Dow Theory Update for June 25: Stocks closed up. No change in trends

Precious metals listless.

Dow Theory and Chinese stocks

As you know, the US stock market is in a primary bear market, as I have explained here, and further explained here.  I also wrote that less than 5% was lost from peak to trough, which is outstanding timing. So I wanted to see whether the Dow Theory would have done a good job at protecting investors in the Chinese stock market. As you can guess, the Dow Theory did a remarkable good job in spotting early enough (March 13) the change of trend for Chinese stocks, as you can read here.

Stocks

The SPY, Industrials, and Transports closed up.

The primary trend and secondary trend is bearish for the reasons explained here, and further explained here.

Today’s volume was lower than yesterday’s, which is bearish as ascending prices were not joined by raising volume. The overall pattern of volume is bearish for the reasons explained here.

 

Gold and Silver

SLV and GLD closed down. The primary trend is bearish, as explained here and reconfirmed bearish here; the secondary trend remains bearish too.

GDX closed down and SIL closed up. The primary trend is bearish, as explained here and reconfirmed bearish here; the secondary trend remains bearish too.

Eventually, one of these primary bear market re-confirmations will be proven false. In the meantime, it is better not to fight the trend, and wait for a primary bull market signal in order to make a commitment on the long side.

Here you have the figures of the markets I monitor for today, which contain no changes as we are flat. As you can see, now I talk of “realized gain” for the SPY as the trade has been closed today. My reading of the Dow Theory tells me to be flat in all markets: GLD, SLV, GDX, SIL and now the SPY. Time to sit on cash (being mindful of the dangers stalking cash in order not to be cyprused).

 

Data for June 25, 2013
DOW THEORY PRIMARY TREND MONITOR SPY
			SPY
Bull market started		11/15/2012	135.7
Bull market signaled		01/02/2013	146.06
Exit June 21		06/21/2013	159.07
Current stop level: Sec reaction lows			161.27
Realized gain %	Tot advance since start bull mkt	Max Pot Loss %
8.91%	17.22%	None.
DOW THEORY PRIMARY TREND MONITOR GOLD (GLD)
			GLD
Bull market started		05/16/2012	149.46
Bull market signaled		08/22/2012	160.54
Exit December 20		12/20/2012	161.16
Current stop level: Sec React low		11/02/2012	162.6
Realized Loss %	Tot advance since start bull mkt
0.39%	7.83%
DOW THEORY PRIMARY TREND MONITOR SILVER (SLV)
			SLV
Bull market started		06/28/2012	25.63
Bull market signaled		08/22/2012	28.92
Exit December 20		12/20/2012	29
Current stop level: Sec React low		11/02/2012	29.95
Realized gain %	Tot advance since start bull mkt
0.28%	13.15%
DOW THEORY PRIMARY TREND MONITOR ETF SIL
			SIL
Bull market started		07/24/2012	17.08
Bull market signaled		09/04/2012	21.83
Exit January 23		01/24/2013	21.69
Current stop level: Sec React low		11/15/2012	21.87
Realized Loss %	Tot advance since start bull mkt	Max Pot Loss %
-0.64%	26.99%	27.81%
DOW THEORY PRIMARY TREND MONITOR ETF GDX
			GDX
Bull market started		05/16/2012	39.56
Bull market signaled		09/04/2012	47.77
Exit January 23		01/24/2013	44.56
Current stop level: Sec React low		12/05/2012	45.35
Realized Loss %	Tot advance since start bull mkt	Max Pot Loss %
-6.72%	12.64%	20.75%

 Sincerely,

The Dow Theorist

Are Chinese stocks in a bear market?

 Chinese stocks and the Dow Theory

According to Zero Hedge, the Shanghai composite entered a bear market on June 24, since now it is down -22% from its February highs. Conventional wisdom has it that a bear market is signaled when stocks go down more than 20%. However, is it necessary for investors to wait so long (and endure the attendant drawdown) in order to be “sure” that a bear market sets in? The answer is no, as the Dow Theory gives as an earlier warning (which is on average -10% from the market highs, and much less in many instances as we have just seen with the US stock market last week when less than 5% was lost from peak to trough.

As the Dow Theory can be applied to foreign stocks as was explained in my post “Can Dow Theory be applied to foreign and to non-stock markets?”, which you can read here, I wanted to see if there was a way to spot a bear market in Chinese's stocks well before the mark of -20% were exceeded.

So I plotted the two charts that you can see below. The upper chart corresponds to the FXI ETF (which comprises 25 big companies). The lower chart corresponds to the HAO ETF (which is a small cap ETF). Please mind that I am applying "classical" Dow Theory (i.e. secondary reactions lasting 15 trading days, just two indices ).

The blue rectangles show the secondary reaction against the primary bullish trend. The red horizontal line highlights the secondary reaction lows, which, in case of their joint violation, would entail a primary bear market signal. As you can see the red horizontal line was violated on March 13, 2013, well before in time and in losses to the “official” bear market signal.

On March 13, 2013, the Dow Theory signaled a primary bear market for Chinese stocks

The closing high of the FIX was made on 01/02/2013 at 41.85. The violation of the secondary lows, and with it the primary bear market signal, occurred on 03/13/2013 at 37.34. So the FIX just lost -10.77% from its January highs.

In other words, had investors relied on the time-tested (and very logically aprioristically) Dow Theory rules, investors would have been forewarned with three months in advance of the beating that is now taking the Chinese stock market, and more importantly, would have protected their equity in a much more efficient way.

Enough for now. The evidence speaks for itself.

Sincerely,

The Dow Theorist

Dow Theory Update for June 24: Stocks and Gold and silver miners ETFs make lower lows

 Digging deeper into a secular bear market

Let’s get started with our Dow Theory commentary for today.

Is the secular bear market still alive?

Last Friday when I was assessing the last position taken in pursuance of the Dow Theory, I wrote that my “benchmark” was the average gain and duration of transactions taken during secular bear markets. I also wrote that defining in real time, whether one is in the midst of a secular bear market is not so easy.

Sy Harding has recently posted a very interesting article on Seeking Alpha whereby he cogently explains that the secular bear market is far from over. If we couple the valuation issues (as explained here by Doug Short) with Harding’s explanations, I can reasonably conclude that more suffering is down the road. In other words, the secular bear market is not behind us yet.

Being mindful of the existence of an ongoing secular bear market should make us even more respectful of the current primary bear market signal that was signaled here and further explained here, as primary bear markets (of a cyclical nature), as those spotted by the Dow Theory, tend to be more vicious when they occur within a secular bear market. 

Time to be cautious.

 Stocks

The SPY, Industrials, and Transports closed down.

The primary trend and secondary trend is bearish for the reasons explained here, and further explained here.

  

Today’s volume was lower than yesterday’s, which makes it a bullish volume day, since declining prices were not confirmed by volume.

Furthermore, today we had another bearish pivot low. If you compare today’s volume with the volume seen at the last recorded pivot low (shown with an ellipse and connected with a horizontal red line), today’s volume was much higher, which implies that today’s new low enjoyed more market participation (conviction) than the preceding pivot low on 05/01/2013. This makes it a bearish pivot. This is why today’s volume has been marked with one red arrow, which denotes the bearish pivot volume inference.

Please mind that any given day can simultaneously be bullish and bearish as far as volume is concerned. This is no contradiction. Pivot volume readings tend to have a longer-term repercussion (being “long term” some days and even weeks), whereas daily volume readings do not have an individual connotation, but rather the clustering of such days.

If we look at the chart below, we can find:

1.    A bearish outside reversal bar with bearish volume on 05/22/2013 (which marked the top of the primary bull market)

2.      A bearish pivot on 31/05/2013.

3.      A very dubious bullish pivot (volume was marginally higher) on May 31, 2013.

4.      A bearish pivot on 06/20/2013.

5.      Another bearish pivot on 06/24/2013.

6.      A clustering of red arrows (bearish volume days irrespective of pivots).

So, all in all, the overall picture of volume is bearish.

A bearish volume picture. Red arrows cluster

Gold and Silver

SLV closed unchanged and GLD closed down. The primary trend is bearish, as explained here and reconfirmed bearish here; the secondary trend remains bearish too.

GDX and SIL closed down. The primary trend is bearish, as explained here and reconfirmed bearish here; the secondary trend remains bearish too.

Eventually, one of these primary bear market re-confirmations will be proven false. In the meantime, it is better not to fight the trend, and wait for a primary bull market signal in order to make a commitment on the long side.

Here you have the figures of the markets I monitor for today, which contain no changes as we are flat. As you can see, now I talk of “realized gain” for the SPY as the trade has been closed today. My reading of the Dow Theory tells me to be flat in all markets: GLD, SLV, GDX, SIL and now the SPY. Time to sit on cash (being mindful of the dangers stalking cash in order not to be cyprused).

 

Data for June 24, 2013
DOW THEORY PRIMARY TREND MONITOR SPY
			SPY
Bull market started		11/15/2012	135.7
Bull market signaled		01/02/2013	146.06
Exit June 21		06/21/2013	159.07
Current stop level: Sec reaction lows			161.27
Realized gain %	Tot advance since start bull mkt	Max Pot Loss %
8.91%	17.22%	None.
DOW THEORY PRIMARY TREND MONITOR GOLD (GLD)
			GLD
Bull market started		05/16/2012	149.46
Bull market signaled		08/22/2012	160.54
Exit December 20		12/20/2012	161.16
Current stop level: Sec React low		11/02/2012	162.6
Realized Loss %	Tot advance since start bull mkt
0.39%	7.83%
DOW THEORY PRIMARY TREND MONITOR SILVER (SLV)
			SLV
Bull market started		06/28/2012	25.63
Bull market signaled		08/22/2012	28.92
Exit December 20		12/20/2012	29
Current stop level: Sec React low		11/02/2012	29.95
Realized gain %	Tot advance since start bull mkt
0.28%	13.15%
DOW THEORY PRIMARY TREND MONITOR ETF SIL
			SIL
Bull market started		07/24/2012	17.08
Bull market signaled		09/04/2012	21.83
Exit January 23		01/24/2013	21.69
Current stop level: Sec React low		11/15/2012	21.87
Realized Loss %	Tot advance since start bull mkt	Max Pot Loss %
-0.64%	26.99%	27.81%
DOW THEORY PRIMARY TREND MONITOR ETF GDX
			GDX
Bull market started		05/16/2012	39.56
Bull market signaled		09/04/2012	47.77
Exit January 23		01/24/2013	44.56
Current stop level: Sec React low		12/05/2012	45.35
Realized Loss %	Tot advance since start bull mkt	Max Pot Loss %
-6.72%	12.64%	20.75%

Sincerely,

The Dow Theorist