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

[Pages:7]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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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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"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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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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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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breached at 23,323.66. As you know from the disclaimer at the bottom of each of these Letters "The detection of these trends may be interpreted differently by different analysts and the opinions expressed on this website may not be shared by other individuals who apply the same principles of The Dow Theory".

Schannep TIMING INDICATOR: This proprietary market-timing Indicator had been a RED (SELL) signal on November 16th, 2018 at 25,413.22 but capitulation on December 24th has changed it to YELLOW with a 50% BUY at 21,792.20. The SELL had occurred after the top of the Bull market, in this case by 5?%. Getting a signal much closer to a top would be unusual, but the more important number is that the market dropped 14.2% after that signal. Hopefully, this capitulation will turn out to have been at, or closer to the low than 5%.

The COMPOSITE Timing Indicator: As of December 24th, our primary major-trend timing Indicators are in agreement in changing to a (YELLOW) status and for this Indicator we go to a 50% BUY at 21,792.20. This Indicator, and our model portfolio shown at the end of this Letter, are 50% invested and 50% in cash/money market fund. This Indicator will change to BUY (GREEN) when/if one or the other of the Dow Theory for the 21st Century or the Schannep Timing Indicator return to a BUY (GREEN).

The BOTTOM LINE: As I've said before, we don't need a recession to have a Bear market, and indeed we have had a short Bear market just like in 2011 and no recession followed then. Lakshman Achuthan of the Economic Cycle Research Institute wrote an excellent article entitled "A Growing Economy Can Be Mauled By a Bear Market" which spells out the case for the Bear market without recession. This Bear market has now been signaled to be over, or at least ending, by our Capitulation Indicator, as the ending to the last 8 Bear markets have been signaled. The good news is that we have had our capital intact to reinvest now, some 5,000 points below the market's high, and waiting to add more as we get further confirmation that the Bear is dead! You should know that the results that have followed such lousy quarters as the 4th quarter of 2018, have had a really impressive record over the next 12 months and beyond. I highly recommend you read this from MarketWatch (12/26): "Opinion: Here's how the stock market has fared after similarly brutal losses in a quarter," by Ben Carson. If our capitulation Buy works out as well as it is looking at the moment, we should have a very favorable 2019 to look forward to. Here's wishing you a very Happy and Profitable New Year!

Jack Schannep Editor for The Schannep team

Historically we have tracked the performance of one of my ACTUAL ROTH IRA portfolios, fully following the Composite Timing Indicator's signals which is currently 50% invested in

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three Exchange Traded Funds and 50% in a money market fund (as shown below).

For longer-term results see The Composite Timing Indicator which we use for timing in our Portfolio verses Buy and Hold. FYI, over the last 64 years Buy & Hold has grown at a 10.8% annual rate whereas The Composite has grown at a 13.6% rate. The problem with showing this real-money Portfolio is that it represents only what I am doing, which could be very different from others. Subscribers use this letter for Market Timing, which could include shorting, going long, even utilizing leveraged investments that could double or triple ? in either direction. These results have been monitored by several independent sources that track our performance such as Hulbert Financial Digest, , CXO Advisory Group and .

This Letter concentrates on the big picture, the trend of the major stock market indices which usually influences the price direction of most individual stocks.

The Dow Theory is a form of technical analysis that relies on detecting trends in the stock market to determine an investment strategy. The detection of these trends may be interpreted differently by different analysts and the opinions expressed on this website may not be shared by other individuals who apply the same principles of The Dow Theory. Past performance is not an indication of future returns. It should not be assumed that any recommendations made will be profitable or without the risk of loss or will equal the performance of the benchmark portfolio. All investments involve the risk of potential investment losses as well as the potential for investment gains. The performance of any portfolio or investment strategy should be viewed in the context of the broad market and prevailing economic conditions.

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