TheDowTheory.com and our recent recession alert featured by Mark Hulbert (MarketWatch)

 Understanding the Schannep Recession Indicator and Its Impact on Market Timing

 

We’re honored to have our Schannep Recession Indicator (SRI) featured in MarketWatch by Mark Hulbert on 6/14/24. We wrote a must-read article with the evocative title: “The latest unemployment report has triggered this spot-on recession indicator”

Below is the link to the MarketWatch article (likely behind a paywall):

https://www.marketwatch.com/story/the-latest-unemployment-report-has-triggered-this-spot-on-recession-indicator-08f2785d

and below is the link to a version not behind a paywall:

https://www.morningstar.com/news/marketwatch/20240614271/the-latest-unemployment-report-has-triggered-this-spot-on-recession-indicator

Below are the key highlights of Mark’s article:

1. Schannep Recession Indicator (SRI) Accuracy

The Schannep Recession Indicator has accurately identified all 12 U.S. recessions since 1946, demonstrating its reliability in predicting economic downturns.

2. Recent Recession Signal

The latest signal from the SRI was triggered on June 7, 2024, when the U.S. unemployment rate report for May showed an increase to 4.0%. This rise brought the three-month moving average to 3.9%, surpassing the threshold by 0.4 percentage points and suggesting that a recession is either underway or imminent.

3. Timeliness of SRI Signals

The SRI provides recession signals much closer to real-time compared to the National Bureau of Economic Research (NBER). Historically, the average lag between the onset of a recession and the SRI signal is just 1.58 months, offering a timely tool for economic forecasting and market decisions.

Finally, I want to remind our esteemed readers of the SRI’s Stock Market Timing Utility. Beyond predicting recessions, the Schannep Recession Indicator is another valuable tool for timing the stock market. By providing early warnings of economic downturns, investors can make more informed decisions about the right time to sell. Our Subscribers already have a plan to trade the stock market according to the new economic conditions. Do you?

Sincerely,

Manuel Blay

Editor of thedowtheory.com

 

Unlocking the Power of Trend Following and Relative Strength: A Century of Outperformance

 Reducing Drawdowns and Maximizing Returns

Trend following and relative strength works. The latest research by Gary Antonacci and Carlo Zarattini, delving into almost 100 years of data, proves conclusively that when done correctly, market timing results in significant outperformance and, more importantly, drawdown reduction. Most investors get blinded by the “outperformance” and forget that the best offense is a good defense, namely, cutting your losses short.

Below is the executive summary provided by one of its authors on LinkedIn, Gary Antonacci (emphasis added by me):

“This study delves into the profitability of a simple, low-frequency trend-following model applied to US industries using a comprehensive database of all US stocks traded between 1926 and 2024.

Over the past century, the Timing Industry portfolio achieved an average annual return of 18.5% with an annual volatility of 12.1%, resulting in a Sharpe Ratio of 1.46. This starkly contrasts the US equity market’s 9.7% return, 17.1% volatility, and 0.63 Sharpe Ratio.

In the paper’s final section, we introduce 31 sector ETFs by State Street Global Advisors and backtest the same trading methodology over the past 20 years. The ETFs successfully replicate the model’s exposure and returns.

We also assess the impact of commissions and slippage, demonstrating that the active timing strategy remains largely profitable even with high trading costs.”

Here is the link to the research article, which is worth your time:

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4857230

Sincerely,

Manuel Blay

Editor of thedowtheory.com

Dow Theory Signals Bull Market for Bonds on 6/4/24: Recession or Soft Landing?

 US Bonds Turn Bullish: What’s Next for the Economy?

Overview: When appraised by the more reactive application of the Dow Theory, the trend of US bonds turned bullish on 6/4/24. The question is: Is the bond market discounting a recession or merely a soft landing resulting in lower inflation?  The unemployment rate for May, to be published on 6/7/24, will probably give us more clues, as well as oil, if it maintains its bearish trend.

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 

The primary trend shifted to bullish on 6/4/24 when TLT and IEF jointly surpassed their 5/15/24 closing highs.

You may read more about the setup that preceded the new primary bull market signal in my 6/3/24 post.

The table below displays the price action that led to the new bull market signal.

So, now the primary and secondary trends are bullish.

The charts below depict the current market situation. The grey rectangles on the left show a rally that occurred in March that did not qualify as a secondary reaction. The blue rectangles (Step #2) highlight the current secondary (bearish) reaction against the primary bear market. The brown rectangles show the most recent pullback that set up both ETFs for a potential primary bull market signal. The blue horizontal lines highlight the bounce highs (step #2), whose breakup signaled the new bull market. The red horizontal lines highlight the primary bear market lows whose breakdown would signal a new primary bear market.

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 detailed in this post, the primary trend was signaled as bearish on 2/13/24.

TLT and IEF drifted downward until 4/25/24 (Step #1 in the table below). From these lows, a bounce lasting 28 trading days followed until 6/5/24 (Step #2). The table below shows that the rally met the time and extent requirements for a secondary (bullish) reaction against the primary bearish trend. Now, we wait for a >=3% pullback to complete the setup for a potential primary bull market signal.

The charts below depict the current situation. The blue rectangles highlight the present secondary (bullish) reaction against the primary bear market.

Therefore, the primary trend is bearish and the second one is bullish.

Sincerely,

Manuel Blay

Editor of thedowtheory.com

 

 

Dow Theory Alert: The trend for US bonds could change from bearish to bullish soon. Learn the critical price levels to watch

From Bearish Trends to Potential Bull Markets: TLT and IEF Insights

Overview: TLT and IEF remain in a primary bear market, but this could change soon. If TLT and IEF jointly surpass their 5/15/24 closing highs, the trend will shift from bearish to bullish. More details are provided below.

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 primary trend for TLT and IEF was signaled as bearish on 2/13/24.

TLT and IEF drifted downward until 4/25/24. From these lows, a bounce lasting 14 trading days followed until 5/15/24. The table below shows that the rally met the time and extent requirements for a secondary (bullish) reaction against the primary bearish trend. After the 5/15/24 bounce highs, there was a pullback until 5/29/24, completing the setup for a potential primary bull market signal.

 

Now, we have two alternatives:

a) If TLT and IEF jointly surpass their 5/15/24 closing highs (Step #2 bounce), a primary bull market will be signaled.

b) If TLT and IEF jointly violate their 4/25/24 closing lows (Step #1), the primary bear market would be reconfirmed.

The charts below depict the current market situation. The grey rectangles on the left show a rally that occurred in March that did not qualify as a secondary reaction. The blue rectangles (Step #2) highlight the current secondary (bearish) reaction against the primary bear market. The brown rectangles show the most recent pullback that set up both ETFs for a potential primary bull market signal. The blue horizontal lines highlight the bounce highs (step #2). The red horizontal lines highlight the primary bear market lows whose breakdown would reaffirm the primary bear market. 

 

Thus, the primary is bearish, and the secondary one is 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 detailed in this post, the primary trend was signaled as bearish on 2/13/24.

The most recent bounce, not reaching the >=15 days threshold, does not qualify as a secondary reaction, and accordingly, no setup for a potential primary bull market signal has been completed.

Therefore, the primary and secondary trends are bearish.

Sincerely,

Manuel Blay

Editor of thedowtheory.com

Spotting Recessions and Bear markets: Schannep Recession Indicator vs. Sahm rule

Which one is even better? Spoiler alert: Schannep's

The "Sahm Rule" is a well-known recession indicator created by Claudia Sahm, an economist who worked at the Federal Reserve. This rule identifies the early stages of a recession when the three-month moving average of the U.S. unemployment rate rises by half a percentage point or more above the lowest three-month moving average unemployment rate from the previous 12 months.

However, another lesser-known recession indicator with a nearly perfect track record was created almost 20 years before the Sahm Rule. This is the Schannep Recession Indicator. Despite its accuracy, it hasn't received as much attention because its creator did not work for the Federal Reserve. You can learn more about it here:

https://schannep.com/

Key Differences Between the Indicators

1.    Reference Period for the Lowest Unemployment Rate:

Sahm Rule: Uses the lowest three-month moving average unemployment rate from the previous 12 months.
Schannep’s Indicator: Uses the absolute lowest unemployment average without the 12-month restriction.

2.    Threshold for the Alert:

Sahm Rule: Triggers an alert when the unemployment rate increases by 0.5 percentage points above the reference low.
Schannep’s Indicator: Triggers an alert when the unemployment rate increases by 0.4 percentage points above the reference low.

Why It Matters

Schannep’s Indicator has successfully signaled all 13 of the last recessions, with 10 of these recessions followed by a bear market. Subscribers to our newsletter know how to trade and adjust their portfolios before the storm hits.

This impeccable record highlights the importance of closely monitoring the unemployment rate as a critical economic indicator. By understanding and comparing these tools, investors and policymakers can better anticipate economic downturns and make informed decisions.

Sincerely,

Manuel Blay

Editor of thedowtheory.com

 

 

Back to "divergent" interpretations of the Dow Theory

 

Setting Dow Theory concepts straight amidst so much "fake" Dow Theory.

Recent Transport weakness relative to the Dow Industrials prompted many “experts” to proclaim that this is a bear market signal. Let’s clarify the concepts.

First, divergence and lack of confirmation, while similar, are not the same and have different implications. Divergence entails one index being higher, whereas the other is lower.

Lack of confirmation means that one index makes a higher high (or lower low), and the other index fails to break out while agreeing in direction.

Rhea studied divergences; contrary to common wisdom, they don’t question the current trend. Normally, they are resolved in favor of the existing trend. Mark Hulbert recently provided data confirming this assertion (see chart below). 

Lack of confirmation merely serves as a yellow light that may question the persistence of the current trend, but it is NOT, as many purport, a signal showing a change in the trend.

Finally, most Dow Theorists are fixing their eyes on the wrong relevant highs. All-time highs (lows) are not necessarily the relevant highs to be surpassed by both indices. In most instances, relative highs (or lows) are the appropriate vital levels to watch.

Therefore, most analyses we read will likely do more harm than good to our portfolios.

These old posts shed more light into what I call “heretical” (or plain wrong) interpretations of the Dow theory:

http://www.dowtheoryinvestment.com/2022/10/dow-theory-update-for-october-12.html

http://www.dowtheoryinvestment.com/2019/02/dow-theory-update-for-february-4.html

http://www.dowtheoryinvestment.com/2019/04/dow-theory-update-for-april-5st-back-to.html

http://www.dowtheoryinvestment.com/2019/04/dow-theory-update-for-april-13rd-back.html

To close, I'd like to stress that most Dow Theorists don't back their questionable assertions with a track record. You can find ours HERE.

 

Sincerely,

Manuel Blay

Editor of thedowtheory.com

Gold and Silver Surge: Dow Theory Confirms Bullish Primary Trend on 5/17/24

Overview: Higher confirmed highs by SLV and GLD (silver and gold) have reaffirmed the primary bull market. The secondary reaction is over.

The most recent pullback in the gold and silver miners’ ETFs (GDX and SIL) was so modest that it did not qualify as a secondary reaction. So, a bull in full gear.

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.  

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

Following the 4/16/24 highs, there was a pullback until 4/30/24 that lasted 11 trading days. Such a pullback met the time and extent requirement for a secondary (bearish) reaction against the primary bullish trend. After the 4/30/24 lows, a powerful rally emerged that surpassed the 4/16/24 highs. SLV broke topside its 4/16/24 high on 5/15/24, while GLD did so on 4/17/24.

The Table below shows the relevant data summarizing the most recent price action.

 The chart below shows the secondary reaction (Step #2, brown rectangles) and the rally starting the 4/30/24 lows (Step #3, blue rectangles). The blue horizontal lines highlight the 4/16/24 highs (Step #1), whose breakup reaffirmed the primary bull market.

 Therefore, the primary and secondary trends are now bullish, and the secondary reaction has been canceled.

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.

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

The most recent pullback did not last at least 15 trading days, so it did not qualify as a secondary reaction.

So, now the primary and secondary trends are bullish.

Sincerely,

Manuel Blay

Editor of thedowtheory.com