Will Dow Theory Get a Black Eye?

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The following is an excerpt from Richard Russell's Dow Theory Letters

"Never allow a person to tell you no who doesn't have the power to say yes." Eleanor Roosevelt

I have a dilemma. If the Dow continues to climb, and if it climbs above its record high of 14,165 and continues to climb from there, then the economic coast will probably be clear for a while, and I'll be pleased that any disaster will be put off for a while. But on the other hand, my warnings about the Transport non-confirmation will have been in vain, and Dow Theory will have received a black eye.

Oh well, you can't win 'em all. But I'll still stick with my strategy as explained on yesterday's site.

I treat investing as a learning experience. And based on the market action, I clearly blew it. Where did I go wrong? Here's what I've concluded and this is what I learned. The Transport non-confirmation was theoretical. Non-confirmations and the trouble they usually bring on are based on past case histories. In the past when one Average or the other failed to confirm, there was almost always trouble.

Then there's my PTI. My PTI is based on actual action. My PTI has been climbing steadily to new highs. At the time (when the Fed announced "QE to infinity") nothing was clear. The Fed had opened the monetary spigots wide. Would the Fed's action override the non-confirmation in the D-J Averages? I should have taken a chance that my rising PTI plus the Fed's all-out action "might" override the non-confirmation by the Transportation Average. I wrongly chose to abide by the threat of a non-confirmation.

Another problem was -- if I decided to align myself with my PTI, how large a position would I speculate on? Ah, here was another big problem. I wouldn't have had the nerve to put a large amount down on a bet that the market would ignore the non-confirmation. And I couldn't ask my subscribers to bet against a non-confirmation. So I decided that the safest and most honest thing to do was to skip a speculation on the market heading safely to the upside -- skip it for both me and my subscribers. If I wouldn't bet on the upside with my own money, then I couldn't tell my subscribers to do what I wouldn't do. So at my age, I'm still learning. And in this business, there are seldom clear and definite answers.


An interesting note: US investors have pulled $138 billion from ETFs and mutual funds (all of which invest in stocks) since March, 2009. Thus, it is probable that retail (small) investors are not the ones who have been driving the stock market higher. To take the other side of the coin, I believe it's the hedge funds and traders who have been driving the Dow higher. This rally has been a godsend for the fund managers, who have had a hard time showing any profits this year.

In the meantime, the market has a flagrant non-confirmation hanging over its head. My instinct is to stay on the sidelines and watch the show. And I tell myself, even if I had "played" this rally, I would have played it conservatively with a limited amount of capital. And you can't make money unless you go into the market whole hog or in a big way.

I ask myself, am I more interested in avoiding a loss or in making trading gains? And the truth -- I'm more interested in avoiding losses. If I lose $5,000 in a trade, then I have to make $10,000 after taxes to make up for my $5,000 loss. So the mathematics of taking a loss is brutal.

With the Fed and the European Central Bank both spewing forth money, how is GDOW, the "Global Dow" doing? GDOW, daily, is shown below. After declining on four out of five sessions, GDOW surged higher today, and I am most interested to see whether GDOW can reach its high of 1997.61. In the meantime all is well.

gdow 16 oct 2012

And tonight is session two of the great presidential debate. I am not alone, as you can see from the letter below from one of my subscribers --

Mr. Russell,

My father was a subscriber of yours since the early 1960's up until his passing about five years ago. I have been a subscriber since then and look forward to your writing each day.

I especially enjoyed your discussion today of how Obama, deep down, wants out of the presidency. I have been telling people around me this same story for a while now and you are the first person who has confirmed what I think.

When he gave his speech at the UN about a month or so ago, when talking about the Iranian nuclear situation and how there is a finite amount of time for diplomacy and the military option is still out there, the sound of his voice and look in his eye was that he was just plain scared.

The Presidency is basically the hardest job in the world and he is in over his head and he knows it. He knows it will be more than he can handle if things get really hot in the Middle East, which is a good possibility some time during the next four years.


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