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…Anyway I owe you,“ Annabeth said.

“We’re a team, remember?” I said. “Besides, Grover did the fancy flying.”

I thought he was asleep but he mumbled from the corner, “I was pretty amazing, wasn’t I?”

Annabeth and I laughed.

— 

Rick Riordan, The Lightning Thief

i miss this sm

Stock Signal Has Only Occurred 10 Times In Past 35 Years


New Long-Term Trend Signals In Numerous Markets

This week’s stock market video reviews a new bullish trend signal that is being generated in numerous asset classes and investment sectors.  



The signal outlined above dovetails nicely with a recent Yahoo Finance post dated August 15, which compares 2016 to the stock market peaks in 2000 and 2007.

How Does 2016 Compare To Stock Market Peaks In 2000 And 2007?


2000 Dot-Com Peak: 200-Day Was Helpful

“As a trader who has seen a great deal and been in a lot of markets, there is nothing disconcerting to me about a price move out of a trading range that nobody understands.”

Bruce Kovner
Market Wizards

A market’s 200-day moving average can assist in monitoring investors’ net aggregate tolerance for risk. Notice in the first chart below the S&P 500 was unable to recapture its 200-day after dropping below it in October 2000. Compare and contrast the top chart to the bottom chart; notice how unlike 2000, the S&P 500 was able to recapture its 200-day after the Brexit bottom was made on June 27, 2016.

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How Can Trends And These Charts Help Us?

If Micheal Phelps was open to providing some insight into how to swim faster, most swimmers would be happy to listen. In a similar way, we can learn from the best money managers of our time. This week’s video covers many basic tenets of the “market wizards” and provides a clear example of how moving averages can be helpful in managing risk and reward.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

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2007-08 Financial Crisis Peak: 200-Day Was Helpful

The situation was similar in 2007-08. Notice in the first chart below the S&P 500 was unable to recapture its 200-day after dropping below it in December 2007. Compare and contrast the top chart to the bottom chart; notice how unlike 2008, the S&P 500 was able to recapture its 200-day after the Brexit bottom was made on June 27, 2016.

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Removing Price Allows Us To Focus On Trends

The concept of trends is easier to see if we remove the day-to-day fluctuations in price from the equation. Notice how during the dot-com bust bear market, the S&P 500’s 50-day moving average (blue) was never able to recapture the 200-day moving average (red). Compare and contrast the present day look (second chart below) of the 50-day and 200-day to the look in 2000-2002.

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In the 2016 chart above, two favorable things from a trend perspective have happened recently that never occurred during the dot-com bear market: (1) the slope of the S&P 500’s 200-day turned back up in a positive manner, and (2) the 50-day crossed back above the 200-day.

Similar Concepts 2007-08 vs. 2016

Notice how during the financial crisis bear market (top chart below), the S&P 500’s 50-day moving average (blue) was never able to recapture the 200-day moving average (red). Compare and contrast the present day look (second chart below) of the 50-day and 200-day to the look in 2007-2008.

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In the 2016 chart above, two favorable things from a trend perspective have happened recently that never occurred during the financial crisis bear market: (1) the slope of the S&P 500’s 200-day turned back up in a positive manner, and (2) the 50-day crossed back above the 200-day.

How Can These Charts Help Us?

No chart from any period, including 2016, can predict the future. However, charts and moving averages can help us better understand the “probability of bad things happening” vs. “the probability of good things happening”.

Right now, given the look of the 2016 charts above, the probability of good things happening today is much higher than it was in early 2001 and early 2008. Nothing says the 2016 cannot breakdown and morph into a look similar to 2001 or 2008. However, that has not happened yet. Therefore, we will continue to hold positions in markets with positive trends, including U.S. stocks. The three charts below summarize the concepts presented above.

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Is Dow Theory Telling Us The Stock Rally Is Going To Fail?


This week’s video can be found in this post.

Dow Theory Non-Confirmation

The charts below show the Dow Jones Transportation Average has failed to print a new high above the previous high made in 2015. Given the Dow has made a new high, a Dow Theory non-confirmation remains in effect.

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What Can We Learn From History?

This post will review some historical cases to help answer the question:

How concerned should we be about Dow Theory?

This week’s video starts with a look at two historical periods when the Transportation Average failed to confirm highs made by other major indexes, including the Dow Jones Industrial Average. The video also updates the trends covered on August 19, along with a analysis of Janet Yellen’s Jackson Hole speech.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

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Charts Monitor, Rather Than Dismiss Fundamental Data

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Critics of technical analysis often mistakenly believe that using charts discounts the importance of fundamental data, such as earnings, employment, and economic growth. Charts allow investors to monitor the aggregate investor interpretation of all the fundamental data. Said another way, charts are efficient tools used to monitor vast amounts of fundamental data, which is important since fundamentals ultimately determine which assets classes will perform best. When the economy is healthy, stocks tend to beat bonds. When economic fear dominates, bonds tend to beat stocks.

Dow Theory Is Based On Economic Common Sense

Dow Theory is based on a series of Wall Street Journal articles written by Charles Dow. The basic tenets of Dow Theory are easy to understand. Charles Dow believed that:

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  1. In order for industrial companies to increase their earnings, they had to produce and sell more goods.
  2. If industrial companies are selling more goods, then transportation companies must be delivering more goods to retailers and wholesalers.
  3. Therefore, in a healthy economy, both industrial companies and transportation companies should be experiencing revenue growth.
  4. If industrial and transportation companies are growing their revenues, then the industrial and transportation stocks should be attractive to investors.
  5. If industrial and transportation companies are doing well and are attractive to investors, both the Dow Jones Industrial Average and the Dow Jones Transportation Average should be making new highs in unison, serving to confirm a healthy economy.
  6. From a bearish perspective, signals are generated when the two indexes make important new closing lows, which is indicative of a weakening economy.

Behind The Averages

After reviewing the companies in the industrial and transportation averages, it is easy to see why they represent logical vehicles to monitor the pulse of the U.S. economy. In the present day, our economy is driven by more than just industrial or manufacturing companies. The Dow Jones Industrial Average contains traditional producers, such as IBM (IBM), 3M (MMM), Boeing (BA), Chevron (CVX), and Johnson & Johnson (JNJ). However, the Dow (DIA) also contains Visa (V), Goldman Sachs (GS), and American Express (AXP), since the present day economy relies heavily on the financial sector. The Dow Jones Transportation Average (IYT) still has railroads, such as Union Pacific (UNP) and Norfolk Southern (NSC), but it also contains more modern logistics companies, such as United Parcel Service (UPS), Fed-Ex (FDX), and J.B. Hunt (JBHT).

We went searching, and found him still playing Virtual Deer Hunter.

“Grover!” we both shouted.

He said, “Die, human! Die, silly polluting nasty person!”

“Grover!”

He turned the plastic gun on me and started clicking, as if I were just another image from the screen.

— 

Rick Riordan, The Lightning Thief

die silly polluting nasty person