.

The Weak Point Of Stop-Losses: The gap

If you trade a concentrated portfolio of a few stocks, the risk of one gapping down would be unbearable, rendering any stop-loss moot. This is a hidden risk for which there is no “standard” protection (unless you use puts or similar sophisticated hedging strategies). A stop-loss will not protect you against a stock that drops 60% overnight. The takeaway is clear: even if you are a technical trader for whom the stop-loss is a must, you must strive for a diversified portfolio.

I have a hard time understanding traders who brag about their “high conviction,” “focused” portfolio. In this game, the objective is survival. Survive, and performance will follow.

Choosing Your Path

The mistake to avoid is not picking the wrong philosophy; it is borrowing the confidence of one philosophy while practicing another. A concentrated breakout trader who refuses to use a stop because Renaissance did not use one is not being sophisticated; he is simply unprotected because he lacks the breadth of positions and the statistical edge that made the stopless approach survivable at scale. Equally, a diversified fundamental investor who panics into a tight mechanical stop on every position is importing a discipline built for a different game entirely.

The honest question to ask before every position is not, “What is my stop?” It is, which game am I playing, and does my protection actually match it?

Sincerely,

Manuel Blay

Editor of thedowtheory.com

 

 

Dow Theory Update for July 31: Primary Bear Market in U.S. Bonds Reaffirmed on 7/29/2026

 

The bear market in bonds continues

General Remarks:

In this post, I thoroughly explained the rationale behind my use of two alternative definitions to appraise secondary reactions.

TLT is the iShares 20 plus Years Treasury Bond ETF. More about it here.

IEF is the iShares 7 to 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.

As I explained HERE, the primary trend was signaled as bearish on 5/19/2026. Following the 5/19/2026 bear market lows, a rally ensued, qualifying as a secondary (bullish) reaction against the primary bear market. The secondary reaction itself was signaled on 6/24/2026, and the volatility-adjusted bounce was completed on 6/29/2026, 27 trading days off the lows. Finally, a pullback on 7/13/2026 set up TLT and IEF for a potential primary bull market.

After the pullback, both ETFs headed lower over the following weeks. On 7/22/2026, IEF penetrated its 5/19/2026 primary bear market lows. On 7/29/2026, TLT broke down below its 5/19/2026 lows, providing confirmation. The Table below shows you the details:

So, the implications of the newer lows are as follows:

1) The secondary reaction against the primary bear market has been terminated. Now the secondary trend is also bearish.

2) The setup for a potential primary bull market has been canceled.

3) The primary bear market signaled on 5/19/2026 has been reaffirmed.

The charts provide a visual representation of price action in the market over the past few months, spanning from the lows observed on 5/19/2026 to the present day. The blue rectangles will indicate the secondary (bullish) reaction against the primary bear market. The dark blue rectangles represent the pullback that set up both ETFs for a potential primary bull market. The red horizontal lines will highlight the primary bear market lows of 5/19/2026, which have recently been pierced.

Therefore, it appears that the bond market continues to price in persistent inflationary pressure rather than the likelihood of an imminent recession. It is not necessarily a harbinger of a bear market in equities, but it may continue to limit their upside.

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.

In this specific instance, the longer-term application of the Dow Theory aligns with the shorter-term rendering explained above. In other words, the price action and the Table shown above fully apply when we take the longer term view as well. Therefore, the primary trend shifted to bearish on 5/19/2026, and both the primary and secondary trends are bearish under this interpretation too.

Sincerely,

Manuel Blay

Editor of thedowtheory.com

 

The Closest Thing to a Free Lunch in Investing

 

The Magic of Combining Strategies

One of the advantages of quantitative investing is that diversification can be engineered rather than left to chance.

I run several independent quant strategies. Within each one, I impose a strict rule: no single sector may account for more than 30% of the portfolio. That limit prevents any individual strategy from becoming overly concentrated. Still, a 30% allocation to one sector can be meaningful and a tad too high to my taste.

This is where the real magic begins.

Instead of relying on a single strategy, I combine four different strategies, each with its own stock-selection logic and sector profile, allocating 25% of the capital to each. The result is far more balanced than any of the individual strategies alone.

As the chart below illustrates, my current combined portfolio’s largest sector is Financials at just 20.69%, followed by Healthcare at 17.14%. No sector comes remotely close to the original 30% cap. The different strategies naturally offset one another, smoothing out sector concentrations without sacrificing their individual strengths.

The same phenomenon extends beyond sectors. The combined portfolio also achieves a healthier mix of market capitalizations while preserving its intended exposure to the mid and small- cap universe.

This is one of the closest things to a free lunch in investing: by combining multiple robust strategies that behave differently, you reduce concentration risk and build a more diversified portfolio without diluting the edge of the underlying models.

And yes, you guessed it: by combining the four strategies, volatility is reduced, as are the spells of underperformance vs. the benchmark.

Furthermore, I was recently asked whether I planned to incorporate AI or quantum computing stocks into my portfolios. My answer was very simple: if they offer a high probability of outperforming over the next three months, my system will find them, and they will automatically appear on my buy list.

That is one of the greatest advantages of a fully systematic, quantitative approach. I don’t have to spend my time trying to identify the next hidden gem or debating whether AI or quantum computing is the investment theme of the future. My job is simply to trust the process.

If AI or quantum stocks truly offer superior expected returns, my models will naturally allocate more capital to them within their respective sectors. If they don’t, they won’t make the cut. Rather than chasing narratives, I let my system do the work—and let the data make the decisions.

Sincerely,

Manuel Blay

Editor of thedowtheory.com

Some Lessons I Have Learned as a Quantitative Trader

 

Outperformance Comes in Bursts, Pain Comes in Stretches

What follows is based on my own experience as a quantitative trader. Other quants, using different models, different universes, or different constraints, may have reached different conclusions.

One of the first lessons I have learned is the importance of understanding the universe one is trading. I run one specific strategy focused on S&P 500 constituents, but most of my other strategies also include mid- and small-caps. I generally avoid microcaps because their low liquidity often makes backtests unrealistic and live trading difficult. It is very easy to produce extraordinary historical returns in illiquid stocks that cannot be replicated in the real world.

Even when I focus on relatively liquid small- and mid-caps with strong ranking profiles, the experience can be psychologically demanding. By ranking profile, I mean the relative attractiveness of a stock based on factors such as financial strength, business quality, growth, value, momentum, or a combination of several of these. In theory, a portfolio of highly ranked stocks should do well. In practice, the journey is rarely smooth.

What I have observed is that small and mid-caps often underperform the S&P 500 for extended periods. This can happen even when the strategy is fundamentally sound and has a strong long-term record. Over a two-year period, and often even over one year, my quantitative strategies have usually outperformed the S&P 500. But that outperformance does not usually come in a steady, comfortable way.

Instead, it often comes in bursts.

This is one of the most important lessons. A strategy may lag badly for months. You may see the S&P 500 rise 10% in five months while your own strategy is flat. That is not easy to endure. It feels as if something is wrong. It creates doubt. It tests your confidence in the model.

Then, suddenly, in a period of only six or eight weeks, the same strategy may gain 25% and leave the S&P 500 far behind. The brief burst of outperformance more than compensates for the long and frustrating period of underperformance.

This is why there is no free lunch. Quantitative strategies may deliver superior long-term results, but they demand psychological fortitude. It is not enough to have a good model. One must also have the temperament to stick with it when it is temporarily out of favor.

The screenshots below illustrate this point clearly. The first chart displays the periods of underperformance (in red) and outperformance (in green) of one of my quant-based trading strategies relative to a simple S&P 500 buy-and-hold approach.

What matters is not merely the final result. What matters is the path taken to get there. And the road may feel uncomfortable.

You can observe several spells of underperformance. In hindsight, they look tolerable. In real time, they are painful. They test your patience because you do not know whether the strategy is merely going through a normal bad stretch or whether something has genuinely stopped working.

However, if we look back over two years, the picture changes completely, as shown in this chart:

The same strategy becomes a strong outperformer. And if we extend the view to almost 20 years, its long-term outperformance relative to the S&P 500 becomes even clearer.

Importantly, these results are not based on a frictionless theoretical exercise. A substantial slippage assumption of 0.25% per side of each trade has been included. That matters because, especially when trading smaller and mid-sized companies, ignoring slippage can make a strategy look much better on paper than it would have been in the real world.

The key takeaway is simple: patience is essential. The more your portfolio differs from the S&P 500, especially if it includes smaller companies, the more likely you are to underperform the index for extended periods. Your edge may not show up every month, or even every quarter. Often, it appears in short, powerful bursts that more than offset the painful spells of relative weakness.

That is the price of outperformance, and it is a price that can only be paid by those with the patience and psychological fortitude to stay the course when the going gets tough. In the end, that is often what separates the winners from the losers.

Sincerely,

Manuel Blay

Editor of thedowtheory.com

Gold and Silver miners ETFs Turn Bearish on 6/9/2026

 

Overview: In my June 1st Letter to subscribers, I noted that the two-year Treasury yield was breaking higher and that this would likely exert a negative influence on liquidity.

One of the main casualties appears to have been the gold and silver miners. On 6/9/26, a new bear market was signaled in both GDX and SIL. Gold and silver themselves have also been affected, as I discussed in this post.

Stocks, by contrast, have been affected only modestly so far. The decline has not even been enough to turn the secondary trend bearish. Therefore, both the primary and secondary trends for stocks remain bullish.

General Remarks:

In this post, I elaborate extensively on the rationale behind employing two alternative definitions to evaluate secondary reactions.

SIL refers to the Silver Miners ETF. More information about SIL can be found HERE.

GDX refers to the Gold Miners ETF. More information about GDX can be found HERE.

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

As I explained in this post, the trend was signaled as bullish on 6/2/25.

Following a pullback (secondary reaction against the bullish trend), both GDX and SIL experienced a bounce, setting up both ETFs for a potential primary bear market signal. You can find detailed explanations and charts HERE.

The table below gives you all the relevant information:

On 6/5/26, GDX broke down below its 3/20/26 pullback lows (Step #2). On 6/9/26, SIL confirmed by piercing its 3/20/26 closing lows. Since it was a confirmed violation, a primary bear market was signaled according to the Dow Theory.

Check out the chart below for a visual walkthrough of the recent price action. The brown rectangles highlight the secondary reaction (Step #2), the blue rectangles show the rally (Step #3) originating from the secondary reaction lows that set up both ETFs for a potential bear market signal, and the red horizontal lines pinpoint the pullback lows whose joint violation signaled the new bear market. The blue horizontal lines highlight the last recorded primary bull market highs (Step #1), whose upside breakout would signal a new primary bull market.

 

Thus, both the primary and secondary trends are currently bearish.

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.

As I explained in this post, the trend was signaled as bullish on 6/2/25.

In this instance, the long-term application of the Dow Theory coincides with the shorter-term version, so there was a secondary reaction against the primary bull market, and the setup for a potential bear market signal has been completed. The confirmed violation of the 3/20/26 secondary reaction low triggered a bear market signal.

Thus, both the primary and secondary trends are currently bearish.

Sincerely,
Manuel Blay

Editor of thedowtheory.com

 

After a Long Ride, Gold and Silver Turn Bearish on 6/9/2026

 

Overview: In my June 1st Letter to subscribers, I noted that the two-year Treasury yield was breaking higher and that this would likely exert a negative influence on liquidity.

One of the main casualties appears to have been gold and silver. Today, 6/9/26, a new bear market was signaled in both metals. Gold and silver miners have also been hit, and I will address them in a separate post.

Stocks, by contrast, have been affected only modestly so far. The decline has not even been enough to turn the secondary trend bearish. Therefore, both the primary and secondary trends for stocks remain bullish.

General Remarks:

In this post, I extensively elaborate on the rationale behind employing two alternative definitions to evaluate secondary reactions.

GLD refers to the SPDR® Gold Shares (NYSEArca: GLD®). More information about GLD can be found HERE.

SLV refers to the iShares Silver Trust (NYSEArca: SLV®). More information about SLV can be found HERE.

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

As I explained in this post, the primary trend was signaled as bullish on 4/2/24.

Following a pullback (secondary reaction against the bullish trend), both GLD and SLV experienced a bounce, setting up both ETFs for a potential primary bear market. You can find detailed explanations and charts HERE.

The table below gives you all the relevant information:

On 6/5/26, GLD broke down below its 3/26/26 pullback lows (Step #2). On 6/9/26, SLV confirmed by piercing its 3/26/26 closing lows. Since it was a confirmed violation, a primary bear market was signaled according to the Dow Theory.

Check out the chart below for a visual walkthrough of the recent price action. The brown rectangles highlight the secondary reaction (Step #2), the blue rectangles show the rally (Step #3) originating from the secondary reaction lows that set up both ETFs for a potential bear market signal, and the red horizontal lines pinpoint the pullback lows whose joint violation signaled the new “bear market.” The blue horizontal lines highlight the last recorded primary bull market highs (Step #1), whose upside breakout would signal a new primary bull market.

Thus, both the primary and secondary trends are currently bearish.

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.

As I explained in this post, the primary trend was signaled as bullish on 4/2/24.

In this instance, the long-term application of the Dow Theory coincides with the shorter-term version, so there was a secondary reaction against the primary bull market, and the setup for a potential bear market signal has been completed. The confirmed violation of the 3/26/26 secondary reaction low triggered a bear market signal.

Thus, both the primary and secondary trends are currently bearish.

Sincerely,
Manuel Blay

Editor of thedowtheory.com

Earnings Beat Valuations: Why the U.S. Still Leads

 

Do Not Underestimate America’s Earnings Machine

Do you remember when, just a few months ago, many experts insisted that U.S. stocks were too expensive, while Europe, and even China, offered the real value?

I never bought into that thesis.

At the time, I wrote several posts (here, here, here and here) warning that so-called “cheap” markets can easily become value traps. Low valuations alone are not enough. A market may look inexpensive for a reason, especially when earnings growth, innovation, capital allocation, and structural competitiveness are lacking.

That is why I was never persuaded by the simplistic argument that “Europe is cheap and the U.S. is expensive.” Cheapness is not a strategy. Earnings are.

Now Bloomberg (reproduced here without a paywall) seems to be reaching a similar conclusion. As Bloomberg reported:

“I don’t think I remember a time that sell side consensus missed actual earnings number by so much,” said Charles Henry Monchau, chief investment officer at Banque Syz & Co SA. He began the year positioned for international markets to outperform, but the war and AI boom prompted him to tactically shift back toward US stocks, noting that regions such as China and Europe “might not be the winners of this war (emphasis supplied).”

The lesson is clear.

Do not blindly trust consensus. Do not blindly trust the experts. And above all, do not underestimate the United States.

In the end, earnings matter. And unless something changes drastically, the U.S. remains the undisputed leader in earnings generation. Energy independence, relentless innovation, a flexible labor market, relatively lower taxation and lighter regulation, and, whether some like it or not, unmatched military strength all reinforce America’s ability to create, scale, and protect profit generating businesses. Valuation arguments may sound persuasive in theory, but markets ultimately reward companies and economies that deliver profits, innovation, and growth.

The chart below shows the whole story:

Sincerely,

Manuel Blay

Editor of thedowtheory.com

Dow Theory Signals Bear Market in Bonds on 5/19/2026

 Once again, the principle of confirmation gave a warning.

 

Overview: High crude oil prices are finally exerting inflationary pressure. With year-over-year CPI at 3.8%, bond yields have finally succumbed, and a new bear market in bonds, implying higher interest rates, was signaled on 5/19/26

As higher interest rates seem to be fueled by rising inflation rather than by higher real rates linked to stronger productivity, this creates another headwind for stocks. It is not necessarily a harbinger of a bear market, but it may limit their upside.

The principle of confirmation once again saved investors from adding to their position on three upside breakouts by IEF. In the three instances, TLT refused to confirm, making the breakouts suspect. More about how the principle of confirmation can save your skin in this post (and links therein)

General Remarks:

In this post, I extensively elaborate on the rationale behind employing two alternative definitions to evaluate secondary reactions.

TLT refers to the iShares 20+ Year Treasury Bond ETF. You can find more information about it here

IEF refers to the iShares 7-10 Year Treasury Bond ETF. You can find more information about it here.

TLT tracks longer-term US bonds, while IEF tracks intermediate-term US bonds. A bull market in bonds signifies lower interest rates, whereas a bear market in bonds indicates higher interest rates.

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

As I explained in this post, the trend was signaled as bullish on 4/4/25.

A rally ensued after the 5/21/25 lows (Step #3), which lasted for >=2 days with IEF exceeding its VAMM. Please remember that we don’t require confirmation for the final rally that completes a bear (or bull) signal setup. More information is in this post.

On 9/25/25, IEF surpassed its 4/4/25 bull market highs, unconfirmed by TLT. Again, on 10/22/25, IEF made an unconfirmed higher high.

Finally, on 2/27/26, IEF made an even higher high, while TLT failed even to exceed its previous local highs. A glaring non-confirmation.

Such a non-confirmation is not a bear market signal, but it was a yellow light: the IEF breakouts were suspect and therefore not enough to cancel the secondary (bearish) reaction.

On 5/15/26, TLT violated its 5/21/25 secondary reaction lows. On 5/19/26, IEF confirmed by piercing its 5/21/25 secondary reaction lows. Confirmation means that a new primary bear market in bonds has been signaled.

The table below shows the price action that led to the primary bear market signal:

So, the primary and secondary trends are bearish now.

The following charts depict the latest price movements. Brown rectangles indicate the secondary (bearish) reaction opposing the ongoing primary bull market. Blue rectangles highlight the rally that completed the setup for a potential primary bear market (Step #3). Red horizontal lines mark the secondary reaction lows (Step #2). The blue horizontal lines show the bounce highs (Step #3). A breach of these peaks would signal a new primary bull market, though this scenario appears unlikely in the near term.

So, the situation is as follows: At the current juncture, a breakout on a closing basis by both TLT and IEF above their 4/4/25 closing highs (Step #1) would signal a new bull market. Until this breakout occurs, we consider bonds to be in a bear market.

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

As I explained in this post, the primary trend shifted to bullish on 4/4/25.

In this instance, the long-term application of the Dow Theory aligns with the shorter-term version, and hence the primary trend shifted to bearish on 5/19/26

Sincerely,

Manuel Blay

Editor of thedowtheory.com

 

Warning: Setup for potential primary bear market signal for Gold and Silver completed on 3/31/26

 Key price levels to watch are revealed in this post

Overview: GLD and SLV underwent a secondary reaction against the primary bull market. The recent price action completed the setup for a potential bear market signal on 3/31/26. Please mind the word “potential”, which implies that the primary bull market remains in force.

General Remarks:

In this post, I elaborate extensively on the rationale behind employing two alternative definitions to evaluate secondary reactions.

SLV refers to the Silver ETF. More information about SLV can be found HERE.
GLD refers to the Gold ETF. More information about GLD can be found HERE.

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

As I explained in this post, the trend was signaled as bullish on 4/2/24.

From the 1/28/26 and 1/29/26 closing highs for SLV and GLD, respectively, both declined into 3/26/26. This pullback met the time and extent requirements for a secondary (bearish) reaction against the primary bullish trend.

Following the 3/26/26 lows, there was a 4-day rally that exceeded the Volatility Adjusted Minimum Movement (VAMM) on GLD and SLV (more about the VAMM HERE).

The table below gives you the relevant dates and prices:

So, now there are two options:

• If SLV and GLD surpass their 1/28/26 and 1/29/26 highs on a closing basis, Step #1 in the above table, the secondary reaction and setup for a potential bear market signal will be canceled.
• A primary bear market will be signaled if SLV and GLD break down below their 3/26/26 low ( Step #2).

The charts below illustrate recent price movements. The brown rectangles highlight the secondary reaction within the primary bull market. The small blue rectangles on the right show the early days of a rally that set up both ETFs for a potential primary bear market signal. The blue horizontal lines indicate the last recorded primary bull market highs that must be surpassed to reconfirm the bull market (Step #1). The red horizontal lines highlight the 3/26/26 lows (Step #2).

As of this writing, the primary trend is bullish, and the secondary one is bearish.

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

As I explained in this post, the trend was signaled as bullish on 4/2/24.

In this instance, the long term application of the Dow Theory coincides with the shorter term version, so there was a secondary reaction against the primary bull market, and the setup for a potential bear market signal has been completed.

As of this writing, the primary trend is bullish, and the secondary one is bearish. 

Sincerely,
Manuel Blay

 Editor of thedowtheory.com 

 

Critical Juncture for Gold and Silver miners: Bear Market Signal One Step Away

 

In the meantime, the primary trend is still bullish, but it could change soon

Overview: GDX and SIL underwent a secondary reaction against the primary bull market. The recent price action completed the setup for a potential bear market signal on 3/25/26. Please mind the word “potential”, which implies that the primary bull market remains in force.

Gold and Silver are also in a secondary (bearish) reaction against the primary bull market but have not yet completed the setup for a potential primary bear market.

General Remarks:

In this post, I elaborate extensively on the rationale behind employing two alternative definitions to evaluate secondary reactions.

SIL refers to the Silver Miners ETF. More information about SIL can be found HERE.

GDX refers to the Gold Miners ETF. More information about GDX can be found HERE.

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

As I explained in this post, the trend was signaled as bullish on 6/2/25.

From the 2/27/26 closing highs, both SIL and GDX dropped until 3/20/26. The decline met the time and extent requirement for a secondary (bearish) reaction against the primary bullish trend.

Following the 3/20/26 lows, there was a 3-day rally that exceeded the Volatility-Adjusted Minimum Movement (VAMM) on GDX. SIL also rallied, but percentage-wise did not exceed its VAMM. Please remember that we don’t require confirmation for the final rally that completes a bear (or bull) signal setup. More information is in this post.

The table below gives you the relevant dates and prices:

So, now there are two options:

1. If SIL and GDX surpass their 2/27/26 highs on a closing basis (Step #1 in the above table), the secondary reaction and setup for a potential bear market signal will be canceled.
2. A primary bear market will be signaled if SIL and GDX break down below their 3/20/26 lows (Step #2).

The charts below illustrate recent price movements. The brown rectangles highlight the secondary reaction within the primary bull market. The small blue rectangles on the right show the early days of a rally that set up both ETFs for a potential primary bear-market signal. The blue horizontal lines indicate the last recorded primary bull market highs that must be surpassed to reconfirm the bull market (Step #1). The red horizontal lines highlight the 3/20/26 lows (Step #2).

As of this writing, the primary trend is bullish, and the secondary one is bearish.

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.

As I explained in this post, the trend was signaled as bullish on 6/2/25.

In this instance, the long-term application of the Dow Theory coincides with the shorter-term version, so there was a secondary reaction against the primary bull market, and the setup for a potential bear market signal has been completed.

As of this writing, the primary trend is bullish, and the secondary one is bearish.

Sincerely,

Manuel Blay

Editor of thedowtheory.com