The Dow Catches Up, a BUY Signal Dow Jones: 26,458

Dow Theory for the 21st Century

October 1st, 2018

Schannep Timing Indicator

l COMPOSITE Indicator

The Dow Catches Up, a BUY Signal

Dow Jones: 26,458.31 S&P 500: 2,913.98

Overview: The Dow Jones Industrial Average (DJIA) has lagged

NYSE: 13,082.52

the rest of the market in 2018. According to the Wall Street Journal (9/12/18) it was the "sole

major U.S. benchmark that (had) not eclipsed its January high". Actually, the much broader NYSE

Composite hasn't either, and I would consider it a major benchmark worth watching. The S&P500 first topped its January high on August 24th, whereas the Dow Industrials just did so on September 20th as you know from my email that day:

Today the Dow Industrials finally caught up with the rest of the market as expected and surpassed their January high of 26,616. This confirms that the Bull market is continuing along with the S&P500 doing the same thing and is a reversal to a BUY signal for the Schannep Timing Indicator (as well as some interpretations of the Original Dow Theory). The economy is operating on all eight cylinders as are most of the stock market indicators and now our portfolio is back where it should be: 100% invested.

Usually the Dow Industrials and the S&P500 are closely aligned. Historically, they have moved in tandem and most of the time top-out on Bull markets on the same day and bottom-out on Bear markets on the same day.

The main problem with the Dow Industrial index is its structure. Charles Dow did not have a computer or even an adding machine when he constructed the Dow Industrial Average in 1896. According to Perry Grainer, Robert Rhea's successor market letter writer in the Encyclopedia of Stock Market Techniques, Dow was seeking to depict the underlying trends of the market as a whole. He started with just 12 industrial stocks but later increased that to the current 30 stocks (not all industrials). It's hard to imagine that is an adequate sample compared to S&P's 500 stocks, but somewhat surprisingly they both work in determining the status of the market. Initially, Dow added the prices of the stocks in his average and divided by 12, later 30. Sounds simple, and it was. Problems arise from the fact that stocks split, new companies are added and others dropped, mergers affect companies, etc. So it is no longer simple, and a divisor comes into play to compensate for changes. But the biggest problem is that it is price weighted! That means that Boeing at $372 per share counts 8 times what Pfizer does at $44 per share. Why is that? If Boeing were to split 8 for 1, then they would be treated the same. If you or I, or Charles Dow for that matter, were to construct a portfolio of "blue chips", which was indicative of the market as a whole, we would not pick favorites. Obviously, a portfolio of equal amounts of the 30 stocks would be more appropriate, that is to say $10,000 of each, not $372,000 of one and $44,000 of another. Otherwise, there's nothing wrong with the Dow calculation.

Remembering Nicholas Darvas.... Buying high and selling even higher is a very hard concept for most to fathom. Perhaps the most famous approach to doing so is called the Darvas Box System which is a trend trading strategy that has stood the test of time. Darvas described it in his 1960 book "How I Made $2,000,000 in the Stock Market". From Wikipedia:

l

October 1st, 2018

He considered a stock price wave as a series of boxes. When the stock price was confined in a box, he waited. He bought when the price rose out of the box. He simultaneously set a stop-loss just under this trade price. Like stairsteps, Darvis bought only when the stock moved from one step to the next. Darvas was, of all things, an international ballroom dancer, educated as an economist but self-taught as an investor. His story and trading technique came to light in a May 25th, 1959 Time magazine article. He was quite an interesting character that caught the attention of Wall Street and myself, a young soon-to-be stockbroker at the time.

There is currently much hubbub about this being the "longest" Bull market in history, with the implication that it is overdue to end. Regardless of the specific length, it does measure as "one of" the longest in history. From the "Bell Curve on Bull Markets" (shown below) it is clear this has been a long bull market:

l

October 1st, 2018

How long it has been is dependent on the definition of a Bull market. Mark Hulbert wrote in his 4/27/2018 column:

"But who, exactly, preordained that the greater-than-20% threshold has to be satisfied by closing prices, or that both the S&P 500 and the DJIA have to satisfy and that other benchmarks don't count? Classification challenges like this one cry out for an objective definition."

He then went on to describe Ned Davis Research's rather convoluted (my words) definition of a Bull market which Hulbert had been favoring. Next, he proceeded to "challenge you to come up with another objective definition that does a better job." You know I couldn't stand still for that and offered my own definition of a Bull market, which is when the Dow Jones Industrials AND the S&P500 attain a 19% increase from their lows. Even Ned Davis Research "acknowledged this relative quickness of Schannep's definition". Hulbert's 5/22/2018 column acknowledged that I had "met the challenge" to come up with a better criteria. My definition of a Bear market is a 16% decline on both the Dow Industrials and the S&P500. 16% declines and 19% advances are reciprocal numbers, 20% and 20% are not (20 and 25% are). The following chart uses the usual 20% definitions and, as a consequence, I feel the need to "correct" it and show the difference that using 19% and 16% makes in determining the length of Bull and Bear markets.

l

October 1st, 2018

I show a bona fide Bear market interrupting the 1921-29 Bull market in 1923 that dropped 18.6% and lasted 7.2 months (confirmed by the WSJ on 11-21-1929 "There was a genuine major bear market in 1923, but it lasted only eight months"). In 2011 another short but real Bear market that dropped 16.8% and lasted 5.1 months interrupted the 2009-18 (to-date) Bull market. Capitulation occurred in 2011 and that has only happened at or near the end of Bear markets. The intraday drop on the S&P was 21.6% but we use closing levels only, and 16.8% qualified. Therefore, those are NOT the longest Bull markets despite being shown as such, and I have "corrected" them to the proper dates of 1923-29 and 2011-18 in the above graph. The 1990- 98 Bull market lasted 93.2 months and is the longest (unless the current 2011-18 Bull market extends into July of 2019).

I have explained in the Special Report on Bear Markets in the 20th-21st Centuries "By using the 'traditional' 20% definition, the 1923 Bear market (-18.6%) and its following recession, the 19567 Bear market (-19.4 %) and its following recession, and the 1978-80 Bear market (-16.4 %) and its following recession, were all missed." My 16% decline definition of a Bear market identified all three.

The DOW THEORY for the 21st Century: This Indicator is GREEN (BUY) as of June 12th, 2018 at 25,320.73. New all-time highs on the Dow Industrials, Dow Transports, and the S&P500 confirm an ongoing Bull market with no signs of change. When those signs appear we will let you know. The Original Dow Theory: This Indicator is also GREEN again (BUY) from August 3rd, 2018 at 25,462.58 when the Transports closed above 11,088.93.

Schannep TIMING INDICATOR: This proprietary market-timing Indicator changed back to GREEN (BUY) signal on September 20th, 2018 at 26,656.98. When a continuing Bull market definition is met by new highs on both the Dow Industrials and the S&P500 as happened this last month, one does not want to be out of the market to the extent we were. The reversal caused by that definition being met is used as a stop loss type BUY signal as the market is once again "in the clear", at least for now.

The COMPOSITE Timing Indicator: Our primary major-trend timing Indicator is once again in BUY mode (GREEN), with half bought at 25,320.73 at the Dow Theory for the 21st Century's BUY, and half bought at 26,656.98 from the Schannep Timing Indicator BUY, for an average reentry level of 25,988.85. This Indicator and our model portfolio shown at the end of this Letter is 100% invested.

The BOTTOM LINE: IF, and that's a big IF, consumer confidence is at a peak in the chart below, then the Bull market is at/near its end. The peak will only be evidenced after it tops out, but it certainly is in the area where it is likely.

l

October 1st, 2018

This next table shows that a confidence peak is followed almost immediately by a Bull market top and the start of a Bear market. FYI, those seven Bear markets declined an average of 31.3%.

Consumer Confidence Lead-time

to >> Bull

Market

Highs

Confidence Peak Lead-time to >>

Recession

Peaks:

in months: Date and Level:

in months: Start:

1) 10/68 @ 142.3

1

12/68 @ 985

13

1/69

2) 12/72 @ 116.1

1

1/73 @ 1052

11

11/73

3) 4/78 @ 109.9

5

9/78 @ 908

21

1/80

4) 11/80 @ 87.2

5

4/81 @ 1024

8

7/81

5) 2/89 @ 120.7

17

7/90 @ 3000

16

7/90

6) 1&5/00 @144.7*

0

1/00 @ 11723

10

3/01

7) 7/07 @ 112..6

3

10/07 @ 14164

5

12/07

8) 9/18 @ 138.4 to-date

?

Average: 121.5

4.6 mos. Median: 3 mos.

12 mos. Median: 11 mos.

* All-time high

The following is from an article in MarketWatch (9/25/2018) "Why stock investors should be wary of consumer confidence at an 18-year high", that breaks down the consumer confidence level into deciles, with the highest of the 10 being when the value is from 128 to 144 as it is now at 138.4. The forward years' returns are shown as being negative 3 of the following 4 years with the percentage of positive returns calculated in the second chart. This a very small sampling and I can't vouch for its accuracy or significance, nevertheless, this would seem to show that the future is not too rosy, to say the least. That makes sense as those returns follow the Bull market highs that we know are coming. I realize there is a lot of negative press out there but this information, if accurate, backs up what I have written years ago in a Special Report on "There's Something About... Consumer Confidence".

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download