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TheDowTheory.com
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TheDowTheory.com |
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June 1st, 2011
It’s Summertime, What Can I Say?
OVERVIEW: Summertime, and the living’s not easy. Below is the seasonal pattern showing the annual ‘lull’, this year it coincides with the completion of Quantitative Easing 2 (QE2) and would seem to parallel the market after the conclusion of QE1 (see March 1st Letter). This is the pattern that has spawned the “Sell in May and go away” investment strategy. Some reasons behind it may be that investors fund their retirement accounts and invest bonuses early in the year, then the summer is vacation time away from work and the stock market, after which they return around Labor Day and refocus on their portfolios, selling out underperforming stocks. Whatever the reasons, it’s not a pretty picture:
Leading economic indicators in the U.S. in May registered their first decline in nearly a year. “The pace of economic growth may be "choppy" in the summer and fall, the Conference Board said May 19th.” In addition, “The world is headed for an economic slowdown,” according to the Economic Cycle Research Institute's (ECRI) Long Leading Index of global industrial growth. "It is not country specific, but imagine if you could add up all the activity in factories around the world and see if it was accelerating or decelerating, that is what this indicator is focused on," says Lakshman Achuthan founder and managing director of the research center. "And it has been telling us very clearly, unambiguously, that we have a peak in global industrial growth this summer."
The good news is that Achuthan does not
believe another recession is headed our way. The bad
news is he says "the
U.S. economy will not escape" the downturn, but will "participate in it…and in
one way, shape or form, it is going to impact this recovery."
The recovery is already the
slowest in years and the continuing unemployment problem is disturbing:
Chart with thanks from www.calculatedriskblog.com, an excellent website and
source.
The consequences of the current employment recession are the forward ripples. According to MarketWatch, the continued unemployment problem has caused the outlook for Medicare's and Social Security finances to worsen. Medicare's Hospital Insurance Trust Fund is now expected to be exhausted in 2024 - five years sooner than last year’s projection. Upon exhaustion, dedicated revenue will only be able to pay 90% of costs for the hospital-insurance program. Meanwhile, government officials report trust fund reserves for Social Security will be exhausted in 2036, one year sooner than last year’s projection. At that point, tax income will only be able to pay for 75% of scheduled benefits though 2085. For the first time since 1983, Social Security spending was greater than income in 2010. When will our government get serious about solving our problems?
The continuing confirmations of slow economic activity, and problems such as the above, probably explain the decline of the stock market in the month of May. As you can see in the chart below, since the last week of April the market fell over 400 points, or 3.6%. Technically we are in our third occurrence this year of a secondary reaction within the primary uptrend. Today's price action looks like it may be resolved favorably, as the others were.
I’m not raising the alarm yet, after all I’ve only been expecting a quiet summer, not a bear market this year, but it’s worth a look at where we are in this bull market. We are now in the 3rd quartile as to length and percentage gain of all bull markets of the 20th and 21st century. That means that only ¼ of all bull markets move on to the 4th quartile. This one is still short of the average bull market which rises 111.7% over 33.2 months. That equates to 13,860 on the Dow Jones Industrials by year-end, another 1,400 points!
26
Previous Bull Markets
1ST
2ND 3RD
4TH Quartiles
1.4 13.2
25.9↑
49.7 93.2 Months
19.6
47.8 75.7 ↑
131.9 371.6% Gain
Bull
markets start out having an equal chance of ending in each quartile, of course,
and yet as they continue past the peak of the
Bell
curve the probability of ending increases simply by definition.
The long-term outlook for the economy and stock market are a mixed bag. Earnings have been terrific, although the rate of change is dropping. Consumer confidence is failing to advance, as it normally would this far into an economic recovery – think jobs. Whatever the current situation, investors should keep looking and planning ahead. One subscriber (thanks T.S. from WA) has asked how much we can expect our Indicators will help us save what we have made in this bull market. In looking at the record of the Composite Indicator (which we use for timing the real-time portfolio shown at the end of each Letter) it turns out that the average sell signal has been about -10.9% after the bull market highs are reached, well above the levels associated with a new bear market. The Dow Industrials and S&P500 would need to drop -16% in order to meet my definition of a bear market. This record should give comfort that much of the bull market gains will be preserved through the next bear market, whenever it comes. The following chart from Hulbert Interactive shows how little money subscribers to our Newsletter lost in the two previous bear markets and have made in this, and the previous, bull markets. May it always be so!
Portfolio performance through April 2011
THE DOW THEORY: This Indicator is in a re-BUY mode (GREEN) at 10,753.62 since 9/20/2010. The signal was “re-affirmed” in December and again in April. Currently, the market is in another secondary reaction as determined by my definition for the Dow Theory for the 21st Century (but not by the original Dow Theory). The market should now bounce at least 3% on one or more of the indices and if all three rise to new market highs then an ‘in the clear’ signal will be given once again. At the moment, they are headed that way. If, however, after the 3% bounce without reaching new highs on all three indices the market rolls over and the S&P and one of the other indices violates the recent pullback lows… a Dow Theory for the 1st Century Sell signal would be given. I will keep this table up to date in the Subscriber’s Area:
|
Date |
DJIA |
% |
Status |
Date |
DJTA |
% |
Date |
S&P |
% |
|
4/29 |
12810.54< |
|
Mkt Highs |
5/10 |
5527.50< |
|
4/29 |
1363.61< |
|
|
5/24(17 days) |
12356.21 |
-3.6 |
Pullback |
5/17 (5 days) |
5335.37 |
-3.5 |
5/24(17 days) |
1316.28 |
-3.5 |
|
5/31 (to-date) |
12569.79 |
+1.7 |
Bounce |
5/31(to-date) |
5469.55 |
+2.5 |
5/31 (to-date) |
1345.20 |
+2.2 |
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and Then? |
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Note: Secondary reactions according to Dow Theory for the 21st Century last a minimum of 8 trading days average of all three indices. (17+5+17=39/3=13 trading days)
The following S&P500 chart is courtesy of a Subscriber (thanks A.M. from MA) who took the colors from the “Recent Letters” page where each month a color is assigned to indicate the status of each of the Dow Theory, the Schannep Timing Indicator and the Composite Timing Indicator’s signals. GREEN for Buy mode, RED for Sell, and YELLOW for somewhere in between. This chart shows the signal colors over the past 9 years for the Dow Theory. As you can see, it caught most of the two recent bull market up-moves and avoided most of the 2007-2009 bear market. The long-term record of the traditional Dow Theory has had an 11.9% annual return v. 10.4% for ‘Buy & Hold’. The long-term record for the Dow Theory for the 21st Century would have had a 14.1% annual return if followed under the current ‘rules’ for this Indicator.
SCHANNEP ↑TIMING ↓INDICATOR: This Indicator continues in its BUY mode (GREEN) from April 2nd, 2009 at 7,978.08. The monetary component continues positive and currently the momentum component is neutral. This chart below is a similar chart to the above with the colors appropriate for the Schannep Timing Indicator. Other than the two brief periods that it was red during the 2002-2007 bull market, it has captured most of the two bull markets and been out of most of the bear market during this period. The long-term record for this Indicator would have had a 13.1% annual return if followed under current ‘rules’ for this Indicator. No change from the current positive signal appears imminent.
The COMPOSITE Timing Indicator: This Indicator is also in a BUY mode (GREEN) and is fully invested at an average BUY level of 9,365.85. Here I have colored a similar chart to the ones above with the signals for this Composite Indicator. There is much more YELLOW in this chart because whenever the Dow Theory and the Schannep Timing Indicator are not in full agreement with one another a yellow color code is used. This is due to the recommendation that subscribers be ‘somewhat’ invested, the percentage can be anywhere from 25-90% as shown in the Letters written at those times. As you can see, this Indicator has been totally or partially invested during most of the last two bull markets and totally or partially out of most of the last bear market. The long-term record for this Indicator would have had a 13.8% annual return if followed under current ‘rules’ for this Indicator. Currently, no change is in view unless the Dow Theory for the 21st Century develops a Sell signal, in which case this would go to a yellow status, 50% in the market and 50% in ‘cash’.
ÞThe BOTTOM LINE: Lots to think about, there always is with the stock market. We keep having these secondary reactions in the primary bull market. It gives the impression that the market is laboring, and one of these reactions will actually be the start of a bear market. But remember, the primary trend is assumed to continue until…as Isaac Newton’s law of physics states: a body in motion tends to stay in motion unless compelled to change its state. Quoting The Dow Theory by Robert Rhea from page 6 of my book, “There is no known method of forecasting the extent or duration of a primary movement.” So we keep our eye on the market to see what it will tell us about what’s next.
Dow
Jones: 12,569.79
Jack & Bart Schannep
S&P 500: 1,345.20
for the Schannep Team
NYSE: 8,477.29
The Dow Theory Schannep Timing
Indicator Composite Indicator
GREEN
GREEN GREEN
Buy Signal
9/20/10
Buy Signal
4/2/09
100% Stock
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As of 4/30/11 the Composite Timing Indicator Portfolio is 100% invested, with equal amounts in each of the Exchange Traded Funds that track the DJIA, the S&P500 and NYSE Composite Indices. For the last 12 months this portfolio is up +19.1% (thanks to the unprofitable Dow Theory Sell last summer affecting one-half or our portfolio) vrs the Dow Jones up +24.0% and the S&P500 up +23.5% excluding dividends. Since the Bull Market’s high on October 9th, 2007 at 14,164.53 this portfolio is UP +19.7% while at the same time the Dow Industrials are still DOWN –11.3% and the S&P is DOWN –14.1% from 1565.15, excluding dividends. |
I have chosen Exchange traded major-market Index funds and cash funds as the best pure play versus a Buy & Hold strategy. I concentrate on the big picture, the trend of the major stock market indices
which usually influences the price direction of most individual stocks. This real portfolio is both the core portfolio of this Letter and also a bench-mark for your own investment results.
"Indices are unmanaged and cannot be invested in directly. The performance data quoted represents past performance, which is not a guarantee of future results. Investing involves risk including the loss of your original investment."
