So far, our Dow Theory analysis of the market action on June 21, 2013 (found here) has been wrong. At the time, we said the following:
“In this case, the fact that both the Industrials and Transports have fallen below the June 5, 2013 lows means that, according to Dow Theory, we are now in a bear market. Violation of the June 5th lows occurred on June 20, 2013 for the Industrials and June 21, 2013 for the Transports.”
Since June 21st, as indicated in the chart below, the Dow Industrials and Dow Transports have managed to achieve successive new highs in early August 2013 and mid-September 2013. In addition, the call for a bear market came slightly before the bottom in the market in late June 2013.
Since our bear market interpretation of Dow Theory on June 21, 2013, the Dow Jones Industrial Average has increased +3.10% while the Dow Jones Transportation Average has gained +7.97%, so far. We can only view the current market activity as a valuable lesson, even as our own partnership account (found here) has managed to match the performance of the S&P 500 with more than 30% of the portfolio in cash, at the end of August 2013.
This conflict in our interpretation of Dow Theory brings to mind a question about when to sell stocks based on Dow Theory:
“If the Dow appears to hit a peak and begins dropping (Dow Theory bear market indication), is the indicated action to sell your stocks and put your investments into cash until the Coppock curve or other indicators show the market has hit a bottom?”
The April 13, 2010 article (found here) is well worth reviewing as it is our most detailed answer of how we treat Dow Theory bull and bear market indications. In short, we use Dow Theory indications as asset allocation signals rather than strict buy/sell signals.
At this time, all we can point to as a cautionary note from a Dow Theory perspective is the fact that there is a potential for a double-top in both indexes. Double tops often indicate that the market will experience significant resistance to moving higher. However, once this level is breached, the market could have a strong move to the upside. Our tendency is to err on the side of caution and consider the worst case scenario of downside risk.
Finally, what is the punch line to the current Dow Theory? First, we are still in a bull market. Second, the bull market will be confirmed if the Industrials and Transports exceed their respective 2013 all-time highs. Third, the initial stages of a bear market would be signaled if both indexes decline below the late-August, early-September lows. Fourth, a bear market would be confirmed if both indexes decline below the late June lows.