Complete Record of ‘Dow Theory for the 21st Century’

The “rules” for signals as described in my book, the “Dow Theory for the 21st Century“, date from 2008 with a half-dozen “tweaks”/updates from 2008 through 2020, shown below, were not all in place throughout the record period.  Most signals however, over the last 25 years were followed in real-time and the record below incorporates all current rules to show what performance would have been attained had they been followed precisely. The rules can be summarized as follows:

1) A secondary reaction that interrupts the primary trend must satisfy specific criteria as to extent and duration. The highest-yet point reached in the bounce from a falling market, or a lowest-yet point reached in the pullback from a rising market, must occur at least 10 calendar days after the previous minimum or maximum on 2 of the 3 indexes (Dow Jones Industrials, Transports, S&P500), with at least 8 trading days later as the average of the three. This definition was changed from “two weeks” in 2010. The timeframe was corrected to one week rather than no time requirement in 2008 for the first bounce following capitulation, by which we mean to be 1/2 the normal, or 5 trading days confirmed by the S&P500 (SPX) and one of either the Dow Industrials (DJIA) or the Dow Transports (DJT).  To qualify as a secondary reaction, the price change must be at least 3% on the S&P500 index and one of the other two indexes.  Since 1953 the average such decline has been 6.7% for each of the Dow Industrials and the S&P500, and 9% for the Dow Transports.  When the down market is punctuated by a capitulation, that is the time to start to buy with a 50% commitment, a second capitulation would be the time to add another 25%.

2) In a rising market that secondary reaction will be a pullback, after which a bounce must rise at least 3% on the S&P500 and at least one of the Dow Jones Industrials or the Dow Transports (clarified in 2020), and take at least 2 trading days (eliminates ‘one-day wonders’, the possibility of ‘flash crashes’, and usually occurs only after a capitulation and was clarified in 2010).

3) In a falling market the secondary reaction will be a bounce, after which a pullback must drop at least 3% on the S&P500 and at least one of the Dow Jones Industrials or the Dow Transports, and last at least 2 trading days.  If capitulation had previously occurred then the pullback would be the time to add 25%.

4) After that, whenever either the Industrials or Transports confirm and join the S&P500 when they fall below the previous pullback lows from a rising market, or rise above the bounce highs from a downtrending market, that qualifies as a signal; Sell in the case of newer lows (the time to go to a full cash position), or a Buy signal in the case of newer highs (the time to get fully invested).  After Buy signals, whenever ALL three indexes close above any previous highs of a bull market that would be an “in the clear” reaffirmation, or below the lows of a bear market, those would be continuation indications. If ALL three were not in agreement that would indicate a divergence and more time would be required for clarification.

5) In the event the market reverses after a Sell signal, and reaches yet higher pre-Sell bounce highs on ALL three indexes, or if the highs of a successfully completed secondary reaction are exceeded by ALL three indexes, a reversal of the signal is called for and a Buy signal is given.  In the case of a Sell signal at or following Capitulation, if a new bull market had not yet met our definition of a 19% increase in the DJIA and the S&P500, then return to 50% invested if one Capitulation had occurred or to 75% if there had been a second.
In the event the market reverses after a Buy signal, and reaches yet lower pre-Buy pullback lows on ALL three indexes, or if the lows of a successfully completed secondary reaction are broached by ALL three indexes, a reversal of the signal is called for and a Sell signal is given (clarified in 2020) .  In the case of a Buy signal following Capitulation, then a breaking of the Bear market lows by ALL three indexes is necessary for a Sell signal

6). Dates shown are dates of signals.  [Here is a tweak for possibly getting better execution prices (but not a part of the record shown): ‘Action’ dates can be days later, usually in the case of 3% bounces/setbacks. The most likely time for this to prove beneficial is in the case of the 3% pullback when the market is coming your way (down), where you would ‘wait and watch’ for additional intervening ‘obvious’ DOWN days, and on the first ‘obvious’ UP day execute the Buy order (may require waiting until the last minutes of the trading day).  Does NOT apply to Capitulation Buys. For buy signals the opposite procedure.]

      The invested position is show below as 25% (buying up to that amount), 50%, 75% or 100% (totally invested, or 100% sold out in the case of a Sell).  The 25% partial Buys occur at the time of a second capitulation, or a 3% pullback by the S&P500 index (after a qualifying secondary reaction bounce, and only following capitulation).  The Buy or Sell goes to 100%  when step 3) or 4) above is complete, or in the event the definition of a Bull or Bear market is met (a 19% advance on BOTH the Dow Jones Industrial Average and the S&P500 Index in the case of a Bull market, or a 16% decline on BOTH in the case of a Bear market).  There are other configurations for such signals as spelled out in my book as well as in the free area of this website but the above is the most common way they develop.
All of the following signals involve the S&P500 to finalize the signal.  Results shown include dividends received and interest earned on 3 month Treasuries as received quarterly. Market levels are for the Dow Jones Industrial Average. When Bull/Bear markets become “official” both the DJIA and the S&P500 levels are shown.

NOTE: The computations necessary to determine capitulation 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, some of the ‘rules’ were only spelled out in the book published in 2008 and some recent clarifications were made since the book between 2010 and 2021, therefore this record is partly from backtesting. Some signals were not acted on at the time (most notably Sell on 2/25/20, recognized but delayed execution) or acted on in error (Sell on 4/9/18 by deferring to the original Dow Theory). The trades taken in real-time which have been documented are for the most part the same as shown below. Following the current rules explicitly throughout the time shown would have resulted in the record shown.

3% Pullback* is the date that the S&P500 index first drops 3% even as the total Pullback may well go further.
NOTE: This is a 13.58% compound annual increase from 12/31/53 to 12/31/23 (70 years). Buy & Hold grew at a 10.74% rate.

Q&A on the Dow Theory for the 21st Century

RESULTS FOLLOWING BUY SIGNALS:

*Average entry level considering early buying due to Capitulation, including any partial and reversed signals **Sell occurred during the period

RESULTS FOLLOWING SELL SIGNALS: