A Monthly Chart Presentation and Discussion Pulling Together the Disciplines of Economics, Fundamentals, Technical Analysis, and Quantitative Analysis Published by Raymond James & Associates
“Hoisted on one’s own petard” is a Shakespearean idiom from Hamlet meaning “To cause the bomb maker to be blown up with his own bomb.” A petard is a small bomb used for blowing up gates and walls when breaching fortifications. It is of French origin and dates back to the 16th century. The term means to fall foul of your own deceit, or fall into your own trap. We have recently been “Hoisted on our own petard” regarding Dow Theory and our December Low Indicator. For example, the D-J Industrial Average fell below its December low in February. Recall, Lucien Hooper told us about said indicator over lunch at Harry’s Bar & Grill at the American Stock Exchange in the early 1970’s. The verbal exchange went like this, as chronicled in a blog from Minyanville:
“When the Dow closes below its December closing low in the first quarter, it is frequently an excellent warning sign. Jeffrey D. Saut, Chief Investment Strategist at Raymond James, brought this to our attention a few years ago. The December Low Indicator was originated by Lucien Hooper, a Forbes columnist and Wall Street analyst back in the 1970’s. Hooper dismissed the importance of January and January’s first week as reliable indicators. He noted that the trend could be random or even manipulated during a holiday-shortened week. Instead, said Hooper, ‘Pay much more attention to the December low. If that low is violated during the first quarter of the New Year, watch out!’”
Plainly, we chose to ignore that December Low signal in February, even though our models “called” for the February Flop during the entire month of January, which we wrote about and suggested raising some cash (indeed hoisted). The second “hoist” came the week of April 8, 2018 when the D-J Transportation Average broke below its recent reaction closing low, thus confirming a similar breakdown by the D-J Industrials below their recent reaction low. That, ladies and gentlemen, is a Dow Theory “sell signal.” As often stated in our missives, Dow Theory is not always right, and it is subject to interpretation, it still is right more often than most indicators. Dow Theory is basically the relation to both the Industrial and the Transport averages. If the two averages act in harmony, with both reaching new highs or lows around the same period of time, the price action of each is said to be “confirming.” It is worth mentioning that the longer it takes for one average to confirm the other average, the less meaningful is the signal.
As stated, Dow Theory is not always right and is subject to interpretation. This is not the first time we have ignored a Dow Theory (DT) signal. We ignored the DT “sell signal” that was registered in the “flash crash” of May 2010 because we thought it to be an aberration. Again in “flash crash” 2, which occurred in August 2015, we ignored the signal because once again we thought it to be an aberration. Similarly, we are ignoring the recent DT “sell signal.” However, if the S&P 500 (SPX/2670.14) breaks below its February 9, 2018 intraday low of 2532.69, we will be forced to reevaluate that strategy. Whatever the outcome, we continue to think the secular bull market is alive and well with years left to run.