2018 Dow Jones: S&P 500: What a Year NYSE

Dow Theory for the 21st Century

January 1st, 2019

Schannep Timing Indicator

l COMPOSITE Indicator

2018 What a Year

Dow Jones: 23,327.46 S&P 500: 2,506.85 NYSE: 11,374.39

Overview: We started the year in a long Bull market and ended it in a short Bear market.

Now, a brief review of how we got here. You'll remember in last year's January Letter "That'll be one bitcoin, sir" we highlighted this chart and this quote from William Jiler's 1961 book, How Stocks Can Help You in the Stock Market, "If this curving occurs after an extended price move, it frequently results in a climactic action that brings the major move to its final peak..." This is as close to a capitulation at the market's top, as the one we have for detecting market bottoms:

As to bitcoins, we simply said: "any discussion about bitcoins is outside the purview of these Letters, except to point to them as a speculative binge that shows what a euphoric mania looks like". At that time bitcoins were pushing $16,000, on their way to $4,000 now. As I said then "When making money looks too easy to be true... well, you know the rest."

January turned out to be the peak for the NYSE Composite, but the Dow Industrials made a second peak in October with its false breakout, thus forming a double top from which the market dropped.

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January 1st, 2019

And drop it did, the end of the year was almost the exact opposite of how it started:

The increasing volume on the decline is not a good sign, unless it is building toward capitulation! What happens next? You would expect a usual/normal Bear market with a decline of 25-30% over the next 15 to 18 months, UNLESS it went into a capitulation first, as this one did. There is no way of knowing ahead of time which will occur, but then the market tells the tale. As you know from the Christmas Eve December 24th email, the market went into capitulation:

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January 1st, 2019

"Today the market dropped into Capitulation! The bottom? Well, too early to tell for sure, but we know we are exceptionally close when we reach a Capitulation level, which historically is at or very near the bottom, and this is an opportunity to BUY back into a 50% invested position. Please reread my Special Report on Capitulation and you will see the excellent record of this Indicator. Scroll down to the last time it happened in 2011 and you'll see the similarity with this market. Some will say, why not to 100%, but you know I move in increments as my other Indicators dictate. In fact, there have been times when there was a second capitulation, but we cannot count on that, therefore we will BUY to 50% on Wednesday. I will cover more on this and the market in general in my January 1st Letter. Merry Christmas!!"

(I reprint the above email in order to get it into the record of this Letter as otherwise emails are not retrievable for the future record). As a reminder of what capitulation is, I quote from my book Dow Theory for the 21st Century (p.79),

"Capitulation as it relates to the stock market is when investors and speculators throw in the towel because they are so disheartened, fearful, need to meet margin calls, or whatever. It is often called a `selling climax' as stocks cascade down into a cataclysmic sell-off".

Can there be any doubt we just saw this? Our Capitulation Indicator is probably the best indicator I have; unfortunately, it only occurs a couple of times per decade.

Following a Bear market, and this capitulation should be a sign that the short Bear market is at, or near the end, the next event is often a recession which occurs 70% of the time. And of course, 30% of the time no recession follows. Which will it be? You'll remember from my November 2018 Letter that Martin Feldstein, President Emeritus of the National Bureau of Economic Research (NBER) predicted that a recession was looming, but he was noncommittal about when. His article is important not only because his is the organization that dates when recessions start and finish, but he also gets the title of "most accurate in picking the market's top". After all, the article was published on September 27th, 2018 at the 26,439.93 level and the market topped out at 26,828.79 just a week later on October 3rd, 2018.

Then comes the Federal Reserve on December 19th, 2018 with a specific year for when it will start. Actually, one needs to read between the lines to determine if it will be in 2021 or 2022 which is one year sooner that their data indicated in their September 2018 report. I am referring to the outlook for the unemployment rate increasing in 2021 and 2022 as shown below:

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January 1st, 2019

Projections from September in Yellow, updated in December in Blue (WSJ 12/20/18)

How is this chart identifying when a recession will start? EVERY time the Unemployment rate has bottomed from its low points and started up, a recession has already been occurring, as shown below. See our Special Report on this relationship. Currently the rate is not increasing, and the Fed's projections make this recent Bear market appear premature/too early for a 2021-22 recession. Usually (18 of the last 19), recessions follow the start of Bear markets within 16 months and 2021-22 is 24-36 months away. It would appear that this Bear market which started on October 3rd, 2018 has nothing to do with the start of a recession that might start 2 to 3 years in the future.

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January 1st, 2019

The following graph implies a recession is not a near-term threat based on the yield curve, according to this from MarketWatch 12/21/18 (as of 12/31 the spread is 0.26):

As one difficult market year ends and a new, hopefully more profitable year begins, I am reminded,

My purpose has always been to help the reader attain personal financial success, and I would hope and expect that will continue to happen.

I hope I have been successful in this endeavor, and in case you are wondering, I plan to continue

for as long as my health (presently good) allows. Some have asked, and I have no apparent

successor at this time . . . but that's a project for another day. In the meantime, I thank you for

your subscription and support, and please know I appreciate each of you, and wish you a Very

Happy AND Profitable New Year!

Jack

The DOW THEORY for the 21st Century: This Indicator had been RED (SELL) from October 24th, 2018 at 24,583.42, but capitulation has changed it to YELLOW with a 25% BUY at 21,792.20. December 24th is the date that capitulation occurred and since the market price level

was available in the market the next morning, I show it as the appropriate level. Followers of this

Indicator alone would follow the rules as outlined in the Special Report, hence 25% now,

additionally as outlined in the Report. A change to GREEN will take a while for this Indicator,

perhaps weeks or even months. The Original Dow Theory: This Indicator is RED (SELL) as of December 10th, 2018 at 24,423.26

and it is not changed by capitulation. Another Dow Theorist felt the SELL was not reached until

the November lows were breached at 24,100.51. Yet another waited for the March lows to be

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