On November 3rd, 2011 marking the 160th Birthday celebration of Charles Dow at the Museum of American Finance, the Market Technicians Association and Educational Foundation invited Jack Schannep, Editor-In-Chief of The Schannep Timing Indicator & TheDowTheory.com Newsletter, to speak on his contribution to the Evolution of The Dow Theory. Having been quoted as “one of the best performing market timing systems” by Market Watch’s Mark Hulbert and ranked first amongst 60 currently active market timing experts by CXO Advisory Group, Schannep explained the evolutionary nature of the study of the Dow Theory. Including his own contributions to the fundamentals of the market timing indicator he was able to show that a 14.07% annualized return would have been obtained versus the 11.87% realized from the traditional Dow Theory. Both, of course, beat the Buy and Hold return of 10.44% since 1953.
Schannep’s argument, made popular through both his book, The Dow Theory For The 21st century, and TheDowTheory. Com’s newsletter, is that Robert Rhea, one of the initial interpreters of Charles Dow’s writings, was correct in saying that “the usefulness of the Dow Theory improves with age.” That is, the fundamentals of the theory stay the same, however, with a faster market and more data available, there are certain advantages we have 80 years later. To find out how you can improve your investment results and find some guidance and “sanity during these insane times” as one of our readers put it, please read the text of the speech for yourself and subscribe to TheDowTheory.com newsletter today!
Presentation at the 160th Birthday Celebration of Charles Dow at the Museum of American Finance in New York City
sponsored by the Market Technicians Association, Dow Jones Indexes, and the MTA Educational Foundation on November 3rd, 2011
by Jack Schannep, Editor,
Schannep Timing Indicator & TheDowTheory.com
Author, Dow Theory for the 21st Century
Thank you Phil Roth for that nice introduction, and especially for inviting me to be a part of today’s program; it is a real honor to be able to participate in this celebration of Charles Dow’s 160th birthday. My daughter asked me why I had been invited and I told her ‘because Charles couldn’t make it’, but we'll hear from him shortly. I started my book with this classic quote from Charles Dow and think it should be recited again as it is the very essence of Dow’s Theory: “A person watching the tide coming in and who wishes to know the exact spot which marks the high tide, sets a stick in the sand at the points reached by the incoming waves until the stick reaches a position where the waves do not come up to it, and finally recede enough to show that the tide has turned. This method holds good in watching and determining the flood tide of the stock market”. As you know from Robert Colby’s previous presentation, the record of the traditional Dow Theory has been very impressive. It has become the benchmark against which all other market timing has had to compete. Many have tried to improve on the Dow Theory’s results, and I am but one of the latest, and today I’ll briefly describe my efforts to add value to the original Dow Theory for the 21st Century. Robert Rhea in his The Dow Theory wrote in 1932 the “the usefulness of the Dow Theory improves with age. Certainly a more comprehensive study of the subject is possible with a 35-year record before us than when Dow worked with the figures of only a few years, while those who use it 20 years from now will have a greater advantage than we now enjoy.” And now we’re 80 years later, so we have an even greater advantage.
In my book Dow Theory for the 21st Century, Technical Indicators for Improving Your Investment Results, I illustrate several improvementswithin the framework of Charles Dow’s original thoughts and premises that would have increased the performance of the traditional "Dow's Theory" over the last 50+ years. The first improvement I added was to begin buying during “capitulation”, a word Charles Dow never utteredbut he clearly alluded to with his discussion of the final phase of bear markets when he described “distress selling of sound securities, regardless of their value…..” Our previous speaker, Robert Colby has described it as the “Disgust” phase. Robert Rhea in his 1932 classic book, The Dow Theory, described it as “a semi-panic collapse (and) it is wise to cover short position and even perhaps make commitments for long account”. There have only been 15 occasions over the past 50+ years when Capitulation, as we measure and identify it, has occurred and each time a Dow Theory Buy signal has followed, about 4 months later, on average. I say “we” here because my son Bart is co-editor with me on our Market Letter, the “Schannep Timing Indicator & TheDowTheory.com Newsletter”. And, if I may brag, Bart was chosen as one of the 10 Outstanding Advisors in 2010 by Registered Rep Magazine, so I feel the future of our Newsletter will be in good hands. Meanwhile, back to capitulation: One half of those 15 times occurred within a day or two of the Bear market lows – four were on THE day of the lows. The average was 14 days and 4.6% above the lows; the median was within 3 days and 2% of the lows.
As market technicians I suspect you’ll be interested in the details and origin of my Capitulation Indicator. When I was a young broker at Dean Witter in the 1960’s they formed a department called COMPARE (COMPuter Assistance to Research). One of the calculations they made back then, and which I have kept up to date since that department went kaput years ago, has to do with a short-term oscillator which measures the percent of divergence between the three major stock market indices (DJIA, S&P500, and the NYSE Composite), and their time-weighted moving averages. When all three indices are simultaneously in double digits below those respective moving averages, we have Capitulation. Those 15 dates, market levels, and the subsequent returns over various timeframes are shown below. You’ll see that the end of the last 8 bear markets were signaled, and 3 of the 7 before that. Some bear markets end, however, with a whimper, hence no Capitulation indication.
This speech was reprinted with permission from TheDowTheory.com