Return to Theory

So in traditional fashion, I’d like to return to my original assumptions, that using the basic tenets of Dow Theory is one building block on which other investment theories and strategies can be built upon.  While imperfect on its own, one must pour the concrete before you build the walls, and certainly long before you pick out the window dressings.  The rules of Dow Theory are part of that concrete mix for the foundation of your investment house.

Let’s readdress the rules set forth by Rhea, Russell and others.

·  The Averages Discount EVERYTHING.  The closing prices of the two indexes give us a completeindex of everything known by anybody than can possibly affect the economy and corporate profits.

·  The market consists of three movements which operate simultaneously.  Primary (one to many years), Secondary, (one to three months) and Daily.  Daily movements are ultimately irrelevant, except for over time producing primary and secondary trends, but gain the most attention by the general public.

·  A primary bull is a broad upward movement interrupted by frequent secondary reactions.  These have three phases where the first is a return to normal values, the second is caused by bettering business conditions and is usually the longest, and the third is feverish and speculative.

·  A primary bear is a broad downward movement which serves to correct the excesses of the previous bull markets speculative phases and does not end until the worst that may happen, has.

·  Successive rallies and declines must advance or decline past previous points.  For example, in a bull market the next high and low of the secondary movements within the primary must be higher than the previous high and low.  Of course the opposite is true for a declining market.

·  The movements of the two averages must confirm each other.  The logic is that if there is to be a valid increase in manufacturing and production, there will also be an accompanying increase in shipping and transportation.

·  Volume expands in the main direction of the trend.

·  "Lines" form when both averages remain within an area of about 5% for 2 weeks or longer, indicating a period of very evenly matched buying or selling.  Both averages penetrating their line limits can predict higher or lower prices to come.

·  The word "penetration," under Dow Theory, implies any movement through a given point of one cent or more.  Some scholars demand a one dollar move as a more valid signal.

·  Finally, and most importantly, the primary and secondary movements are NOT susceptible to manipulation.

Putting words to pictures

From a pure theory perspective, I find it hard to argue against the bull market we’ve been in on the equities side since December of 2012.  While the INDU showed growth the year prior, it’s hard to argue in favor of a technical bull since the TRAN didn’t begin to confirm bull until the end of last year, so we have been in a bull market for about 7 months now.  

My personal prejudice would argue that much of the gains of late are heavily influenced by government monetary manipulation, interest rates and the like, and while I “feel” a reckoning is coming, theory states neither primary nor secondary trend can be manipulated and therefore I must concede that yes we are and continue bull market in the equities for the time being.  History being always easier to read than the future, we cannot know for sure if we are seeing a primary or secondary trend bull.
If I Were A Betting ManNone of the following statements are anything beyond my own feelings, no technical analysis, just gut.  A few things that bother me right now.  First, the RSI sits oversold for as long as it did on the TRAN's through the first 2 1/2 months of 2013, yet the sell off was minuscule   This concern is minimal, just interesting.  Second, the TRAN's do appear to be building a beautiful head and shoulders pattern, the INDU's on the other hand look like a ball bouncing up a hill.  Finally, if you cut the right half of both charts off and stick them on top of the left half of the charts, it looks pretty similar.  This is why my gut tells me that although it's straying from the tenets of the Theory, I do not believe that recent growth in the equity markets is legitimate growth, but instead inflationary investing.  When I say that this feeling strays from the Theory, the only thing it strays from is the duration listed for primary trends.  I personally believe a primary trend can last far longer than 1 to 3 years, I think some of the commodity markets have proven this, but Dow Theory is used for investing, and investors don't own things through the duration of a 10 year primary trend, savers do that.  So I will stick with the theory as is.For the time being, because of trend theory I will not be liquidating any positions at the moment, buy because of my gut I won't be adding anything either.
Tomorrow... where should we be adding right now and why!!!