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Dow Theory Secondary Lows Forming

Published on October 26, 2018 by in Dow Theory

On Wednesday, both the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA) closed low enough that they are in the process of forming new secondary lows. A secondary low is a dip in a long term bull market that retraces between 33% and 66% of the previous rally. They last from about 3 weeks to as much as 3 months. When this current dip ends and the market rallies for more than 3 weeks we’ll have new secondary lows in place. Once that happens, those lows will be the new triggers to signal a long term bear market if they are broken to the downside. The current triggers are 23533.20 on DJIA and 7093.40 on DJTA. As long as this dip doesn’t break both of those lows we’re still in a bull market. Since we’re still in a Dow Theory bull market, this is a dip that should be bought. Yes, a dip that should be bought. Most of the methods I use to allocate money for my portfolio are

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Market Risk Warning

My Market Risk Indicator is signalling today. That means I add a mid term volatility hedge to the Volatility Hedged portfolio and the Long / Short hedged portfolio. The Long / Cash portfolio goes 100% to cash. The portfolio allocations are as follows: Long / Cash portfolio: 100% cash Long / Short hedged portfolio: 50% long high beta stocks and 50% long mid term volatility (or an ETF like VXZ or VIXM) Volatility Hedged portfolio: 50% long and 50% long mid term volatility (or an ETF like VXZ or VIXM) As always, use your own judgement and personal risk preferences to allocate your own portfolios. And, of course, never trade a financial instrument that you don’t understand.  

 
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Market Strength Whipsaw

Over the past week my core measures of market strength whipsawed. The category went positive last week, then went back to negative yesterday. Another thing of note is that my core measures of stock market risk fell substantially. This indicates a foundational weakening in market action (as opposed to my market risk indicator which looks for fear in the market). The core portfolio allocations have changed to the following: Volatility Hedged portfolio: 100% long (since 5/7/2018) Long / Short Hedged portfolio: 70% long high beta stocks and 30% short the S&P 500 Index (or use an ETF like SH) Long / Cash portfolio: 40% long and 60% cash

 
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Market Strength Goes Positive

Last Friday my core measures of strength went positive. That changes the portfolio allocations as follows: Volatility Hedged portfolio: 100% long (Since 5/7/2018) Long / Short Hedged portfolio: 80% long high beta stocks and 20% short the S&P 500 Index (or use an ETF like SH) Long / Cash portfolio: 60% and 40% cash

 
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Market Quality Goes Positive Again

My core measures of market quality have gone positive again. My measures of market trend and strength are lagging. As I mentioned a few weeks ago, this suggests a somewhat choppy market ahead (although I was completely wrong on the chop keeping us from new highs in the S&P 500 Index — so maybe the consolidation will happen just above new highs). With market quality going positive the portfolio allocations change as noted below. As always, use your own personal risk tolerance to structure your own portfolio. Volatility Hedged portfolio: 100% long (since 5/7/2018) Long / Cash portfolio: 40% long and 60% cash Long / Short Hedged portfolio: 70% long high beta stocks and 30% short the S&P 500 Index (or use an ETF like SH)  

 
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Consolidation Likely

My market health indicators are signalling that some consolidation is likely. All of the core categories are negative with the exception of risk. When this happens it usually signals that investors are taking profits, rebalancing portfolios, and/or rotating between sectors. At this point, I don’t expect a large draw down. It’s more likely that we get some chop (maybe a month or so) before moving to new highs in the S&P 500 Index (SPX). The movement in my core indicators change the portfolio allocations as follows: Volatility Hedged portfolio: 100% long (since 5/7/2018) Long / Cash portfolio: 20% long and 80% cash Long / Short Hedged portfolio: 60% long high beta stocks and 40% short the S&P 500 Index (or use an ETF like SH) As always, use your own risk tolerance to manage your portfolio.

 
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Market Quality Recovers

Over the past week, my measures of market quality recovered and are now back above zero. This changes the portfolio allocations as follows: Long / Cash portfolio: Long 60% cash 40% Long / Short Hedged portfolio: Long 80% high beta stocks Short 20% the S&P 500 Index (or use and ETF like SH) Volatility Hedged portfolio: 100% long (since 5/7/2018)

 
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Market Quality and Strength Falter

Over the past week my core measures of market quality and strength fell below zero. One thing of note is that perceptions of risk aren’t rising much (yet). So, we’re seeing core weakness without a lot of concern. We’ll just have to wait to see if the weakness turns to fear or if this is simply a whip saw. The weakness in market quality and strength changes the core portfolio allocations as noted below. As always, use your own personal risk tolerance to structure your own portfolio. Volatility Hedged portfolio: 100% Long (Since 5/7/2018) Long / Short Hedged portfolio: 70% long high beta stocks and 30% short the S&P 500 Index (or use an ETF like SH) Long / Cash portfolio: 40% long and 60% cash  

 
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Market Quality Goes Positive

Over the past week my measures of market quality have gone positive. This changes the portfolio allocations as follows: Long / Cash portfolio: 80% long and 20% cash Long / Short Hedged portfolio: 90% long high beta stocks and 10% short the S&P 500 Index (or use an ETF like SH) Volatility Hedged portfolio: 100% long (Since 5/7/2018)

 
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Strengthening Indicators

All of my market health indicators are strengthening. Most notably my measures of risk and strength have moved from negative to positive. This changes the portfolio allocations as follows: Long / Cash portfolio: 60% long and 40% cash Long / Short porfolio: 80% long high beta stocks and 20% short the S&P 500 Index (or use an ETF like SH) Volatility Hedged portfolio: 100% long (since 5/7/2018)

 
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