Over the last few weeks, several of my core market health indicator categories have turned positive. However, they’re barely moving above zero and have turned down early this week. In addition, my market risk indicator isn’t showing any signs of wanting to clear. Its core indicators are showing strength, but have turned back down. The downturn is happening at both a normal resistance point to consolidate the recent rally and where it should if we’re in a bear market. This, along with my core indicators compressing near zero, is creating an inflection point that could resolve either higher or lower. This will make the next few weeks very important for the market. So far, price is merely consolidating the rally out of the December 24th lows. As long as the S&P 500 Index (SPX) can say above or near its 50 day moving average I won’t worry too much. However, a clear break of the 50 and 20 dmas would tilt the odds toward revisiting and breaking the lows. Dow Theory
Both the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA) have broken their last secondary lows. This officially puts Dow Theory in a bear market by my count. So, what does this mean for trading and investing? First, what it doesn’t mean. It doesn’t mean you move all your money from long to short. Or from long to cash. The reason for this is that Dow Theory changes of long term trend often happen just as the market is ready to make its first counter move of the new trend. In this case, it means we’re likely due for a counter trend rally. Now, on to how I use Dow Theory as a part of my investing strategy. I use it as a part of the timing when rebalancing any hedges. Since we’re now in a bear market, I’m more likely to let the profits from the hedge run a little more than my “about 15%” rule. If we were in a confirmed Dow Theory bull market I’d be
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
2015 was a year of intermediate term whipsaws. 2016 saw longer term indicators whipsawing. The longest term indicator I follow is Dow Theory. It looks for trends that last from one to three years (or longer). As a result, Dow Theory gives a lot of leeway to counter trend moves. It’s common to have a 10% or 15% correction during a long term bull market that doesn’t change Dow Theory’s long term trend. You can see some examples during the long term uptrend from mid 2009 to early 2016 in the chart below. Zooming in to the last few years, you can see what appeared to be a long term trend change according to Dow Theory. In August of 2015, both the industrials (DJIA) and the transports (DJTA) had large enough corrections to mark Dow Theory secondary lows. In December of that year, DJTA broke below its secondary low point and created a bearish non-confirmation in the indexes. In February 2016, DJTA broke its secondary low point. This created a
Today at the close Dow Theory signaled a bull market is underway. Bull markets are expected to last from one to three years. The current signal comes after what I consider a bad bear market call in February. On a side note, almost all of my core market health indicators surged strongly higher this week. They are also indicating that the market is preparing for a year end rally. The most notable change is that my measures of market quality have now moved above zero. If that holds, the core portfolios will be adding more exposure and reducing hedges.
The Dow Jones Transportation Average (DJTA) is once again bumping up against its last secondary high. It has failed to surpass it on the last two occasions. If it can clear the 8110 level on a daily closing basis it will signal that we’re in a long term bull market. If that occurs, I’ll consider the bear market call from Dow Theory last February a bad signal that resulted in a whip saw. Although the last signal might be a bad one, Dow Theory has a long track record keeping us on the right side of the market for long term trends.
Yesterday, the Dow Jones Transportation Average (DJTA) closed just 32 points away from its last secondary high. If it had closed above that level it would have signaled, from Dow Theory, that a long term bull market was underway. Currently, Dow Theory sees us in a long term down trend, but with a bullish non-confirmation of the down trend. This is due to the Dow Jones Industrial Average (DJIA) being above its last secondary high, but DJTA failing to surpass its last high. DJIA is about 6% above its last secondary low. A close below that level would re-confirm that we’re in a long term down trend (that can be expected to last from one year to three). When we look at a one year chart of both indexes (above) the thought that we’re in a long term bear market seems silly. But looking at a two year chart (below) one could argue that DJIA is completing a complex topping pattern, while DJTA is still in a down trend. So,
Last week we got a market risk warning due to the surprise of the Brexit vote. This week, that warning has been cleared as market participants realize it will take a couple of years to sort out… so they can wait until then to panic. 😉 My core market health indicators, with the exception of trend, improved last week. The overall numbers are still soft, but positive enough to change the portfolio allocations to the following. Volatility Hedged portfolio: 100% long Long / Short Hedged portfolio: 80% long high beta stocks and 20% short the S&P 500 Index (or the ETF SH) Long / Cash portfolio: 60% long and 40% cash One thing of note that happened over the past few weeks is the Dow Jones Transportation Average (DJTA) created a new secondary high near 8110. The Dow Jones Industrial Average (DJIA) also created a new secondary high near 18100. DJIA is above November 2015 secondary high, but DJTA is below all of its recent secondary highs. As a result,
The market is exhibiting behavior that we often see during times of indecision. Price is swinging in a large range and at the same time intermediate and long term indicators are giving mixed messages. Take a look at how compressed the the Y axis is on a point and figure chart for the S&P 500 Index (SPX). This clearly shows the sideways range of the past two years along with with multiple changes in the short to intermediate term trend (over the past year). The current trend is up and will stay that way as long as SPX stays above 2020… which coincidentally is about where the 200 day moving average is. The next set of mixed messages comes from a weekly chart of SPX. Weekly RSI is trying to turn down near normal bear market peak levels, while at the same time MACD is moving above levels associated with bear markets. Monthly momentum and MACD are mostly exhibiting bear market behavior. MACD is a little stronger than we normally
Yesterday the Dow Jones Industrial Average (DJIA) closed above its last secondary high point, however the Dow Jones Transportation Average (DJTA) is still about 4% away from its last secondary high. This creates a non-confirmation where one index is making new highs while the other is lagging. When a non-confirmation occurs it puts the current trend in doubt… kinda. As I’ve said before, most non-confirmations just don’t matter. They’re normal conditions during any trend so we have to wait for both averages to agree before drawing any conclusions. Until then the long term trend is still considered bearish. But, it’s time to start watching the transports closely. If they can surpass their last high it will indicate that a new bull market has begun (or that the bear call in February was a whip saw or false signal). Along with the non-confirmation that is inherently bullish my core market health indicators are improving rapidly. The measures of market trend and strength are improving quickly enough that one or both categories