There has been an increase in news stories about Dow Theory lately. Most of the discussion has been focused on the divergence between the transports (DJTA) and the industrials (DJIA). As you know I’ve added to the news flow by highlighting the break in opposite directions of Dow Theory lines by the averages. What almost everyone is talking about is the non-confirmation and its implication for the market. The opinions range from “the sky is falling” to “non-confirmations don’t mean anything” or even “Dow Theory is useless so this non-confirmation is nothing more than fodder for idiots”. I’ve been asked by one of the readers of Downside Hedge to share my thoughts on a recent blog post by a popular market commentator. His article was of the “useless fodder for idiots” variety. I’m happy to respond, but rather than call someone out I’ll focus on the general arguments I usually see against Dow Theory (which the “fodder for idiots” article touched on). The arguments against Dow Theory generally fall into
After seeing our core portfolios taking the most cautious stance they can last Friday I’m guessing you’re surprised that I’m writing a post telling you that according to Dow Theory the long term bullish trend is still intact. I’m also guessing that somewhere in the next few days you’ll read or hear people saying a Dow Theory sell signal has just been triggered. Those misinformed people will cite the fact that today both the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA) have closed below their previous lows. There are two problems with people calling a Dow Theory sell signal today. The first is that there is no such thing as a Dow Theory sell signal. The second problem (which is moot because the first problem negates it…but I’ll keep writing for those of you who still aren’t convinced) is that although both averages closed below their previous lows today, they didn’t close below their previous secondary low points. One of the major requirements for a
Over the past week all of our core health indicators improved even as the market consolidated. The worst that can be said about this market is that some of our indicators are starting to show over bought readings. However, over bought conditions can persist for a long time so all we can do is watch for them to turn back down. Another interesting point is that perceptions of risk are very low. This is positive for the market. This is one of the things most market participants get wrong. They believe that if everyone is bullish and measures of risk like the Volatility index (VIX) are low the market should fall. The problem with this belief is that those signals are almost never timely. Sentiment can stay high and VIX can stay low for a long period of time before the market corrects. I look for dramatic changes in those types of indicators, not a specific value to warn that the market may fall. Below is a chart of our
Another week has passed, but the same conditions persist. We’re now going into the third week of the same story. Underlying conditions are strengthening while perceptions of risk are rising. Market participants are simply waiting. A few show nervousness and cause some price deterioration, then others see lower prices as a great short term opportunity and buy almost every intra-day dip. I won’t go into the details of every indicator this week, but for those of you interested you can read this post since the conditions are the same. There seems to be a general consensus that this budget battle should be compared with July/August 2011. I believe that comparison is incorrect. Everyone seems to have picked up the narrative without taking time to think about conditions in 2011 (so this post falls into the category of eating cat). I believe that the fiscal cliff debacle of December 2012 is a much better guide for the current market. August 2011 had the overhang of bond rates all across Europe skyrocketing
A couple of days ago I fumbled my phone and it fell right into a 24 ounce glass of water. It was completely submerged. I snatched it out as fast as possible and immediately dried off the outside with a paper towel. I figured that it would be dead, but didn’t want to lose hope so easily so I opened it up and took out the battery and memory cards. After drying the inside I left it over night under a ceiling fan. The next morning I told my youngest what I’d done and he said he’d heard that putting it in rice would draw out water that might have seeped into the internal bowels of the phone. Since he’d got the information from the internet I figured it must be true. ;) Or at the least it couldn’t hurt…so the phone went into a sealed bag of rice for another day. Then came the moment of truth. I put the phone back together and turned on. It worked!! My
Recently I’ve seen a lot of people mention on Twitter and various blogs that the market doesn’t give you time to get out at tops. I have to politely disagree. If you’re an intermediate or long term investor the market will almost always give you warning that it is preparing to consolidate. As an example, here is one of our early warning posts from last October. Often the first warning signs are well ahead of the actual top, so the key to successful investing is in waiting for the weight of evidence to turn before making major changes to your portfolio. Here at Downside Hedge we move money slowly as market conditions change. From mid February we’ve been seeing signs of deteriorating market conditions. Our canaries in a coal mine post on 2/19 highlighted some of the deterioration that we’ve been seeing. The S&P 500 Index (SPX) was trading near 1520 at the time. SPX is now near 1565 and most of those conditions are still in place. For a
I like salt and fat more than I like sweets so the wife got me Cheetos for Easter. I use chopsticks to eat them…which I believed was original thought until I Googled it…original thought isn’t the subject of this post so back to the Easter treat. Since she’s a woman and it’s a holiday the gift had to have a theme. Cute, huh? One more note, I’m married so I don’t get a whole bag…just that tiny box.
Everyday, as the market continues to grind higher, I see sentiment on Twitter and various blogs get more and more incredulous. Almost everyone is talking about the correction that never came or the reasons why the market has to correct…and correct now. The reasons vary, but are almost always a multiple choice grab bag of the following: China’s economy is slowing Europe is already in a recession US GDP is falling Greece’s bond rates…I mean Spain’s bond rates…I mean Italy’s bond rates…well somebody’s bond rates are rising The US is going to be downgraded by Moody’s (today’s new rumor…and it has to be true…I read it on Twitter) Oh yeah, Japan. I know I’ve been talking about Japan for 25 years now, but… The VIX is too low US budget negotiations are coming up soon…and you know that won’t end well We’ve been at the top of the Bollinger bands for several days now AAII investor sentiment is way to bullish Margin debt is at record highs Equity, ETF, and
When the Dow Jones Industrial Average (DJIA) is making new highs and the Dow Jones Transportation Average (DJTA) follows to new highs as well you often seen news reports exclaiming a “Dow Theory Buy Signal”. If you use those reports to make investment decisions you’re being misled by a writer who doesn’t understand Dow Theory. There are no buy signals or sell signals in Dow Theory that indicate a specific date where you should go long or short. Robert Rhea in his book “The Dow Theory” went so far as to warn about buying or selling just after a confirmation of a trend change due to the risk of an abrupt correction near those points. Whenever prices have pushed through into new low ground in bear markets or to new highs in bull markets, it is usually safe to assume the primary direction will be maintained for a considerable time; but every trader should remember that from such new peaks or valleys secondary reactions can occur with amazing rapidity. (emphasis
My youngest got home from Berkeley yesterday for Christmas break. By planning ahead he saved himself the trouble of packing. Two weeks ago he started wearing the clothes he would need for the holidays then used his duffel bag as a laundry bag. His college education is finally starting to pay off. Maybe he can become an efficiency expert when he graduates.