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

Alessio Rastani Features TheDowTheory.com: Update on the technical landscape for Bitcoin and Ethereum

 Alessio Rastani has a knack for making excellent and content-rich videos. As a follower of Alessio’s work for many years, I can attest that he tends to be on the right side of the markets most of the time. In his latest video, he delves into the current technical landscape of Bitcoin and Ethereum. I’m honored that he’s incorporated insights from my Dow Theory analysis and highlighted my work. Alessio identifies crucial price levels that must hold for the bullish trend to remain intact.

https://www.youtube.com/watch?v=E3W3EEcdwp8 

Sincerely,

Manuel Blay

Editor of thedowtheory.com

Warning: Bearish alert for Bitcoin and Ethereum

Dow Theory and basic trendline analysis tell us that trouble is brewing with Bitcoin.

In my April 1st, 2024 Crypto Report (available only to Subscribers), I wrote that “if Ethereum and Bitcoin jointly pierced the 3/20/23 lows, I would turn bearish”. ETHE decisively violated its 3/20/24 lows on 4/12/24 and continued lower for two days. On 4/16/24, BTC also broke down its 3/20/24 lows, confirming ETHE. I consider such a breakdown a bearish omen.

Some might argue that the pullback from the 3/13/24 (BTC) and 3/11/24 (ETHE) highs to the 3/20/24 lows did not meet the time requirement for a secondary reaction, and hence, the joint piercing of such lows was not so bearish. To get the setup for a bear market signal, we first need a secondary reaction, which must last at least ten trading days.

Given that cryptos are fast-paced and highly volatile, I tend to shorten the time requirement to consider the existence of a secondary reaction (which later may evolve into a Sell signal). Thus, the breakdown of the 3/20/24 lows was, at the very least, a warning sign.

If we insist on a secondary reaction lasting two weeks or more, even in such circumstances, both BTC and ETHE have completed a secondary reaction and the setup for a primary bear market in BTC and ETHE have been completed. Following the pullback lows (Step #2), a four-day bounce followed that completed the setup for a potential primary bear market signal (Step #3).

The table below gives you the relevant information:

 

 So, now the situation is as follows:

a) if BTC and ETHE jointly pierce their pullback lows (Step #2), a primary bear market will be signaled.

b) if BTC and ETHE jointly break topside their March highs (Step #1), the setup for a primary bear market and secondary reaction would be canceled.

The chart below helps you visualize the current situation. The brown rectangles show the secondary reaction that started after the March highs. The blue rectangles highlight the bounce (Step #3) that set up both Crytos for a potential primary bear market signal. The red horizontal lines highlight the 4/23/24 lows whose breakdown would signal a new primary bear market. The blue horizontal lines highlight the March highs whose breakup would cancel the secondary reaction and the setup for the bear market signal.

All in all, the April lows are vital. I would even add that the breakdown of the 3/20/23 lows was the first warning of a trend change. I am willing to accept a secondary reaction in the fast-paced crypto markets when the pullback/rally lasts less than two weeks. So, it is not outlandish to say that I have been “preliminarily” bearish since 4/17/24 when BTC pierced its 3/20/24 lows (and confirmed ETHE, which did so on 4/12/24). Looking forward, a breakdown of the 4/23/24 lows would be most bearish.

While not Dow Theory, the chart below is obvious and not bullish. A significant trendline has been broken, and the subsequent price action indicates a clear bearish trend, as prices struggle to move back above the trendline:

For the fundamental reasons I will explain in my next crypto report to Subscribers (due on May 1st), I am becoming bearish on Bitcoin, and the charts seem to confirm my bearishness. BTC is due for a breather.

Sincerely,

Manuel Blay

Editor of thedowtheory.com

 

 

 

Melt up: gold and silver soar, triggering a new Dow Theory bull market signal on 4/2/24

 SIL and GDX are also in a Bull market since 4/3/24

Overview: On 4/3/24, SLV finally surpassed its 12/1/23 closing high at 23.33 and confirmed GLD, which had breached its 12/27/23 highs on 3/1/24. So, now, according to the Dow Theory, a primary bull market in gold and silver has been signaled.

Today, 4/3/24, SIL and GDX also triggered a new primary bull market signal by breaking above their 12/27/23 closing highs. In the next few days, I will write more about SIL and GDX.

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 bearish on 2/13/24.

Following the 2/13/24 lows, a strong rally ensued with no meaningful pullback. Accordingly, the relevant highs to be surpassed were the 12/1/23 closing highs for SIL at 23.33 and 12/27/23 for GDX at 192.59. On 3/1/24, GLD broke above such highs without SIL confirming. On 4/2/24, SIL confirmed signaling a primary bull market.

Check out the chart below for a visual walkthrough of the recent price action. The blue rectangles indicate the rally that began after the lows on 2/13/24. The small grey rectangles represent a pullback that failed to meet the criteria for triggering an ordinary buy signal in both ETFs. In the absence of this setup, the highs of the previous bull market become the relevant highs to surpass.

Thus, both the primary and secondary trends are currently 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 HERE, the primary trend was signaled as bearish on 6/21/23.

In this post, I explained that the setup for a potential primary bull market signal had been completed.

On 12/27/23, GLD surpassed its 12/12/23 bounce high, which was unconfirmed by SLV. On 4/2/24, SLV surpassed its 12/1/24 highs, providing confirmation, and thus, a primary bull market has been signaled.

The table below contains all the details:

The charts below show the most recent price action. The blue rectangles display the secondary reaction against the bear market (Step #2 in the above table). The brown rectangles highlight the pullback that set up both ETFs for a potential primary bull market signal (Step #3). The blue horizontal lines show the relevant price levels to be jointly surpassed for a primary bull market signal. The red lines indicate the 10/5/23 primary bear market’s last lows, whose violation would signal a new primary bear market (very unlikely at this juncture).

 Sincerely,

Manuel Blay

Editor of thedowtheory.com

Exploring Effective Investment Strategies with Giacomo Mondonico on Hustle Hub

 Learn How the Dow Theory Can Elevate Your Investment Game

Being featured on Giacomo Mondonico’s YouTube channel, Hustle Hub, was an absolute pleasure. In our first interview episode, we explored various investment strategies, carefully assessing their effectiveness. Through our analysis, we found that the Dow Theory stands out as a reliable approach for understanding market trends. Its solid principles and track record make it a valuable tool for navigating the market. As we continue to share insights with our audience, we encourage you to stay updated and join us on our investment journey.

    https://youtu.be/CSB3bFHTFQw

 

Sincerely,

Manuel Blay

Editor of thedowtheory.com