We are very excited that Marketwatch picked up our response to recent criticism regarding the Dow Theory. Read the article HERE
Over the years, I have observed that while no two Bull or Bear markets are ever exactly alike, there are certain ingredients that must be present for them to form. Years ago as a young flight instructor in the U.S.Air Force I taught Meteorology for a time. In the study of thunderstorms, it was obvious that there were a combination of factors that had to come together, for them to form. It wasn’t just moisture in the air or moisture aloft at higher altitudes that was required, but also a source of lift. Air needed to be lifted, either by passing over a mountain range by summer heating of the ground below, or a cold frontal system moving in under the existing warmer air. That combination, with a little help from unstable air and Zeus, the ruler of the celestial realm, usually caused cumulus clouds which then developed into thunderstorms. And then the thunder and lightning began !
A combination of factors must come together at the same time to form either a Bull or Bear market. First, a momentum must begin upward in the case of a Bull market, or downward in the case of a Bear. Whether that movement is “just a jiggle” or is of adequate strength to build into a genuine Bull or Bear market is the critical factor. Variation away from an existing trend can be measured, and when it reaches a certain threshold, can be judged to be likely to continue. In addition to momentum, the second ingredient is a monetary atmosphere conducive to fueling a Bull Market, or to contributing to a Bear market. Fortunately, that also can be determined to be favorable or unfavorable, adding to or detracting from the likelihood of the momentum developing further into a Bull or Bear market.
While every schoolchild realizes that the future is not knowable, nonetheless some things are predictable, like the weather! Believe it or not, I’ve seen the figure of 93% used as to the correctness of weather forecasts.
The purpose of my Stock Market Major Trend Timing Indicator is to identify changes in the trend of price movements on the major stock averages. It has been said many times in Dean Witter (now Morgan Stanley) publications that “the genius of investing is recognizing the direction of a trend – not catching the highs or lows”. Neither the duration nor the extent of the move can be predicted in advance. None of the input that goes into my indicator is from forecasts, all is from existing printed public information.
I would like to give Dean Witter credit for believing in investment timing as evidenced in their 1975 booklet “Will COMPARE improve Your Sense of Timing?: “Dean Witter believes timing – knowing when to buy and when to sell - is one of the most important factors in any investment decision”.
But Dean Witter was not the first to believe in timing. Over 65 years ago, in 1945, an advertisement by Merrill Lynch, Pierce, Fenner & Beane stated “With world-shaking events a commonplace many an investor seeks an investment guidepost, realizes now more than ever that when to buy ranks equally in importance with what to buy. Too, wise investors also know that no security today can be bought and forgotten, that successful investment practice requires keen judgment in timing sales as well as purchases”.
As data became available on a more timely basis from the Federal Reserve Board and I was able to generate the necessary calculations on my own computer, I have streamlined, refined and made my Indicator more time responsive than its rudimentary start in 1969 (earlier posted results are from back-testing). While the makeup of my Indicator is proprietary, nonetheless it is not subject to individual interpretation such as is The Dow Theory. My C.P.A. is privy to my Indicator’s very specific construction and had no trouble certifying its signal dates without contradiction with my own interpretation. .
BOTTOM LINE: While the signal dates are similar for my Schannep Timing Indicator and those of The Dow Theory, they are constructed in totally different ways. My Indicator is constructed through mathematical calculations of internal momentum and monetary atmosphere, whereas the Dow Theory is totally determined by the external chart patterns. In my humble opinion, these are the two premier stock market major trend timing indicators with documented and verified long term records which set the standard for market timing. While we certainly endorse this excellent indicator on a stand alone basis, we also include it in our COMPOSITE Timing Indicator which is the synergistic combination of the Dow Theory and the Schannep Timing Indicator. Synergy: “The interaction of two or more agents or forces so that their combined effect is greater than the sum of their individual effects”.
The dates and market levels through 1998 are shown in the CPA verification for my Timing Indicator. Since that time they have been published publicly.
Chart courtesy Hulbert Interactive
NOTE: The current status is available to Subscribers Only.
The above results equate to a 13.1% compound annual increase since 12/31/53 (61 years). Buy & Hold grew at 10.7%. The computations necessary to determine this indicator were not available on a real time basis before 1968 and there was no way to make investments in the total stock market in accordance with these signals until the first S&P tracking Index Fund came along in 1976. In addition, the 'rules' were not spelled out until the publication of my book in 2008, therefore this record is largely real-time since 1968 with rule changes backtested. Following the rules explicitly would have resulted in the record shown.
- Gains from Schannep Timing Indicator Buy signals
- Declines after Schannep Timing Indicator Sell signals
- CPA verification of the historical records
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While the Original Theory is flashing a sell signal, the S&P 500 has not dropped past it's lows, "yet". Read Hulbert's article which outlines our current position HERE