Dow Theory Review for 2015

US Stocks
Let’s briefly recap how our Dow Theory analysis fared in 2015. Did we do a good job at determining the primary trend of the markets? 2014, as explained here, was a good year for those applying the Dow Theory to stocks, gold, silver and their miners. 2015 has been a good year too (by avoiding losses with losers).

Today I focus on US stocks. In the coming days, I will review how gold, silver and their ETF miners fared when traded in pursuance with the Dow Theory.
 
The year began on January 2 with an ongoing primary bull market (more about it, here)
 
This primary bull market signal lasted until August 20th, when a primary bear market was signaled, as explained here and here.
 
Following the primary bear market signal, the SPY further declined  -8.18% until a bottom was made on 8/25/2015. Please mind that my reading of the Dow Theory slightly diverged from that of Schannep. Schannep signaled the primary bear market one day later, on 8/21/2015, and hence, the subsequent decline until the bottom amounted to only -5.24%.
 
For the sake of clarification I must say that I signaled the primary bear market one day earlier that Schannep because I had identified a secondary (bearish) reaction against the then ongoing primary bull market in a different fashion than Schannep (I considered the primary bull market reconfirmed with just confirmation from the Industrials and the SPY; and from such higher highs I appraised the development of a secondary reaction, whereas Schannep, by requesting confirmation by the three indices of the all-time highs, did not appraise a new secondary reaction, and had to wait until the traditional Dow Theory signaled a primary bear market signal. Yes I know it is kind of esoteric, and I hope one day I have the time to further dissect such nuances of Schannep’s Dow Theory). In the spirit of full disclosure I must say that if I were to apply Schannep’s Dow Theory right now, I would have done it in exactly the same way than Schannep. Hence, I don’t want to boast that I was one day earlier or smarter than Schannep. It was mere luck, because further study of Schannep’s Dow Theory proved me that Schannep’s requirement of confirmation by three indices in order to consider the primary bull market reconfirmed (when breaking out above last primary bull market highs), is a very sound requirement, which I plan to respect to the letter in the future. In past instances (i.e. 1999 and 2007), and specially within aging bull markets, Schanneps’ requirement of demanding all three indices to confirm higher highs, resulted in avoiding false signals, and kept investors on the right side of the market.
 
On October 7, 2015 a primary bull market was signaled, as explained here and here.
 
Please mind that the entry price was at a slighter lower level than the previous exit price, which is good.

 
It was a short-lived primary bull market, though, as a primary bear market signal was signaled on December, 11th 2015, as explained here.
 
Please mind that the exit price (SPY at 201.88) was at a slightly higher level than the entry price (SPY at 199.41). Thus, even though it was not an outstanding signal (in the sense that it didn’t bear much fruit), it was certainly not a loser. The pattern of Dow Theory trades resembles that of trading: Most of the trades tend to be small winners or losers; however, every now and then we stumble on a big winner (2013-2014 comes to my mind). There is nothing wrong with small winners provided the losers are kept under control, something which the Dow Theory manages to do remarkably well.
 
Here you have a chart displaying 2015, from January 2nd (first trading day) to December 31st. The orange rectangles displays the periods we were sitting on the sidelines due to primary bear market signals.
The Dow Theory kept investors on the safe side during 2015
Now let's have a look at profits, as shown in the spreadsheet:




Please mind that the real profits made by the investors are those that I label "capitalised". This is the money you'd have made starting with 100 units, cashing out 98.84 units at the August 20 exit (-1.16% loss) and reinvesting the 98.84 units at the buy signal on Oct 7, and exiting on December 11 (+1.23% profit) for a total gain of 0.056%. As you can see the Dow Theory managed to remain (barely) positive, while buy and hold lost -1.21% during 2015.
 
Thus, the Dow Theory outperformed buy and hold by +1.27% in 2015.
 
As I explained here, the Dow Theory tends to outperform “buy and hold” when the going gets tough. In good times, there is no need for “timing” as a rising tide lifts all boats. 2015 was a tough year, though, with sideways movement punctuated by sharp declines and recoveries that is noise, which tends to kill traders)
.
While Schannep’s Dow Theory managed to outperform by and hold by almost 1.27% in 2015 (which is no meager accomplishment, given the deflationary environment), we should adjust total returns by taking into account the maximum drawdown suffered during 2015. If we do so, then we see the net superiority of the Dow Theory over buy and hold, as such an outperformance came with less risk. As you will see on the spreadsheet below, when we adjust for risk, we sew that buy and hold had a maximum drawdown of -12.28% versus  a mere -4.44% for the Dow Theory. From these figures we can draw two conclusions:

 a) The obvious one: The Dow Theory manages to contain losses, and to keep investors on the safe side (cash) when bullish trends subside. It had a maximum drawdown almost three times smaller than that of buy and hold.
 
 b) The Dow Theory (especially, Schannep’s one), manages to signal the change of the primary trend very close to top. It is highly reactive. The two largest drawdowns  experienced by the Dow Theory during 2015 which coincided with two “sell” (primary bear market) signals occurred at less than 5% from the top.



MAX  Drawdown 2015  SPY buy and hold
MAX  Drawdown 2015  SPY Dow Theory













Price 
Date


Price
Date
Closing high
213.5
5/21/2015
Closing high
213.5
5/21/2015
Closing low
187.27
8/25/2015
Exit 
203.97
8/20/2015











Max Drawdown
-0.1229


Max Drawdown
-0.0446


















Closing high
211
11/03/2015






Exit 
201.88
12/11/2015

















Max Drawdown
-0.0432

 
Conclusion: the Dow Theory did a good job keeping us all year long on the right side of the market. Out of 12 months, the Dow Theory had us invested in the market roughly 10 months. The first primary bear market signal helped us avoid a major scare (the August mini crash), while the second one of December is helping us right now (January 8 as I write) from another steep decline. 
 
GOLD AND SILVER
 
GLD:
 
2015 began with an ongoing bear market which had been which has been signaled by this blogger truly yours on December 20th, 2012 (as explained here).
 
On October 12th, 2015 a very dubious primary bull market signal was signaled. In real time, I wrote that it was perfectly legitimate to ignore the signal, as the secondary reaction whose closing highs had been just broken up was more than dubious (time requirement very dubiously met).

By the way, my warnings concerning the dubious nature of the primary bull market signal were quite clear, since I minced no words:
 
“On a closer look, I have seen that SLV did not even manage to rally for at least 10 calendar days. According to Schannep, at least two indices should rally for 10 calendar days, irrespective of the average time of trading days. While all this is not carved in stone, and Rhea himself stressed the difficulty in defining secondary reactions, I feel that maybe the latest closing highs we have seen may not be indicative of a primary bull market, but rather constitute the real secondary reaction highs. Those willing to jump the gun, may consider the primary trend as bullish (especially given that the ETFs miners, which tend to lead, are already on a primary bull market of their own). Nonetheless, those more conservative may rightfully consider that the last recorded highs determine the real secondary reaction, and from this point we should wait for a pullback of at least 3% (in volatility-adjusted terms) on either SLV or GLD. After such a pullback the joint violation of the October 12 closing highs would entail a primary bull market.
 
 (bold letters added)
 
On November 17th, 2015, the last recorded primary bear market lows were violated, which implied a reconfirmation of the primary bear market (for those who interpreted that a “bull” had never existed) or a new primary bear market signal had been signaled (for those that considered that a primary bull market had been signaled). More about it here

All in all, 2015 ended under the grips of the bear.
 
The year began with GLD at 114.69 and closed at 101.46. Hence, a decline of -11.53%.
 
Those who decided to stay the whole year on the sidelines avoided thus a loss of -11.53%
 
On the other hand, those that, in spite of my warnings concerning the dubious nature of the signal, went long on October 12th, 2015, underwent a loss of -8.05% (entry at 111.31 and exit at 102.34).

Please mind that even for those that went long and lost -8.05% on the trade that those with a buy and hold strategy would have lost -11.53%. So even accounting for the whipsaw, the Dow Theory managed to outperform buy and hold in 2015 (as it did in 2013 and 2014).
 
Furthermore, we have to bear in mind that during 2013 and 2014 we were also on the sidelines, hence avoiding a whopping -28.83% loss for that year, and an additional loss of -3.746% during 2014.

Thus, I am quite dumbfounded at some recent criticism recently thrown which literally says that the:
“[f]requency of inaccurate calls for gold, silver, HAO, GLD and SLV suggests that the Dow Theory being applied is inaccurate”
 
I feel that being on the sidelines since the end of 2012 all through the beginning of 2016 proves several things:
           
 a) When there is a real trend (in this case bearish) there is not so much  frequency” of  calls.
            
 b) Besides such calls (only one, at most two) have been very accurate.
 
That being said, it is true that anything can happen on any given Dow Theory signal. One has to keep a long term perspective. To expect positive results on any given trade or in any given year is a very false assumption, as I explained here.
 
Here you have the 2015 chart for GLD:
Another year of bear market action: 2015
 SLV:
 
As to silver (here SLV), which I trade in tandem with paper gold (GLD), we had the same Dow Theory signals (of course). For those seeing a secondary reaction against the primary bear market and acting upon the breakup of the secondary reaction closing highs, there was a whipsaw, as the primary bull market was quickly reversed when the last recorded primary bear market closing highs were jointly broken by SLV and GLD. For more details, please read my comments concerning GLD above.
 
The year began with SLV at 14.96 and closed at 13.19. Hence, a decline of -11.83%.
 
Those who decided to stay the whole year on the sidelines avoided thus a loss of –11.83 %
 
On the other hand, those that, in spite of my warnings concerning the dubious nature of the signal, went long on October 12th, 2015, underwent a loss of -10.44% (entry at 15.13 and exit at 13.55 on Nov 17, 2015).
 
Please mind that even for those that went long and lost –10.44 % on the trade that those with a buy and hold strategy would have lost –11.83 %. So even accounting for the whipsaw, the Dow Theory managed to outperform buy and hold in 2015 (as it did in 2013 and 2014).
 
Furthermore, we have to bear in mind that during 2013 and 2014 we were also on the sidelines, hence avoiding a whopping -37.47% loss for that year, and an additional loss of -21.68% % during 2014.
 
Thus, you can see that the Dow Theory (even allowing for a very dubious whipsaw) did a good job at riding (by being out of the market) the bearish trend that was signaled at the end of 2012.
 
Here you have SLV’s chart for 2015:
 
More bearish action in 2015
 

SIL and GDX

SIL:
 
The year started with an ongoing bear market, and the Dow Theory was suggesting staying on the sidelines. 
 
Here you have the chart displaying SIL for 2015. The blue rectangles display the time the Dow Theory suggested being in the market.
On January 12, 2015 a primary bull market was signaled. As I explained here, it was not a very clear primary bull market signal as the volatility requirement was barely met (it was not met when the secondary reaction leading to the primary bull market set up was developing, and was only met when we were confronted with the actual signal).
 
However, one has to take decisions under uncertain conditions, and I decided to heed the most recent volatility readings, and hence I considered a primary bull market had been signaled. However, I cautioned to make a subpar commitment. Not only the signal was not clear-cut, but the initial risk (initial Dow Theory stop) was quite large. I make a general observation. Not all trades are created equal. Some have a good risk reward ratio (due to a narrow Dow Theory stop), others don’t. We are not supposed to be batting all the time. At the very least, the size of our commitment should take into account the initial risk. The entry price for SIL was 31.23.
The powerful longer term trend bear market (as determined when applying the Dow Theory to weekly charts) eventually prevailed and at July 1, 2015 a primary bear market was signaled, as was explained here.

The exit price for SIL was 24.75
 
Hence, this particular Dow Theory trade resulted in a loss of -20.75%.
 
The Dow Theory suggested staying on the sidelines until the next buy signal which was given on October 5th, 2015, as explained here.

The entry price for SIL was 22.2
 
The year ended on December 31st, 2015 with an open position. In other words, the trade taken on October 5th, 2015 had not been reversed by a primary bear market signal yet.
 
SIL price at the end of year was 18.51, which translates into an unrealized loss for this trade of -16.62%
 
As you can see in the spreadsheet below the compounded loss resulted from the two losing trades (one realized and one unrealized) amounted to -33.92%
 
Definitely, it was not a good year for the Dow Theory when applied to SIL. The strong “long term or quasi secular” bear market took its toll on both signals. The breakups proved to be prematurely aborted.
 
How did buy and hold fare?
 
The year began at 1/2/2015 with SIL at 27.39
 
An ended at 12/31/2015 with SIL at 18.51
 
Which amounts to a loss of -32.42% for buy and hold.
 
In other words, the Dow Theory slightly underperformed buy and hold.
 
Here you have a spreadsheet comparing buy and hold and the Dow Theory for SIL.

Please mind that in any given year or on any given couple of trades anything can happen. The long term nature of the Dow Theory and the scarcity of trades per annum implies that in any given year (or even longer term period) buy and hold may outperform. Therefore, even though, the Dow Theory managed to almost equal buy and hold, anything could have happened.
 
We can draw interesting lessons from 2015: We can see that when there is a powerful bear market (on a very long term, almost secular basis) long trades are faced with headwind. Faced with adversity, the Dow Theory manages to contain losses or even not to lose (when being completely out of the market as in 2014). However, losing less or not losing is not tantamount to making money. When there is a huge bear market we can hope, at best, to lose less.

Of course, in real time no one knows whether the powerful bear market is about to end, and hence, one should take all trades, unless the risk/reward is clearly unfavorable (i.e. likely initial risk 50%). Hence, I feel it is advisable to diversify across markets. One never knows in advance in which markets powerful and clean trends will develop
If  we take a longer term perspective and start looking at SIL (and GDX) from 2012 we will see that the Dow Theory has greatly outperformed buy and hold. When I find time, I would like to post a chart showing the time period spanning from 2012 to date, and we will see how outperformance is build upong long term periods. 


GDX
 
The year started with an ongoing bear market, and the Dow Theory was suggesting staying on the sidelines. 

Here you have the chart displaying GDX for 2015. The blue rectangles display the time the Dow Theory suggested being in the market.
On January 12, 2015 a primary bull market was signaled. As I explained here, it was not a very clear primary bull market signal as the volatility requirement was barely met (it was not met when the secondary reaction leading to the primary bull market set up was developing, and was only met when we were confronted with the actual signal).
 
However, one has to take decisions under uncertain conditions, and I decided to heed the most recent volatility readings, and hence I considered a primary bull market had been signaled. However, I cautioned to make a subpar commitment. Not only the signal was not clear-cut, but the initial risk (initial Dow Theory stop) was quite large. I make a general observation. Not all trades are created equal. Some have a good risk reward ratio (due to a narrow Dow Theory stop), others don’t. We are not supposed to be batting all the time. At the very least, the size of our commitment should take into account the initial risk. The entry price for GDX was 21.49.
 
The powerful longer term trend bear market (as determined when applying the Dow Theory to weekly charts) eventually prevailed and at July 1, 2015 a primary bear market was signaled, as was explained here.

The exit price for GDX was 17.28
 
Hence, this particular Dow Theory trade resulted in a loss of -19.59%.
 
The Dow Theory suggested staying on the sidelines until the next buy signal which was given on October 5th, 2015, as explained here.

The entry price for GDX was 15.12
 
The year ended on December 31st, 2015 with an open position. In other words, the trade taken on October 5th, 2015 had not been reversed by a primary bear market signal yet.
 
GDX price at the end of year was 13.72, which translates into an unrealized loss for this trade of -9.26%
 
 
As you can see in the spreadsheet below the compounded loss resulted from the two losing trades (one realized and one unrealized) amounted to -27.03%
 
 
Definitely, it was not a good year for the Dow Theory when applied to GDX. The strong “long term or quasi secular” bear market took its toll on both signals. As with SIL, the breakups proved to be prematurely aborted.
 
How did buy and hold fare?
 
The year began at 1/2/2015 with GDX at 18.03.
 
An ended at 12/31/2015 with GDX at 13.72
 
Which amounts to a loss of -23.90% for buy and hold.
 
Here you have a spreadsheet comparing buy and hold and the Dow Theory for GDX.
 
In other words, in 2015 buy and hold outperformed the Dow Theory. It is worth bearing in mind that the Dow Theory clearly outperformed buy and hold in 2013 and 2014. If we take a somewhat longer term view, the Dow Theory has done a decent job. When I find time, I would like to post a chart showing the time period spanning from 2012 to date, and we will see how outperformance is build upong long term periods.

 
Sincerely,
The Dow Theorist

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