The Long-Suffering Bull Market The primary movement is the broad basic trend generally known as a bull market.. Robert Rhea, The Dow Theory, 1932

Transcription

1 Dow Theory for the 21 st Century Schannep Timing Indicator COMPOSITE Indicator The Long-Suffering Bull Market The primary movement is the broad basic trend generally known as a bull market.. Robert Rhea, The Dow Theory, 1932 Dow Jones: 15, S&P 500: 1, NYSE: 9, OVERVIEW: Has any Bull market endured more starts and stops or secondary reactions than this one? Not that I can think of. Thank you Washington D.C. (all of you) for this latest setback. There are short Bull markets (2008-9: +19.6% over 1.4 months) and there are long Bull markets ( : % over 81.1 months), and there are cyclical and there are secular Bull markets. What, you say? Most people would say that a stock market making new highs was in a Bull market (period), and they don t delineate Bull markets as cyclical or secular, but it is important to know the difference. We had quite a lengthy discussion on this subject in our March 1 st, 2013 Letter where we pointed out: Fidelity Global Strategies estimates that stocks have averaged annual returns of 18% during secular bull markets and only 1% during secular bear markets (W.S.J. 2/11/13). The difference, as I see it, is that cyclical Bull markets are measured from the last Bear market low such as October 3 rd, 2011 was for this one. Hence, this Bull market is just now 2 years old and this 3% decline does not change its status. I realize some say it started on March 9 th, 2009, but to me that was the start of this secular Bull market which at the moment is composed of two cyclical Bull markets (March 9 th, 2009 April 29 th, 2011 and October 3 rd, 2011 present). The second one started from a level (10,655.30) above the previous one s starting point (6,547.05), and has exceeded its high of 12, Higher lows and higher highs are the definition of an uptrend (whether adjusted for inflation or not), and in this case I feel they constitute a secular Bull market. You may recall that I proclaimed the March 2009 lows as the start of not only a cyclical Bull market but also of a secular Bull market when I wrote in the January 1 st, 2010 Letter: Of course some people think we have been in a continuous bear market since January of 2000 because the market is still below that high of 11, That doesn t make sense to me since we ve been higher at 14, two years ago in October of If there was a secular bear market, I d say it ended at the lows last March at 6, Of course, we won t be able to prove it until the market exceeds the all-time highs. Even then, I can tell you there will be those who won t believe it or accept it as a new secular bull market. The following chart will show why there are those who feel we are still in a secular Bear market dating back to the top in The reason is that they are using an inflation adjusted stock market, which means this market needs to exceed about 2000 for the S&P500 (currently 1682) to make new inflation-adjusted highs. The chart shows that secular Bull markets have had significant gains of from +334% at the start of the last century to +666% at the close of the century. Please note that I have taken the liberty of drawing the trend lines AND changed the color on this recent uptrend to show that new highs above 2000 on the S&P would point to if/when this current phase becomes a secular Bull market All logos, trademarks, and content used in this newsletter are registered trademarks and/or copyright of their respective companies and owners. 1

2 on an inflation-adjusted basis. The original chart from Doug Short s website (dshort.com) shows this phase in red until such a new high is attained. Of course each blue line on the chart was originally red, until it surpassed its previous inflation adjusted peaks, and then was changed to blue. Obviously, we would cheer such a change of color as the target would then make our 18,550 goal (about 2,050 for the S&P) look like a passing fancy on the way to 3,000 on the S&P. I m not saying the market is cheap at these levels, and it IS above the mid-point trend line, but that does not mean it can t go higher in the year or two ahead (it certainly will over a longer timeframe as this chart shows). The market was above the mid-point trend line for 40 years at the start of the chart and doubled after it rose through it in Following this current setback the market appears on the verge of an upside breakout which should be significant. The DOW THEORY for the 21 st Century: This Indicator is in BULLISH mode, following a Re-BUY SIGNAL (GREEN) on July 18 th, 2013 at 15, That Signal was prompted by newer highs on all three Indices (DJIA, DJTA and S&P500). Since then, as you know from our 9/18/13 to all Subscribers, we have had newer all-time highs which constituted an In the Clear signal. This is not a fresh Buy signal but is a reconfirmation that the Bull market is intact. The problems enumerated in our last Letter are still on the table and will from time to time cause setbacks as they raise their ugly little All logos, trademarks, and content used in this newsletter are registered trademarks and/or copyright of their respective companies and owners. 2

3 heads, but for now this Indicator is in the Bullish camp. There currently is a potential for a qualified secondary reaction, which we will keep an eye on. The Original DOW THEORY got its Buy signal on January 18 th at 13, and is also In the Clear. Schannep IMING NDICATOR: This Indicator s signal remains in BULLISH mode (GREEN) with an average entry level of 11, from the time of the last Capitulation Indicator BUY signal on August 8 th, 2011 at 10, to the completion to 100% invested on October 27 th, 2011 at With recent new highs in the market, the Momentum is still positive as is the Monetary situation. The tapering by the Federal Reserve will not affect the monetary status as actual increasing of the Fed Funds rate and changing the Free Reserve status would seem to be a considerable way in the future. At present there is no change in sight for this Indicator. The COMPOSITE Timing Indicator: This Indicator returned to a Buy mode (GREEN) when the Dow Theory for the 21 st Century returned to a Re-Buy on July 18 th, 2013 at 15, Combined with the Schannep Timing Indicator s BUY at 11, in August-October of 2011, the average entry level for this Indicator is 13, As you know, this Indicator is the one we use in our Real-money portfolio shown at the end of each Letter. In that monthly accounting, one of the things we have shown is the change since the last major top in the market six years ago on 10/8/07. Inflation adjusted or not, our portfolio is currently near an all-time high valuation. Here is the graph of our portfolio compared to the S&P500 over that timeframe (courtesy TimerTrac.com): All logos, trademarks, and content used in this newsletter are registered trademarks and/or copyright of their respective companies and owners. 3

4 You ll note that the major reason for this outperformance is that we contained our draw-downs when the market took its dive in Since then, even with a few costly sell signals that were followed by buys at higher levels, we have maintained the advantage. As you can see, it s the big losses that hurt performance, not the defensive moves along the way that detract only somewhat from the overall performance. Dividends and/or interest are included for both, so we are comparing apples with apples. The BOTTOM LINE: We expect the actual start of tapering by the Federal Reserve of its buying of Treasuries and/or mortgage-back securities will have only a minimal effect on the stock market after it gets over its initial shock similar to a kid when his training wheels are first removed from his new bike. Life goes on so long as the economy keeps on chug, chug, chugging along. There is reason to think that will be the case despite the various problems enumerated in our last Letter. As to those problems, the pecking order seems to have changed, and undoubtedly will continue to change as items are checked off the list. Here s the way I see those problems now, see if you agree: 1) Full debate and haggling over extending the debt ceiling. Last month was: #5 2) Implementation with delays of ObamaCare #6 3) The Federal Reserve s tapering expected to begin this year #2 4) Ben Bernanke s replacement and ability to manage the Fed s balance sheet #3 5) The potential for disappointment in earnings expectations #7 6) An expected new round of sequestration cuts #4 7) You fill in the blank #8 8) Syria #1 Since our Indicators are all in Bullish mode, it is logical to look for reasons the market may go up, and we don t need to look far. In order for the market to do better we ll need a better economy, with Gross Domestic Product increasing and earnings to do the same, and there is reason to think those two things will happen: The following charts show the relationship between the Institute of Supply Management s (ISM) Manufacturing Production Index and subsequent (two quarters later) profit growth, and Gross Domestic Product. As you will see, the recent upturn of the ISM should be a harbinger of better things to come for the economy, and the stock market. All logos, trademarks, and content used in this newsletter are registered trademarks and/or copyright of their respective companies and owners. 4

5 This graphic displays the relationship between the ISM production index (quarterly average) and the year-over-year (Y/Y) growth rate in industrial sector earnings per share as calculated by Zacks. The ISM production index tends to lead growth in industrial sector profits by roughly 2 quarters. Zacks (9/4/13). All logos, trademarks, and content used in this newsletter are registered trademarks and/or copyright of their respective companies and owners. 5

6 The chart above shows that when the ISM Manufacturing Index drops through 46 it points to recession, as it did at the time of the last three recessions in 1990, 2001 and When the Index turns back up as it did at A and B, and now C above, the economy (GDP) and stock market have continued higher. And there IS room for price-to-earnings ratios to rise; 20 of the 30 stocks in the Dow Jones Industrials are selling at p/e ratios based on next fiscal year s estimates below their recent 7-Year average level, according to AAII (American Association of Individual Investors) Journal (September 2013). Additionally, companies have strong balance sheets resulting in lots of cash on hand: The upshot of the excess cash is more mergers and acquisitions, more buying back of their own shares, more increasing of dividends, all of which are happening and are favorable from a market standpoint. Now all we need to do is check off more of the items on our Problems list. It is not just the Market that is changing, but this Letter too. My son, Bart Schannep, after years of contributing ideas and analysis has finally officially joined the ranks here at TheDowTheory.com as Contributing Editor. I am not going anywhere, remaining Editor of both the website as well as this Letter, but I certainly welcome his active engagement and participation. So, for the first time we sign off as: Jack Schannep, Editor Bart Schannep, Contributing Editor for The Schannep team All logos, trademarks, and content used in this newsletter are registered trademarks and/or copyright of their respective companies and owners. 6

7 As of 9/30/13 our REAL money (I.R.A.) Composite Timing Indicator Portfolio is 100% invested, with approximately equal amounts in each of the Exchange Traded Funds that track the DJIA, the equal-weighted S&P500 and NYSE Composite Indices. For the last 12 months this portfolio with dividends reinvested is only UP +11.8% (thanks to the whipsaws last November and this June) vs. the Dow Jones UP +15.4% and the S&P500 UP +18.8% including dividends. 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 All logos, trademarks, and content used in this newsletter are registered trademarks and/or copyright of their respective companies and owners. 7