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Dow Theory Update For Jan 25: Stocks Continue Making Higher Highs

|Includes: DIA, GDX, GLD, IYT, SIL, SLV, SPDR S&P 500 Trust ETF (SPY)

Precious metal's meltdown continues unabated.

In Barry Ritholz blog, we can find an interesting post concerning the average duration of bull markets. You can find this interesting post here:

Even though the way the duration of such bull markets has not been defined according to the Dow Theory (the average duration stands at ca. 3.8 years whereas for the "classical" Dow Theory stands at ca. 2 years and for the Schannep's flavor at ca. 1 year), it gives us a good perspective in order to know where we currently stand. According to the post the average duration of bull markets is 3.8 years and the current bull market started in 2009 being right now ca. 3.8 years old.

Thus, if we measure the current bull market from 2009, then its duration is just "average." Thus, it is neither a young one, nor too old. So I'd say that this implies that the longer-term trend is neutral as far as the current Dow Theory bull market signal is concerned. In other words, if the current bull market as measured from the 2009 lows were in its 5th year, then I'd say that it is very likely that further price advances will face statistical headwind. On the other hand, if we were in 2010, then I'd say that the odds favor additional advances as the bull market is very young. Being the longer-term bull market just "average," I'd say that the odds are neutral. The current primary bull market signal is not likely to face either head or tailwind.

In any instance, I don't favor cherry-picking primary bull market buy or sell signals. The Dow Theory is too strong to argue against it. However, it is always good to have a bigger perspective.

The SPY, Industrials and Transports closed up once again. Current price action is a testimony of the adage "don't fight the trend." Markets can stay overbought longer than one thinks.

Furthermore, the strength of the market confirms the wisdom of taking all Dow Theory signals as soon as possible. While ca. 2/3 of the Dow Theory primary bull markets signals are followed by a movement contrary to the primary trend (which would allow for an entry at a more advantageous price), 1/3 of such signals don't deign to offer the investor even a modest pullback. While I lack more exact figures, I'd say that the gains made 2/3 of the time by waiting for a small pullback are amply lost when missing the primary bull market signal because the market relentlessly continued to go up.

If we think of it, it is normal that 2/3 of primary bull market signals tend to be followed by some kind of pullback. After all, for a primary bull market signal to exist it is necessary that prices break above prior levels. This implies in most instances an overbought market, which is prone to pullbacks.

However, an overbought condition doesn't always translate into a correction. Thus, in ca. 1/3 of cases the market instead of pulling back continues its upward movement.

Current price action is one of those instances where, in spite of severe overbought readings, the market continues going up.

In this fashion, the market has rallied 2.83% since January 2, when the primary bull market was signaled as per our Dow Theory "flavor." You can read the details of such a primary bull market signal here.

The primary and secondary trend remains bullish.

Volume today was higher than yesterday's, which makes it a bearish volume day since higher prices were not confirmed by expanding volume. Little by little the short term pattern of volume is becoming bearish.

Gold (NYSEARCA:GLD) and silver (NYSEARCA:SLV) closed down again. The primary and secondary trend remains bearish.

SIL and GDX (the gold and silver miners ETF) continue making lower lows. The primary and secondary trend is bearish. If I can get some free time (always in short supply) I'll try to write something about the recent primary bear market signal in this Dow Theory blog.


The Dow Theorist