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