What To Do If This Correction Turns Into a Real Bear Market
Mr. Market is looking ahead as we start the new week. What does he see? Is that a fork in the road out there? And does the sign on the right fork read "Bull Market," while the left fork reads "Bear Market"? Yeah, it does look that way.
So which fork will Mr. Market take?
Last week, we may have gotten a hint. It came from those who follow the venerable and esteemed Dow Theory. A bear market sell signal may have been given. It came about like this:
Prior to last week, the Dow Industrial Average closed below its previous low. That constituted a "lower low," i.e., a closing price for the Average that sunk lower than the lowest previous price for the nasty correction that began in February. At that point, the waiting began. Would the Transports "confirm" what the Industrials did? If and when they did, we'd have (maybe) a bear market sell signal. The Transports had established a low for the correction, but then refused to confirm the Industrials second and lower low. Without that confirmation, there's no bear market sell signal.
Then it happened. On Monday of last week the Transports did close below their previous low. Voila! Bear market sell signal: Right? But wait; not so fast. It seems there's a possible glitch here. (Hence our hedging our remarks above with "may have," and "maybe.") The great Richard Russell, the most recent successor to the masters of Dow Theory (May he rest in peace) wrote about this confirmation pattern. And it would seem that a valid confirmation of a bear market sell signal requires both a longer period of time and a deeper drop in price. In that view, the Industrials correction from their bull market trend should have retraced 1/3rd to as much as 1/2 of the previous rise. It didn't. It's roughly 10% was too shallow. The correction also should take more than the few weeks we've experienced so far. So if Mr. Russell was correct in describing what distinguishes a true bear market signal from a mere secondary trend correction in an ongoing primary bull market, then the Transports lower low doesn't fit the bill.
And so we're left hanging.
Mr. Market, which fork will you take? He's not responding. Looks like he's holding his cards close to his chest. No matter how hard I crane my neck, I can't see a thing. Right or left, bull or bear, we need more evidence. For now, we stick with our current allocations.
Oh, that Mr. Market. Don't you think he enjoys keeping us on our toes?
So which fork will Mr. Market take?
Last week, we may have gotten a hint. It came from those who follow the venerable and esteemed Dow Theory. A bear market sell signal may have been given. It came about like this:
Prior to last week, the Dow Industrial Average closed below its previous low. That constituted a "lower low," i.e., a closing price for the Average that sunk lower than the lowest previous price for the nasty correction that began in February. At that point, the waiting began. Would the Transports "confirm" what the Industrials did? If and when they did, we'd have (maybe) a bear market sell signal. The Transports had established a low for the correction, but then refused to confirm the Industrials second and lower low. Without that confirmation, there's no bear market sell signal.
Then it happened. On Monday of last week the Transports did close below their previous low. Voila! Bear market sell signal: Right? But wait; not so fast. It seems there's a possible glitch here. (Hence our hedging our remarks above with "may have," and "maybe.") The great Richard Russell, the most recent successor to the masters of Dow Theory (May he rest in peace) wrote about this confirmation pattern. And it would seem that a valid confirmation of a bear market sell signal requires both a longer period of time and a deeper drop in price. In that view, the Industrials correction from their bull market trend should have retraced 1/3rd to as much as 1/2 of the previous rise. It didn't. It's roughly 10% was too shallow. The correction also should take more than the few weeks we've experienced so far. So if Mr. Russell was correct in describing what distinguishes a true bear market signal from a mere secondary trend correction in an ongoing primary bull market, then the Transports lower low doesn't fit the bill.
And so we're left hanging.
Mr. Market, which fork will you take? He's not responding. Looks like he's holding his cards close to his chest. No matter how hard I crane my neck, I can't see a thing. Right or left, bull or bear, we need more evidence. For now, we stick with our current allocations.
Oh, that Mr. Market. Don't you think he enjoys keeping us on our toes?
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