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To Infinity and Beyond

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Posted on February 1, 2017

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OVERVIEW:  Ok, perhaps a quote from Buzz Lightyear of Toy Story is a bit much.  But, so are some of the recent headlines predicting fairly outlandish  market high levels.   Or are they? Now might be a good time to remind our readers of the concepts of Secular and Cyclical Bull and Bear Markets.

 

Markets regularly go through long phases, bullish, bearish and sideways,  which last anywhere from months to years to decades.  The longer phases are referred to as being Secular.  Secular Bull markets are periods of significant gain lasting many years and may include one or more Cyclical Bull and Bear markets within their run.  Long Secular Bull markets occur for several reasons, but the results lead to broad economic progress and ultimately to higher corporate profits.  Thus, as markets do well, investors become willing to pay more for a dollar of earnings as the Secular Bull market continues. 

Many of our Subscribers are conservative investors, and that is often appropriate given age and aversion to risk, HOWEVER if their investment timeframe is even just a few years they should be invested with at least a portion of their funds. And that portion is what this Letter addresses. We've gotten Sell signals near past market tops and Buys near past market bottoms, a record that should give peace of mind. Isn’t the low cost of this Letter cheap insurance?  Spread the work, we welcome new Subscribers!      

As can be seen in the chart below, courtesy of Doug Short (www.advisorperspectives.com), there have been five Secular Bull markets since 1877: 1877 to 1906, when the market gained an inflation adjusted 334%, 1921 to 1929, when the market gained an adjusted 396%, 1949 to 1968 with an adjusted gain of 413%, 1982 to 2000 with an adjusted gain of 666%, and the current one which began in 2009 with a gain to-date of 162% using monthly averages. The actual gain from low point to high has more than tripled, but whatever figure one uses you will see from the chart below that all previous Secular Bull markets have gained more than this current one to-date. That should speak to further gains.

Source: http://www.advisorperspectives.com/dshort/

So, with the stock market in a Cyclical Bull market which began in 2011, within a Secular Bull market since 2009, how best to proceed?  The market is certainly not cheap at these levels, and there is no telling how long the current Trump Honeymoon might last, but the following chart from Alger Funds becomes intriguing.  What this chart attempts to demonstrate is that large cap growth stocks historically have traded at a 40% price-to-earnings premium over large cap value stocks.  However, as investors have scrambled for yield they have turned to dividends from value stocks as bonds and other options have become unattractive.  As value stocks have been bid up, the relative premium of growth stocks have diminished to just 12%, a record low.  According to Alger Funds, whenever such a low premium has occurred growth stocks tend to begin to out-perform large cap value stocks.   The Exchange Traded Funds that we use in our “model”/real-money portfolio shown at the end of each Letter tends to be tilted toward growth, an attractive stance for Bull markets.

The DOW THEORY for the 21st Century:  This indicator is solidly GREEN (BUY) from the August 11th, 2016 Buy signal at 18,613.52. Each time the Transports establish new all-time highs along with the Industrials, as they have done recently, we view the market as “In the Clear”.  That is not to say, as others have interpreted, a new Dow Theory Buy signal, but it is a reconfirmation of the previous signal.  The Original DOW THEORY also remains firmly in a Buy from Sept 7th, 2016 at 18,526.14

Schannep ­↑TIMING ↓INDICATOR:  This Indicator also is solidly GREEN (BUY) and has been since the August-October of 2011 Buy signals, with an average entry level of 11,746.  With the markets hitting new highs on the Dow Industrials, the S&P500, and the NASDAQ, this momentum indicator is far from getting a Sell anytime soon. Of course, events can change, but December's level of consumer confidence reaching a 15-year high implies we have more to run in this Bull market.

The COMPOSITE Timing Indicator:   Both of our principal Indicators are showing GREEN (BUY) with one entry level from the Schannep Timing Indicator Buy at 11,746.50 from 2011 and the other half from the Dow Theory for the 21st Century Buy on August 11th at 18,613.52 for an average entry level of 15,180.  This is the Indicator we use for our real-money portfolio shown at the end of each Letter.  Even as our Indicators have been in Buy mode for some time you will see our most recent transactions as we use ‘first in, first out’ accounting to conform with IRS calculations.

The BOTTOM LINE:    From time to time we address targets for the stock market.  You can type the word “target” in the “Search” box in the upper-right corner of any page of our website to review all previous mentions. Incidentally, this works for any subject you want to see if we have addressed it in one or more of these Letters. In most cases, we remind you of Charles Dow’s admonition that “there is no known method of forecasting the extent or duration of a primary movement”.  The following chart shows targets A, B, and C from the Special Report on the Rule of Seven issued in December of 2014, and how the original target “C” was reaffirmed in our June 1st, 2016 Letter with its recent target “A”. You may remember that a similar target was confirmed by the “measured move’ as shown in our last LetterAnd now that those targets have been attained, does that mean it is a top and therefore we should sell?  No mention is given to that possibility in writings on the Rule of Seven or a measured move.  Targets can be tops but that is to be determined by other factors; at the time, they are determined they are an “objective” as to how far the market might go.  Once an objective/target is attained and then moves above it, the next target comes into play.  “In dynamic markets a fourth objective must be considered” according to Arthur Sklarew’s book, and that means a Target “D” from the Original calculations which would be up about another 50% from here. A more reasonable target would be a target “B” from the recent calculations which is shown below as 21,344 for the Dow Industrials.

The purpose of this Letter and our Indicators are to constantly look for a change in direction, and thus far nothing is pointing to such a change.  Although we are now fluctuating below the 20,000 milestone, that is entirely normal.  Enjoy the ride.

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 100% invested in approximately equal amounts into each of the following Exchange Traded Funds, as shown below:

This format shows the current status of our Portfolio with the most recent purchase dates and price levels of each investment, as well as the progress (or lack thereof).   For longer-term results see The Composite Timing Indicator which we use for timing in our Portfolio verses Buy and Hold.  FYI, over the last 63 years Buy & Hold has grown at a 10.6% annual rate whereas The Composite has grown at a 13.4% rate. The problem with showing this real-money Portfolio 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 DigestDowTheoryInvestments.comCXO Advisory Group and TimerTrac.com.  

This Letter concentrates on the big picture, the trend of the major stock market indexes 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.

 

For Subscriber service, please e-mail: Editor@TheDowTheory.com



Latest News

Mark Hulbert of Marketwatch noticed, as we did and told our subscribers in an email sent two days earlier! Read the article HERE.

 

 

Mark Hulbert of Marketwatch: One of the geniuses of the Dow Theory is that it counsels against overreacting to every cloud on that horizon. That’s why, as Jack Schannep, editor of TheDowTheory.com, reminds us, the “current trend is assumed to continue intact until it is proven otherwise.” Read the article HERE.

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