Category Archives: Manuel Blay

Dow Theory: Quality v. Quantity

Posted on July 29, 2016 by | Leave a comment

Intro

There is some need to explain how and why we have chosen to do an assessment of Manuel Blay’s work on Dow Theory published on SeekingAlpha.com. Below is a brief summary of how we went from never commenting about Manuel Blay’s work to “suddenly” bringing to light data that questions his work.

How It All Began

On January 7, 2013, Manuel Blay wrote an article titled “Dow Theory Special Issue: Assessing The Current Primary Bull Market Signal”.  In that article, Mr. Blay gave a breakdown of a recent call for a “primary trend bull market signal” according to the dictates of Dow Theory.  In summary, Mr. Blay said the following:

“As with any timing device, the Dow Theory ‘detects’ the existence of a new bull or bear market with some lag. No timing system is able in ‘real time’ to spot the emergence of a new trend. However, as I have previously written in this Dow Theory blog, the Dow Theory does a good job at signaling new bull and bear markets in a timely fashion. As I wrote in my post ‘Revisiting the 1987 crash’, which you can find here, ‘the Dow Theory tends to do a remarkable job at getting investors out of investments on a timely manner’. By the same token, the Dow Theory also excels at signaling new bull markets close enough to the bottom.”

In the comment section of the same January 7, 2013 article, we left a response that addressed several issues on the Dow Theory analysis provided by Mr. Blay. We highlighted the following problems:

  • the failure of short duration of primary trend changes
  • conflicting calls of when signals were given
  • Jack Schannep’s performance using short duration Dow Theory analysis

Mr. Blay’s response was a detailed article titled “Dow Theory Special Issue: An Answer To The New Low Observer (NLO)” dated January 12, 2013.  From that point in time, we could not offer an acceptable rebuttal without appropriate data to support our initial claim that such frequent short-term changes in the primary trend require additional study as it is not consistent with Dow Theory and should result in negative performance results.

The Collection of Data and Findings

This brings us to our analysis  in a July 13, 2016 article titled “Dow Theory, This is Not” which took data from January 24, 2013 to the present.  We felt it was only fair to take all market calls from the date that we questioned the “style” and duration of Dow Theory primary trend calls and examined the actual results based on the work of Manuel Blay.

The following is a reposting of the assessment of Mr. Blay’s work (in chronological order) from January 7, 2013 to the present.  The font that is in green or bold is a profitable transaction and the red or unbolded font is an unprofitable transaction, if a transaction were entered into based on the published date of the change in the Dow Theory Primary Trend. 

  1. Bear Market: –31.54% for GDX
  2. Bear Market: –26.08% for SIL
  3. Bull Market: –24.91% for GDX
  4. Bull Market: –26.95% for SIL
  5. Bull Market: –5.24% for HAO
  6. Bear Market: +7.46% for DJT
  7. Bear Market : +6.21% for DIA
  8. Bear Market: +7.00 for SPY
  9. Bull Market:  -9% for GDX
  10. Bull Market: –23% for SIL
  11. Bull Market: –11.30% for GLD
  12. Bull Market: –16.01% for SLV
  13. Bear Market: +8% for DIA
  14. Bear Market: +7% for SPY
  15. Bear Market: +8% for DJT
  16. Bear Market: +4% for  HAO
  17. Bull Market: +2% for  DIA
  18. Bull Market: –9% for GLD
  19. Bull Market: –11% for SLV
  20. Bear Market: +17% for GLD
  21. Bear Market:+10% for SLV
  22. Bear Market: +2.60% for DIA
  23. Bear Market: +52% for GDX
  24. Bear Market: +58% for SIL
  25. Bull Market: –4.39% for DIA

 Our Conclusion

Thus far, the data (source citations found at end of  July 13, 2016) matched our January 2013 thesis that short duration primary trend calls based on Dow Theory would result in greater than necessary negative performance results.  Not only has there been overwhelming negative results from the Dow Theory analysis the frequency of the transactions alone result in unnecessary transaction costs that add to the negative performance.

It could be said that our assessment is selective, whereby we have chosen to ignore calls made prior to January 2013. However, we only used data from the date that we questioned the work. Another criticism is that the exact date of the change in the “primary trend” did not occur at the exact date of the published work or commentary. We stand corrected on the performance numbers if the published start and published end dates are incorrect.  It could be said that we have an axe to grind with Mr. Blay.  We don’t.

Our Hope

So what is our point? Why bother someone else about their work on a topic that is a theory, at best?  Isn’t it possible to be wrong and still enjoy the process?  Isn’t is a low blow to tarnish the hard work of another? 

The point, as we see it, is to advance the topic of Dow Theory.  As we’ve said in the past, Dow Theory is often right about the market it is only the interpretation that is incorrect.  We are not excluded from this dilemma as we have been wrong on many occasions in the past.  However, when there is a clear learning opportunity, why should we stand on formality when the data is staring us in the face?  At least, that is how we see it.

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Posted in Dow Theory, Manuel Blay

Dow Theory, This Is Not

Posted on July 13, 2016 by | 2 comments

Dow Theory is only a theory.  Therefore, it is necessary to take all indications with a tremendous grain of salt.  However, it has been our endeavor to determine the qualitative nature of the work as presented by anyone who writes on the topic.  One individual that we’ve found of interest is Manuel Blay on SeekingAlpha.com.  Mr. Blay provides commentary on elements of Dow Theory and in this piece we’d like to examine the performance of the market calls associated with the concept of Dow Theory.

How do we arrive at performance data?  We take the date that a primary trend bull/bear market is indicated and looked for the date for when the indicated stock, ETF or index next received a change to the primary trend bear/bull market indication.  This seems the best way to gauge the concept of performance even though we understand that there are nuances to actual start and end dates.  The very end of this article has the internet links and dates associated with the collection of performance data.

Anyone interested in Dow Theory should make it their goal to identify, whenever possible, what the primary trend of the stock market is based on the movements of the Dow Jones Industrial Average and Dow Jones Transportation Average.  The goal of identifying the primary trend is to maximize profits while avoiding as much loss as possible.  In the case of Mr. Blay, he has applied Dow Theory to ETFs and individual stocks as well as the usual stock market indexes.

For each bullet point below, we only took the date of the call for a “primary bear market” or “primary bull market” and measured the respective stock, ETF, or index for percentage change.  If it was a bear market and the percentage change was negative from the primary bear market signal to the subsequent primary bull market signal then, on the whole, we’d consider that Dow Theory met expectations as a tool for profitable investing (green font).

Alternatively, if it was a bear market and the percentage change was positive from the primary bear market signal to the subsequent primary bull market signal then, on the whole, we’d consider that Dow Theory did not meet expectations (red font).

There may be errors in our ability to identify any subsequent bull or bear market article, however, below is our best effort to identify any change to the primary trend based on the work of Manuel Blay (We’d give a margin of error +/-1% to any estimate.):

  1. Bear Market: –31.54% for GDX
  2. Bear Market: –26.08% for SIL
  3. Bull Market: –24.91% for GDX
  4. Bull Market: –26.95% for SIL
  5. Bull Market: –5.24% for HAO
  6. Bear Market: +7.46% for DJT
  7. Bear Market : +6.21% for DIA
  8. Bear Market: +7.00 for SPY
  9. Bull Market:  -9% for GDX
  10. Bull Market: –23% for SIL
  11. Bull Market: –11.30% for GLD
  12. Bull Market: –16.01% for SLV
  13. Bear Market: +8% for DIA
  14. Bear Market: +7% for SPY
  15. Bear Market: +8% for DJT
  16. Bear Market: +4% for  HAO
  17. Bull Market: +2% for  DIA
  18. Bull Market: –9% for GLD
  19. Bull Market: –11% for SLV
  20. Bear Market: +17% for GLD
  21. Bear Market:+10% for SLV
  22. Bear Market: +2.60% for DIA
  23. Bear Market: +52% for GDX
  24. Bear Market: +58% for SIL
  25. Bull Market: –4.39% for DIA

It could be argued that the date that the primary trend changed was not the same as the publish date of the article.  However, as a person interested in Dow Theory, you probably could only act on what is published and not the literal date that the market made a presumed bull or bear market primary trend change.

Among all 25 instances of a bull or bear market primary trend indication, only three (#1, #2 and #17) had performance that was expected of Dow Theory.  All of which leads to the obvious question, why would Dow Theory provide such disastrous results when the whole point of Dow Theory is to take advantage of primary trends in the stock market?

Primary Trend Bull Markets

Our view on the lack of performance at the conclusion of a primary trend bull market is best stated by Charles H. Dow himself when he said:

"We have frequently demonstrated that the stock market, while full of short fluctuations [also known as secondary reactions], has a continuing main movement, which often runs in one direction for three or four years at a time. (source: Dow, Charles H. Review and Outlook. Wall Street Journal. September 13, 1900)."

We believe that the primary trend indications provided by Mr. Blay are not long enough to be meaningful and advantageous.  The lone exception, in terms of time, HAO from September 13, 2013 to August 21, 2015, still garnered a performance that was counter to the goal of Dow Theory (primary trend bull market but lost –5.24%).

When a signal is given in a period that is less than a year for a primary trend bull market, we would reassess the current and previous interpretation to determine where we went wrong, because clearly, calling a full cycle of a (bull-bear-bull) primary trend WITH negative returns does not augur well for Dow Theory analysis.  If the (primary trend bull market) is less than a year then something is wrong.

Primary Trend Bear Markets

Alternatively, it is known that primary trend bear market last ⅓ to ½ as long as the preceding bull market.  Therefore, we cannot hold primary trend bear market signals to the same time criteria as primary trend bull markets.  A collapse in the market (a la 1987) resulted in a bear market to bull market signal in less than 5 months.

Do you short bear market for additional gains?  If the performance data for Mr. Blay is any indication, we wouldn’t recommend short selling primary trend bear markets.  Only in the very first case (#1) were we able to see a bear market with declines by the end of the bear market period.

Dow Theory in Three Steps

What does a Dow Theory primary trend bull or bear market look like, in theory?

image

Again, this is a theoretical look at the way primary trends should transpire.  Anyone who plays the “Dow Theory” game will need to accept some missed opportunities like the very top and very bottom of a market move.  Notice that  each primary trend indication occurs after a peak or trough.  This is the point at which a low or peak has been reached, is then retested but not violated, then continues in opposition to the previous primary trend.

What does the above primary trend chart mean?  It means that as an investor who attempts to apply Dow Theory, you should see some investment gain no matter which market you’re in.  While the amount of the gains will vary, the net result should be positive percentage change in a primary trend bull market and negative percentage change (for short sellers) in a primary trend bear market.

Mr. Blay’s performance of 12% correlation with the primary trend suggests that either Dow Theory doesn’t work, that the analysis was incorrect or that Dow Theory AND the analysis don’t work.  We’d argue in defense of Dow Theory being reasonably accurate and the interpretation being incorrect in this instance.  An investor cannot be faced with 88% of calls not correlating with the primary trend.

A Line or Trading Range

Missing from the above chart is the period of time that the market wallows in a trading range. The concept of trading range or “line” does get addressed by Charles Dow and is best described by William Peter Hamilton, fourth editor of the Wall Street Journal, as indicated in the following commentary:

“Such a narrow fluctuation, to the experienced student of the averages, may be as significant as a sharp movement in either direction.” Rhea, Robert. The Dow Theory. Barron’s (1932). page 82.

Hamilton suggests that a trading range is equal to or greater than a parabolic move up or market crash.  The current market environment has provided us with what we believe is a trading range which began in February 2014.

image

With a range of 6.70% between the middle of the line and the top/bottom, any breakout above or below the range should result in exceptional change in the index.  However, these processes are a function of market sentiment which generally plays out over time.  A line can last for quite some time and Dow Theory has been clear in saying that the previous trend is still in effect until the line is broken.  (the Dow Jones Industrial Average isn’t the only element necessary to achieve a Dow Theory primary trend change.)

Conclusion

It is very clear that Mr. Blay is dedicated to the work he does in Dow Theory.  He writes on the topic almost every other day.  However, Dow Theory moves at a glacial pace and requires stepping away from the topic.  None of the great Dow Theorists (Russell, Schaefer, Omerod, Fritz, Shumate, Rhea, Hamilton, Nelson, and Charles H. Dow) carried an account of market action with primary trend changes with the frequency that has been displayed by Mr. Blay.

There is no way that a person could be applying Dow Theory and come away with, at least on paper, results that are the exact opposite of each call in the change of the primary trend.  As shown in the cycle chart above, there is a theoretical sweet spot where a gain will be made if you go long in a primary trend bull market and go short in a primary trend bear market.  Yet, in neither case, except in the three out of 25 instances cited above, was it possible to demonstrate gains.

For anyone interested in Dow Theory, when you see primary trend changes at such a high frequency you have to be very critical of the work.  When you see the above performance that is attributed to Dow Theory analysis, then you should know that you’re not witness to Dow Theory at all.

References:

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Posted in Dow Theory, Dow Theory Bull Market indication, Manuel Blay