Charles Dow is known as the father of technical analysis and his Dow Theory has instilled in us all the relevance and importance of market price and volume action to the analysis of financial markets and the allocation of investment portfolios and trading accounts. But perhaps its high time Dow Theory was modernized and brought into the 21st Century of trading and investing.
As the creators Stock Trader’s Almanac and champions of market cycles, patterns and seasonality we have had to change with the times over our past 52 years on The Street. Our market probability calendar has changed dramatically over the years, most notably by the mid-month spike. We’ve built on the January Barometer, First Five Days and Santa Claus Rally indicators by combing them into the January Indicator Trifecta. Adding MACD-timing to the Best Six Months has also been a boon. There is more…
The concept of Dow Theory is still quite sound: technical confirmation across correlated industries or major segments of the market economy. We are big fans of confirmation. We are especially fond of seasonal or cyclical trading patterns that are confirmed over multiple time frames: long, short and intermediate.
With all the recent near term bearish sentiment and the chatter about the big Dow Theory sell signal since the Dow Jones Transportation Average posted a confirming new low with thought it prudent to examine this closer.
Referring the “Gross Output by Industry” data as of 2018 Q2 on the St. Louis Fed’s excellent data base you can see that the services industry is about two thirds (65%) of the U.S. economic output while “goods-producing” industries are about 25% of the economy. (Government accounts for the rest.) The “transportation and warehousing” industry account for a mere 3.4% and “manufacturing” is 13.7%.
So how can such a small portion of the current economy still be deemed a leading indicator? Utilities are a paltry 1.4% of the economy, but at least everyone and everything uses energy. Think back to early 2016 when we had our last Dow Theory sell signal. Industrials and Transports made new lows but not Utilities. Perhaps confirmation from Healthcare or Financials should be considered. In any event, it’s probably time to revisit this century-old indicator.
Stock Portfolio & Free Lunch Update
Over the last six weeks since last update, S&P 500 declined 1.3% through yesterday’s close. Russell 2000 was 0.04% lower over the same time frame. Overall, the entire Stock Portfolio jumped 7.3% excluding any dividends or trading fees. The small-cap portion of the portfolio was responsible for all the gains in the overall portfolio, leaping 14.6% due to the success of our Free Lunch basket. Mid-caps slipped a modest 1.8%, but also benefited from some exposure to Free Lunch positions. Large-caps performed the worst, off 6.9%. There were no large-cap positions included in Free Lunch.
Our Free Lunch strategy is a short-term trade using a different set of guidelines than the rest of the
Almanac Investor Stock Portfolio. Those guidelines were provided
with the portfolio and reiterated in the
first email Alert of the year. We do not anticipate holding Free Lunch positions much longer and will likely have exited most of them by the time mid-February arrives.
This year’s Free Lunch has outperformed the NYSE Comp and NASDAQ by a wide margin since the open on December 24. The entire basket, including closed positions, through yesterday’s close was up an average 25.5% compared to gains of 7.9% for NYSE Comp and 11.1% for NASDAQ. NYSE-listed positions have enjoyed the largest gains, up 34.0% on average. NASDAQ positions have also done well, up 21.8%.
Free Lunch positions can be identified in the portfolio based upon a “Presented Date” of December 24, 2018 and are also shaded in grey in the table below. Remaining Free Lunch positions are on Hold. We will continue to employ the suggested 8% trailing stop loss, updated daily using each position’s respective close. It appears that as long as the broader market remains firm, Free Lunch positions could also continue to perform.
Outside of the Free Lunch basket defensive positions established in June of last year did weaken with the broader market in the second half of December of last year but have proven to be somewhat resilient as many are still holding onto respectable double-digit gains. Church & Dwight (CHD) is now the best performing defensive position from the June 14, 2018 basket. At yesterday’s close CHD was up 35.5%. The former leader, McCormick & Company (MKC) has slipped into the number two spot with a 31.7% gain.
Regrettably, November’s stock basket proved less than timely and many of the positions in that basket have been stopped out. Brooks Automation (BRKS), Kemper Corp (KMPR), US Ecology (ECOL), CDW Corp (CDW) and Plains All American (PAA) were closed out at various times over the last six weeks as they closed below their respective stop losses. First Busey Corp (BUSE), the second longest holding in the portfolio, was also closed out of the portfolio in mid-December.
All positions in the portfolio are on Hold. Should market volatility subside we will consider unwinding remaining defensive positions and entering new long positions. Please see portfolio table below for Current Advice and Stop Losses.