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Is the Market Making a Short Term Bottom?

In Uncategorized on October 16, 2014 at 3:12 pm

Stocks have been in a downtrend for over a month losing over 10% and putting a scare into buy and hold investors. Headline risks are high with Ebola, ISIS, Hong Kong protests and oil prices dropping. In the face of this, three things lead me to believe that we are close to the end of the current selling stampede in stocks:

1) Selling skeins within BULL markets tend to last 17-25 days. We are at day 19 today. At the same time, bonds have rallied on a flight to safety. Bonds reversed yesterday at new highs forming a potential blow-off top in bonds (read SELL longer dated bonds):

2) Exhaustion selling in global stocks on huge volume accompanied by a POSITIVE chart formation called a HAMMER. Junk bond ETFs made similar patterns:

3) The Volatility Index registered back to back CVR3 VIX BUY signals (see green chevrons in bottom pane). The RED chevron mid Aug is one reason we got out of this market. When volatility contracts, stocks usually rise in price:

These three things, along with a slew of other data, suggest at least a a 3-5 day rally here and perhaps short term bottom in stocks is in place. There is no guarantee that the stock market can’t go lower, but probabilities suggest good risk/reward entry point for a portion of your risk assets.

The calls I am receiving from non-clients suggest that they are scared and that fear is growing. At the same time their advisors are not holding their hands and reminding them of their “process”. You need to review your risk management strategy and confirm that you are properly positioned.

If you are an AlphaDow or Ivy Portfolio client you don’t need to do anything — we have already made the changes for you. Our process dictated that our team move you to cash and bonds in mid-August and as such we have outperformed our benchmark while keeping risk to less than one-third of the stock market. Email me for complete details.

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DOW THEORY CONFIRMS BULL MARKET

In Uncategorized on March 20, 2010 at 9:32 pm

This week Dow Theory confirmed that the primary tide is still UP.  The Dow Jones Industrial Average and the Dow Jones Transportation Average both closed at 17 month highs.  The initial Dow Theory BUY signal came in July of last year,  which reversed the SELL signal from November 2007.   As John Murphy of stockcharts.com fame wrote “(that’s) a good thing for the market and the economy.  That’s because transportation stocks are cyclical in nature and do better when investors are optimistic on both.”

Writing over 110 years ago, before the advent of the computer and the benefit of back-testing, Charles Dow outlined a methodology for gauging the primary tide of the stock market.  There have been 63 Dow Theory signals since, with over 75% being accurate (email info@alphadow.com).  Chart 1 shows the new high in the Dow Industrials and Chart 2 shows the Dow Transports:

Chart 1

Chart 2

QUESTION: Should we take profits and try to buy back lower?

ANSWER: No.  A trend following approach like Dow Theory requires that you hold your winners as long as possible.  That’s because no one knows how high this market can go.   Trying to pick tops and bottoms is a fools game.

QUESTION: My friend’s broker is recommending people go to cash because he thinks the market will go down again.  Do you agree?

ANSWER:  There is no way to tell for sure.  Right now the probabilities favour higher prices.  The best course of action is to hold.  When the trend is over, Dow Theory will let us know.

QUESTION:  What should my portfolio look like now?

ANSWER:  That depends on your risk tolerance.  Check out our AlphaDow page or our ETF Advisor page for ideas.

WE GOT PAST PEARL HARBOUR AND WE WILL WIN THIS WAR – WARREN BUFFET

In Uncategorized on March 10, 2010 at 3:23 pm

I posted last month that the February swoon was a dip in an ongoing BULL market.  Apparently the Oracle of Omaha thinks so too.  Economic data continues to improve (except average hours worked and “under-employment” rate) and the market has hit news highs on several fronts (small caps, consumer discretionary, biotech).  Subscribers to this site took initial trading positions in January 2009 and got fully invested on July 24th, 2009.  If you follow our ETF Advisor page, you bought Banks, Mid-Caps, TSX60 and Tech along the way.  The market is now substantially higher and the question becomes “What now?”

Answer: Until we get a Dow Theory sell signal, stay invested.

AlphaDow followers continue to hold index funds that replicate the TSX Index or S&P 500, depending on your preference.  I use Powershares for the TSX because they have a tax deferred “class” and we can move to money market without tax consequences.  In my tax deferred account I prefer the ETFs (pictured above) because I can put a stop-loss in the market and forget about it.

Question:  “How high can it go?”

Answer: Nobody knows for certain.  Therein lies the rub.

If pressed for an answer I think we have one more good-sized move higher.  Dow Theory suggests BULL markets move in 5 waves.  We just had the 4th corrective wave end in the second week of Feb.  I suggest the 5th wave up is underway.  Continue to use stop losses as prescribed – Mr. Market is a lot smarter than me.  Email info@alphadow.com for more information.

NORMAL CORRECTION IN A BULL MARKET

In Uncategorized on February 9, 2010 at 2:39 am

Dow Theory is like a light switch.  Once it is turned on, it stays on until it is turned off.  Likewise, a BUY signal stays in force until such time that a SELL signal is given thus reversing the previous BUY signal.  It is binary.  It is 1 or 0 — there is no gray area — except in interpretation.  The most difficult time a Dow Theorist has is during a secondary reaction (rally in a bear market or reaction in a bull market) when the change in primary trend is not yet clear.

Since the confirmed dual January highs in the Transportation Average and the Industrial Average, we have seen a pullback or reaction of less than 10%.  During the previous bull market from 20003-2008 we experienced several pullbacks of less than 10%.  Until such time as we get a SELL signal, I have no choice but to take the most recent pullback as just that: a secondary reaction in a primary BULL market.  Let’s take a look at the Transportation average below (I have included the Industrial ETF called DIA in grey).

Chart 1

When you look at the weekly chart above, the correction looks like a normal reaction in a long-term uptrend.  If you have not established your bullish positions yet, I recommend you use this “sale” to do so.  Check our AlphaDow or ETF Advisor page for recommendations.

“BE SIMPLE. TAKE THE GRAND VIEW.” – ANGAS

In Uncategorized on October 1, 2009 at 3:06 pm

A unique part of the Dow Theory is the “principle of confirmation”.  When I speak to people about the 30 Industrials (DJIA) being the “makers of stuff”, and the 20 Transports (DJTA) as the “shippers of stuff” I generally see the light bulb go on.  The “ahhhh” coming out of their mouths generally signals when they “got it”.  It makes intuitive sense.  If you have a bunch of companies making stuff and no one selling or shipping it to the stores or end user, you are going to have a whole pile of stuff sitting around – and that’s no good for the econonmy.  Economics at it’s finest.  It took me about 8 years to distill this information into a useable format.   If my economics professors at the University of Western Ontario had the same synthesizing intelligence they could have saved me a lot of time and money.  Or as Matt Damon so eloquently says in Good Will Hunting  “you’ll spend $150,000 on an education you could have got for $1.50 in late fees at the public library.”  But I digress, let’s look at the charts:

NDT 1 OCT 09

 

As you can see by the dark blue horizontal lines, the orthodox Dow Theory Buy signal came on 23 July 09 when the Industrials (in the top frame) confirmed the new high in the Transports.  This came just before our mechanical New Dow Theory buy signal on 7 Aug 09 indicated by the blue arrow and blue word “BUY”.   What could be more simple.  The Primary Trend has been UP since then.  Period, full stop.  This is the “grand view”. 

QUESTION: “I feel like I’ve missed the rally.  What do I do with all that cash?”

ANSWER: Most people succumbed to what I call I.C.S.IA. market timing — “I can’t stand it anymore.”  They panicked out somewhere around the October or March lows because some talking head on TV (maybe Kevin O’Leary or Jim Cramer) told them to.  Or their broker was tired of hearing them complain about their losses and couldn’t stand it anymore herself and she let them sell.  If you want a simple solution, call your broker and recite the following:  “the tide is now rising and we are sitting in too much cash.  I want you to purchase an index fund that tracks the blue chip index.  Take 25% of the cash in my account and buy it today.  Buy another 25% in a month.  The other 50% we will monitor together and deploy on any minor ripple that doesn’t take the index down below its June close of 8146 on the Dow.” 

Whew.   That took courage.  And you know what?  You have a better than one-third chance of being wrong.  That’s the cost of equity investing.  The panic you feel when you do the right thing.  Because the easy thing is the wrong thing to do.  The easy alternative is buying a 0.5% GICs and paying 43% tax on that 0.5%.  And that’s a guaranteed trip to the poor house if and when inflation rears its ugly head in the next economic expansion.

BABY BULL NEEDS A BREATHER

In Uncategorized on August 31, 2009 at 2:38 pm

bull mktAUGUST 31st, 2009…This baby bull market may be in need of a breather.  Most stocks are trading above their 200 day average price, the bullish percent indicator is overbought, and most momentum indicators are diverging.  The Dow Theory buy signal that gave birth to this new bull was given on 23 July 2009.  This makes the baby bull a little over  a month old, and yet it is already looking a little tired.  Let’s not forget that the market has risen 50% off of its March 9th lows.  Jeff Saut of Raymond James has aptly stated that “maybe the energy expended to get to the buy signal is enough to warrant calling for a rest.”  Here’s a Point & Figure chart of the Dow Jones Industrial proxy (DIA):

DIA 31 aug 09

On a shorter term horizon, Chart 2 below shows the DIA making a new August high, however, the momentum indicator in dark green (14 day RSI) has failed to confirm the new high that it made at the beginning of August.  This means that things are going up, but at a slower pace than before (think about throwing your pen cap into the air — at the highest point, momentum stalls and then actually reverses).

DIA st 31aug09

September and October are usually volatile months (think 1987, 1998, 2001, 2008).  For this reason, I am recommending a cautious portfolio stance.  I’m recommending new equity purchases be held off until the momentum situation is resolved.  If this means missing more of a rally so be it.  I would rather be cautiously wrong footed than commit new capital at this altitude.

GOLD FORMING A BULLISH PENNANT….  The battle lines are being drawn in the gold market and it appears as if the bullish forces may win.  Usually pennant formations are continuation patterns.  This means the upward trend that has been in existence since the breakout at $450 may be close to resuming.  Notice the several attempts at breaking $1000 on Chart 3.  This is akin to mountain climbers making several assaults on the summit.  Each base camp is progressively higher and allows the market to gather strength for a new assault on the old highs.  We are beginning the fifth ascent towards $1000:

gld 31 aug 09

CONCLUSION: Maintain stops on all positions and take profit on trading positions.  The Dow could easily pullback to 8000-8250 over the next two months and still be in the confines of a BULL market.  Check our ETF Advisor page for current positions and email me for stop levels.

DOW THEORY SIGNALS NEW BULL MARKET

In Uncategorized on July 24, 2009 at 11:13 pm

bull mkt“Those who forget the past are doomed to repeat it” – Santayana

I can’t help but bring up the analogy of the “noise canceling headphones’ again.  My wife Sarah gets a chuckle out of all the responses to that one (she calls them ‘Sarah canceling headphones’).  The real benefit of Dow Theory may be proving it’s merit right now.  With all the talk of ‘green shoots’ and falling jobless claims, no one seems to believe the recession is over.  I play on a hockey team with a number of people in the financial business, and to a person they are skeptical.  Me, on the other hand, I prefer to leave the ‘noise canceling headphones’ on and follow the one barometer that has consistently signaled every major turn in the market since 1906.

To recap, on July 20th the Dow Jones Industrial average made a new high above its June 12th high of 8799.26.  Yesterday, the Dow Jones Transportation Average made a new high above its June 11th high of 3399.88.  This means that Dow Theory has signaled a new Bull market in stocks.  So what to do?  It may be time to equitize some of the cash that we have had sitting on the sidelines for so long.

One way to equitize cash is to purchase an Exchange Traded Fund (ETF) or Closed End Fund (CEF) that tracks an index or sector that you like.  I use our ETF Advisor program to determine the highest Relative  Strength (RS) countries and sectors (email me for a copy).  Right now the strongest sectors are the Banks, Materials and Technology.  The strongest countries in the world are China, Singapore, South Korea, Hong Kong, Taiwan and Brazil.  Be sure to use stop losses approximately 8-10% under your purchase prices.

ndt july09

NOISE CANCELING HEADPHONES

In black swan, DIA, dow theory, ETF, ETFs, GDX, Gold, OIL, transports, Uncategorized, XIU on June 25, 2009 at 4:03 pm

New Dow Theory Position

New Dow Theory Position

I recently went to an electronics retailer in search of “noise canceling headphones” for my iPod. You know, the kind you see people wearing on the airplane – they “cancel” out any ambient noise (my wife calls them “Sarah canceling headphones”). When you put them on you feel like someone shut the door on a noisy party next door. It makes you focus on the topic at hand. In my case I use the iPod mostly for audiobooks and it makes a big difference.

It made me think: “What if we had noise canceling headphones for the markets?”.  Often times, that’s what Dow Theory feels like to me. It cuts through the clutter of the day to day noise in the financial press and gives you an objective answer as to the primary trend of the market. Beyond a doubt the biggest question I get lately is “Is the Bear market over?”  I’m going to give you the answer in this post. But first a refresher:

1. Dow Theory provides us with a binary answer. That means it’s either 1 or 0. There is no room for interpretation. The “noise” as it were, is cancelled out. A “BEAR” signal is in force until such time as a “BULL” signal has been given. Think of the light switch in your kitchen. Once you turn the lights OFF, you can’t turn them OFF again until you turn them ON. There is a lot of bad information on the web about Dow Theory, including some high priced subscription letters that have made many mistakes in the last two weeks interpreting this exact situation.

2. Charles Dow, writing over 108 years ago, used only daily closing prices. An intra-day high is just more noise that is canceled out. The reason is that Dow felt that a closing price trumped all other intra-day prices because it represented a price that traders and investors were happy to carry home overnight. This showed more of a commitment.  This is important as you will see below.

Now I’m going to give you the answer. As you can guess from the image on this post, we are still in a BEAR market. That’s because the last unique Dow Theory signal was a SELL signal way back in November of 2007. That’s right. The light switch has been OFF since November 2007. We are waiting for a Dow Theory BUY signal if and only if the markets can better their most recent secondary reaction highs. What does that mean? That’s technical mumbo jumbo for “the market has to make higher highs and higher lows”. There’s no doubt that the Dow Industrial stocks have done this. They have bettered the May peak by a good margin. However, Dow required the two indicies to confirm each other. The Transport stocks have stubbornly NOT confirmed the high in the Dow Industrials.   The daily close that we need for a Dow Theory BUY signal is a higher close on the Transportation Average of 3404.11.  Above I stated closing prices were important.  That’s because two weeks ago the Dow Transports were on the verge of giving a signal intra-day, and then reversed and closed lower and therefore failed to “flip the switch” to ON.  Let’s look at a chart to see what I mean:

Dow Theory 24 June 09

Dow Theory 24 June 09

The point I am trying to impress upon you is that the Dow Transportation stocks may “know something” that the Dow Industrials don’t.  The failure of the Transports (lower high in June than in May in lower box above) signals a divergence in the indicies.  William Hamilton, Dow’s understudy, warned of such divergences in the indicies as potential danger spots.

DOW THEORY DIVERGENCE? HISTORY OF DOW THEORY SIGNALS, DOW LOSING MOMENTUM

In Uncategorized on April 24, 2009 at 4:18 pm

APRIL 24, 2009…  The “chassis” on which my market analysis is built is called Dow Theory.  The inventor of Dow Theory, the Dow Jones Industrial Average and the first editor of the Wall Street Journal, Charles Dow, laid out his theory in a series of editorials in the Wall Street Journal over 100 years ago.  These were recorded and reproduced by his understudy William Hamilton, and subsequently published in ‘The Stock Market Barometer’ in the 1920’s.  Orthodox Dow Theory requires that the Dow Jones Industrial Average or DJIA (the stocks that make stuff), and the Dow Jones Transportation Average or DJTA (the stocks the ship the stuff) must act in concert to confirm the direction of the market. 

The best way to to visualize this is to equate the market to the tide of the ocean.   Imagine two friends standing on a beach attempting to determine if the tide is going in (up) or out (down).  One friend puts a stick in the sand at the point where the waves recede.  The other friend does the same further down the beach.  After a few minutes, the stick is completely covered in water so it is pulled out and placed at the new spot, higher up the beach, to where the waves now reach.  At the same time the friend down the beach “confirms” that his stick too, had to be moved and placed higher up the beach and therefore they can safely assume that the tide is coming in (or going up).  This is the essence of the confirming nature of Dow Theory.  Think  of the two friends as the DJIA and the DJTA.

QUESTION:  If it is so simple, why aren’t more people doing this?

ANSWER: Because as simple as it is, it isn’t easy.  Human emotion gets in the way and corrodes the un-emotional framework of the chassis. 

QUESTION: How would this theory have performed in the latest market crash?

ANSWER: Dow Theory turned bearish or negative on 21 Nov 2007.  The 103 year track record of Dow Theory beats buy and hold by 3900%.

QUESTION: Why hasn’t my advisor told me about this before?

ANSWER: Dow Theory has come under constant criticism because it is always late.  It is the grandfather of all “trend following” disciplines, and as such, it tends to lag the market.  Also the brokerage industry is focused on commissions and trading.  Dow Theory made only 63 trades in 103 years – hardly enough to make the lease payments on your broker’s BMW.

QUESTION:  What does Dow Theory say now?

ANSWER: Currently Dow Theory is still bearish, or negative.   There is evidence that the tide may be turning, however, it is too soon to make that determination.  Take a look at Chart 1 below.  The light green line shows the April 17th highs in both averages (remember the sticks in the sand?).

 ndt-0424095

NO DOW THEORY BULL SIGNAL YET

In Uncategorized on April 16, 2009 at 8:07 pm

New Dow Theory Position

New Dow Theory Position

APRIL 16, 2009…. One of the criticisms of Dow Theory is that the signals always lag the market. This is true of any trend-following methodology and Dow Theory being the grand-daddy of them all is no exception.  As my friend John Murphy said today, “bottoming is a process”.  The beginnings of the process are evident, however, bear markets don’t end with a “V” bottom.

QUESTION: What would it take to signal a new bull market?

ANSWER: Traditionally, there is a re-test of the prior lows (in this case March 9th, 2009).  Dow Theory requires that these lows hold, and then the Dow and the Transports better their most recent April highs.

QUESTION: What if no re-test occurs and the market powers higher?

ANSWER: The market can and will do anything.  The probability is that some sort of pull-back or re-test is coming.  The momentum indicators are diverging and there are too many bulls.  Imagine throwing the cap of your pen into the air — at the highest point the momentum (acceleration) has slowed to 0.  I believe we are reaching that point.

QUESTION: I’m tempted to buy now – the market is going up and I’m missing it.  Should I buy the Dow stocks now?

ANSWER: No.  If you look at the probabilities using a “weight of the evidence” approach, I still favor cash.  There has been no Dow Theory BUY signal yet, and the current bear market has been the shortest of the big three bears this century.

The biggest financial calamity in history is not likely to end with the shortest bear market.  Dow Theory is about values.  At the bottom of the bear market in 1974 and again in 1982 (not shown) the market was trading at 5-7x P/E ratio or Price to Earnings.  This means you paid $5-7 for each dollar of earnings.  The dividend yields were 5-8%.  Today’s market is no where near such a bargain.  My position is that we are in what Charles Dow would call a secondary reaction — a rally within a bear market.  I could be wrong, I often am, however, capital preservation is still the primary concern of my subscribers.  If the facts change, I will report them here as quickly as I can.

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