August 1 st, Divergence Warning

Transcription

1 Dow Theory for the 21 st Century Schannep Timing Indicator COMPOSITE Indicator Dow Jones: 18, Divergence Warning S&P 500: 2, NYSE: 10, OVERVIEW: On July 11 th both the Dow and the S&P broke above their pre-sell highs and have since gone on to establish new all-time highs while the Transports have done neither. Could this prove to be a warning? Both of these charts look quite similar, as would be expected with them having a relatively high correlation between them. Notice, however, the chart of the Transportation Index: All logos, trademarks, and content used in this newsletter are registered trademarks and/or copyright of their respective companies and owners. 1

2 The divergence of the Transportation Index against the Dow and the S&P illustrated in the chart above and below is quite concerning. As we will discuss later, a Buy signal is still possible once the Transports close above their pre-sell highs. However, the Transportation Index tends to be a leading indicator of the market and is a reflection of economic activity. With a clear down-trend evident, the concern over a looming economic slowdown is natural. Such divergences have served as warnings in the past on four prior occasions when the Transports did not follow the other indexes. The aftermath was a -19.2% S&P decline in July 1998, a -12.1% S&P decline in August 1999, a -18.3% S&P decline in August 2007 and a -9.8% S&P decline in August The fact that three of those declines were in August has not escaped our notice, and may only be a coincidence. At present there is no way to be assured if this is a warning but it is worth being mindful. The DOW THEORY for the 21 st Century This indicator returned to RED (SELL) on June 24 th at the 17, level and remains so even as the S&P and the Dow Industrials close near new all-time highs, confirming a continuing Bull market (by definition as both the Dow Industrials and the S&P All logos, trademarks, and content used in this newsletter are registered trademarks and/or copyright of their respective companies and owners. 2

3 participated). The Dow Transports are not above their June 20 th pre-sell high, which means the Dow Theory Sell signal is not reversed. IF the Transports close above (only 3.3% away, now ) THEN the re-buy would be activated. The market will not be "in the clear" however, until the Transports exceed their all-time high of Of course, a regular set-up after this current qualifying secondary reaction, then a 3% pullback, followed by a breakout could also trigger a new Buy signal. The Original DOW THEORY: is also in a SELL at the same level and date. Schannep TIMING INDICATOR: This Indicator has remained steadfastly GREEN (BUY) with an average entry level of 11,746 from the August-October of 2011 Buy signals, keeping us consistently invested with at least a 50% exposure throughout the continuing Bull market, even as the Dow Theory had numerous Sell and Buy signals. As the chart below demonstrates, we have had various market scares (as measured by the Fear Index of the VIX), and appropriate times to take risk off of the table. The Dow Theory has successfully reduced risk at these times while our Schannep Timing Indicator has yet to be tripped to a SELL. All logos, trademarks, and content used in this newsletter are registered trademarks and/or copyright of their respective companies and owners. 3

4 Do the talking heads on TV, radio, or favorite website have your friends confused? If so, invite them to become subscribers. We'll 'thank you' with a 6 month extension of your Subscription if they subscribe for a year. Thanks, Jack & Bart The COMPOSITE Timing Indicator: Our combination of the two indicators is YELLOW (HOLD) with half in the market, half out of the market. As usual, one cannot predict which side will join the other, but this divergence of the Transports could make us happy to be half out at this point or until the Transports join the other indexes on the high side. The BOTTOM LINE: Presently, there is no way to tell the significance of the Transports downward trend, and there are compelling reasons to think the economy and thus the market should continue to do well. There are numerous headlines about improving housing, retail sales and industrial output, but the new second quarter GDP report was certainly disappointing. And valuations are of concern, as this from the Wall Street Journal, July 28th points out: The U.S. Treasury's Office of Financial Research noted this week that stocks have reached today's valuations "only ahead of the three largest equity market declines in the last century". Further the article states: It doesn't mean a recession is coming; but it's a vulnerability the Fed should keep top of mind. The value of our Indicators is to take our collective biases out of the investment decision process and replace it with technical reasons to add, subtract, or maintain the current risk levels to a portfolio. With our YELLOW light we believe a 50% equity exposure position is the right mix until such time as the Transports join in above or prove to be the harbinger of economic weaknesses to come. We will let you know when such clarity develops. Jack & Bart Schannep Editor and Contributing Editor for The Schannep team Historically we have tracked the performance of Jack s ACTUAL ROTH IRA portfolio, fully following the Composite Timing Indicator s signals which is currently 50% invested in approximately equal amounts into each of the following Exchange Traded Funds: For the last 12 months this portfolio with dividends reinvested is DOWN -1.4% vs. the Dow All logos, trademarks, and content used in this newsletter are registered trademarks and/or copyright of their respective companies and owners. 4

5 Jones UP +6.6% and the S&P500 UP +5.3% including dividends. Despite the current lagging, throughout 2014 and 2015 this portfolio beat the DJIA in each 12-month period. The problem with such reporting 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, DowTheoryInvestments.com, CXO Advisory Group and TimerTrac.com 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. Bart Schannep is the President of Southwest Investment Advisors, Inc. This article is co-written as an outside business activity by Bart Schannep as Contributing Editor in conjunction with Jack Schannep. As such, Southwest Investment Advisors, Inc. does not review or approve materials presented herein. The opinions and any recommendations expressed in this Letter are those of the authors and do not reflect the opinions or recommendations of Southwest Investment Advisors, Inc. nor its broker/dealer and separate and unrelated company, National Planning Corporation (NPC). 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. 5