Dow Theory: From Bear to Bull, the Long Haul

J

JT47319

Short-term we may see possible pullbacks and a decline from this point. However, Dow Theory wise (the granddaddy of all that is Technical Analysis and holy), we've witnessed the much needed and final confirmation of a major Bull Market when the Transports and Dow closed at new highs Friday.

We're talking about the long-term market direction. For the past three years, Dow Theory has given a major sell/bear signal. Friday saw the first buy signal in three years. And with a 75% accuracy on general market direction, its probably one of the best trend following strategies out there, and less broker friendly to boot.

Dow Theory doesn't catch the initial mark-up phase of a bull market or the turning point in the trend, but it does catch the MEAT of a trend. Has it been wrong before? Yes, but at 75% success rate, that's a helluva lot better than most other systems out there AND its stood the test of time, long in the tooth as it is.

Other points to consider however:
-According to the COT report, commercials are increasing their long exposure in the SPOOs (after becoming net long for the first time in years) and making a new high net long (this data lags and is published every Friday)
-Insider selling is still at a record high (bearish)
-The Rydex ratio (bear mutual funds), after hitting an all new low (ie bears at their bearish, funnelling more money into bearish funds), are starting to increase (ie bears converting/washing out)
-Mutual fund net cash flow is starting to turn up again after being net negative in 2002
-Don't give me Sentiment/Contrarian readings, they're meaningless and don't deserve the appellation of Techanical Analysis
-Don't give me Fundamental Analysis or moralistic diatribes about market manipulation, I don't care about Alan Greenspan, George Bush's tax machinations, or the PPT myth; the market's moving and I only need to know if its still going to go in the same direction in the intermediate/long term; we're here to make money, not change the world
-Is this a bubble, a blip? I don't care, I just want to make money, preferably a crapload of money that makes my broker sit up and notice so he can call me up and kiss my ass

So what do you guys think? Dow believers? or trend faders?

http://www.robertwcolby.com/

http://cbs.marketwatch.com/news/sto...e&guid={7E225D0E-E76E-4E9C-9A82-0638FE026232}

http://stocks.internetnews.com/close/article/0,1785,1701_2217501,00.html

http://www.cftc.gov

http://www.ici.org

http://www.globinvestor.com/s&p.htm

http://www.softwarenorth.net/cot/current/charts/SP.png
 
The Rydex ratio is considered a sentiment indicator, so why accept this and not the Bull/Bear newsletter ratios (which at extremes, have given reliable signals in the past)
 
Quote from JT47319:

So what do you guys think? Dow believers? or trend faders?
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There is some question as to the continued relevance of Dow Theory, at least in terms of the relationships among the industrials, transports, and utilities, as they no longer represent what they once did (the industrials made the goods, the utilities provided the power to make the goods, the transports moved the goods). Additionally, it's been twenty+ years since we had a bear market, and these averages are much different than they were in the late seventies.

Therefore, these confirmations may yet again be important, or they may not. Just something to keep in mind.
 
Quote from dgabriel:

The Rydex ratio is considered a sentiment indicator, so why accept this and not the Bull/Bear newsletter ratios (which at extremes, have given reliable signals in the past)
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I differentiate "sentiment" indicators like AAII, which is simply an unrepresentative opinion poll, from actual position trading, like COT or Rydex. Everyone has assholes and opinions, but its when you put your money down is when it counts. SHOW ME THE MONEY!

The Rydex ratio is about actual bear mutual fund NAV assets, not pie in the sky opinions.

The key here is to see the divergence of the Rydexers, the "dumb money" mutual funders which hit an all new low (ultra bearish), versus the COT commercials (smart money), who hit an all new net long high.

Quote from dbphoenix:



There is some question as to the continued relevance of Dow Theory, at least in terms of the relationships among the industrials, transports, and utilities, as they no longer represent what they once did (the industrials made the goods, the utilities provided the power to make the goods, the transports moved the goods). Additionally, it's been twenty+ years since we had a bear market, and these averages are much different than they were in the late seventies.

Therefore, these confirmations may yet again be important, or they may not. Just something to keep in mind.
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I think that may be a relevant concern, but like our everyday trading, when your system gives you a buy/sell signal, that's what you should do, bowing to discretion only occasionally. And the fact is, it really hasn't been disproven or shown ineffective as a trading strategy.
 
Quote from JT47319:



And the fact is, it really hasn't been disproven or shown ineffective as a trading strategy.
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Though there haven't been that many opportunities to test it during the last half century.

As I said, just something to think about.
 
That depends on where you are drawing your trendline. If you are talking short term resistence then we have broken it, but we are still well below the long term trendline.
 

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I believe that this has been a cyclical bull market that begun in October 2002 since the lows have not been retested since then.

The market should give back half of these gains this summer and advance sometime in the fall to new highs in this run. However, the bear should resume once again sometime next year IMO.

Bear markets don't end with P/E's so overvalued. Should this time be any different?
 
Quote from dbphoenix:



Though there haven't been that many opportunities to test it during the last half century.

As I said, just something to think about.
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There have been some 25 signals post 50s.

That depends on where you are drawing your trendline. If you are talking short term resistence then we have broken it, but we are still well below the long term trendline.
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I believe Dow Theory wise, the Averages & Transports needs to close above its previous Secondary Reaction high, which they have. Or below their respective lows for a Bear Market.
 
From the post stating that Dow Theory captures the MEAT of moves: That would be great if there is still some meat left in this move, which may be stalling now to allow for more meat.
 


There have been some 25 signals post 50s.

Depends on how you define a bear market.

I believe Dow Theory wise, the Averages & Transports needs to close above its previous Secondary Reaction high, which they have. Or below their respective lows for a Bear Market.

Even if one argued that the transports had a selling climax in March, they have not yet had a secondary reaction, though even if one believed that they had, advancing by a few points after all this time is nothing to get excited about.

Again, just something to consider.
 
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