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Dow Theory for the 21st Century Schannep Timing Indicator COMPOSITE Indicator

Dow Jones: 33,874.85 We Call Them Charts: S&P 500: 4,181.17 NYSE: 16,219.33

Overview: Yes, I know we show a lot of charts/graphs in these Letters, but we are believers that a picture is worth a thousand words, and we’d like to keep our verbiage to a minimum yet be meaningful. Our first chart (below) is an update using the S&P500 rather than the Dow Jones Industrials which was shown in our January 1st, 2017 Letter. The gist of it was that markets usually hesitate and/or return to “round numbers”, specifically the 1,000-point market levels. For the Dow Industrials from the 1,000 level, updated through the 34,000 level, there were only two levels (5,000 and 32,000) that were passed through without ever looking back. Will that be the case for the S&P500 at the 4,000 level? So far, yes. It is higher by 4.5%, but if it doesn’t drop back sooner or later that will be rare, although not unheard of. In the case of the Dow Industrials, other than the two instances mentioned above, the time it took to clear levels and leave them for the last time measured from a few days (three times), but all the others (29 times) lasted for months, to as much as ten years (6 times), and for 12 years when it was stuck on 11,000. FYI, for the S&P to leave the 1,000 level behind took 8 years and 7 months from the time it was first attained. But, as you can see below, the time “stuck” at a round number has recently been shortening, partially because a lesser percentage gain is required as higher levels are reached. Still, after 35 out of the 37 (94.6%) previous Dow Industrial and S&P500 “barriers” that were breached, there was a setback below their 1,000-point round-number levels at some point for varying lengths of time:

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In the meantime . . . the Russell2000 small cap are no longer leading the parade (and yet another chart). In our March 1st, 2021 Letter we noted “that the typical length of the outperformance by the Russell2000 (small-cap index) does not usually exceed 12 months (March was the 12th month from the start in April of 2020). So, what does the Russell2000 topping mean? As we wrote then, “A weakening of the ratio tends to be associated with a declining market.” Just another top (?) to worry about, but so far, the early warnings have been just that . . . early.

The DOW THEORY for the 21st Century: This Indicator is GREEN (BUY), from the 25% held from 10/25/19 and the 75% bought on 4/6/20 for an average buy of 23,749.50. All indexes continue making higher confirmed highs. The S&P500 made its last closing high on 4/29/21, the Dow Industrials on 4/16/21 and the Dow Transports on 4/29/21. As of this writing, we are far from a secondary reaction. As usual, we will alert you via email if the requirements for a secondary reaction are met, or there are other changes.

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The Original Dow Theory: ’s Theory is GREEN (“BUY”) since 5/26/20 at 24,995.11. The Dow Industrials and Transportation made its last recorded highs on 4/16/21 and 4/29/21, respectively. Thus, there are no hints of a secondary reaction against the Bull market.

Schannep TIMING ↓INDICATOR: This proprietary Indicator is still a BUY (GREEN) from 50% bought on 4/6/20 at the 22,679.99 level and 50% previous bought on 2/19/19 at the 25,891.32 level, for an average of 24,285.65. is positive and the monetary status continues extraordinarily positive; therefore, this Indicator is still positive. The COMPOSITE Timing Indicator: This is our primary major-trend timing Indicator which we follow in our real-money portfolio shown at the end of each Letter. The portfolio stands $260,731 above a year ago, up 47.6% from last year’s same month. It is in a BUY (GREEN) from 4/6/20 at the 24,022.57 average level from the Buys from the Schannep Timing Indicator and the Dow Theory for the 21st Century Buys. With no Sell signal on either of the above two Indicators, this Indicator is 100% invested. Should either of the two get a Sell signal we would move to a 50% invested position.

Manuel and I have been going over each of our Indicators with a fine-toothed comb to be sure they are correct and in line with our written rules. While I had usually referred to the rules as "can be abbreviated as follows" we have tried to make them as all-inclusive as possible, as some had not been clear for all situations. As best we can, those oversights/clarifications have now been made. For instance, we altered the entry percentages for the Schannep Timing Indicator to conform with our other Indicators during/following Capitulations. That is to say, still invest 50% at the first Capitulation but then add 25% (to 75% invested) if another occurs (instead of just 1/6th to 2/3rds invested), and finally another 25% (rather than 33%) to complete at 100% on the actual Schannep’s Timing Indicator. Capitulation calls for a more aggressive approach, and several of our more adventurous Subscribers have been promoting, and in fact entering, a larger proportion at Capitulation than we advocate in our Letters. Call us conservative, but each individual Subscriber can make the choice to invest more, or less, at Capitulation, or at any of our Indicator’s signals, for that matter. Bringing the records up-to-date to 2020 year-end shows what explicitly following the rules for each as they are currently written, would have resulted in. The average annual percentage gains over the last 67 years are as follows:

Buy & Hold 10.81% Original Dow Theory 11.22% Schannep Timing Indicator 13.06% Composite Timing Indicator 13.77% Dow Theory for the 21st Century 14.06% For details on capture ratio and reduced drawdowns see the following discussion.

Sincerely, Jack and Manuel

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How accurate are the Dow Theory for the 21st Century (DT21) and Schannep’s Timing indicator (STI) at identifying trends? I, Manuel, subscribe to several services, and I get a continuous bombardment of ideas, most of them BTW untested. Some look good in theory but untradeable in real life; others do not stand a strict scrutiny; others look good on a 20-year period with hair-curling drawdowns in between. All in all, lots of noise, dubious track records, and little actionable advice. While what follows may perhaps look like self-aggrandizement, I feel it is essential to convey to our Subscribers the faith we have in the DT21st and the STI, making the Composite. To trade any trading system, and the DT21 and STI are -term trading strategies, the must have absolute confidence in the system traded, and we’ll show below why that is appropriate. Merely good past performance is not enough when the going will inevitably get tough. Absent absolute faith, the investor will back down when a couple of subpar trades (or very challenging market conditions) hit. This is why in our June 1st, 2020 Letter, when the prevailing mood was very pessimistic, we analyzed the excellent odds that surrounded our April 6th, 2020 Buy signal. It was quite an “academic” post, but we felt it was necessary to strengthen our Subscribers' faith in the newborn trade, which has been proven very successful. Those who know my history know that I am a “true-believer” in Schannep’s timing abilities since 2012. My praise has always been genuine. However, such faith was cemented by my obsessive study of Jack’s book and all his past Letters, plus countless emails I sent torturing him with questions (which he always gentlemanly answered). So all this is not a sales pitch. It is just a way of instilling in our Subscribers the faith Jack has in his own systems and the confidence I have developed after profound study. I can say without blinking that both the DT21 and STI are among the best timing indicators to appraise trends in order to derive trades with an approximate duration of 1 year. The combination of both indicators, the Composite indicator, is as good or even better than each of its parts. In this specific category, the Composite indicator is unmatched. This is not a casual or unbacked statement. A very savvy financial advisor, Subscriber to our Newsletter, put us onto what is called the "capture ratio" as he had made calculations that he found amazing. We followed up on his lead, and here are the definitions and what he found and we verified. He calculated the capture ratio of the Composite indicator versus Buy & Hold. There is the up-market capture ratio and the down-market capture ratio. Paraphrasing from Investopedia:

“The up-market/down market capture ratio is the statistical measure of an investment manager's overall performance in up-markets/down markets. It is used to evaluate how well an investment manager performed relative to an index during periods when that index has risen/fallen. The ratio is calculated by dividing the manager's returns by the returns of the index during the up-market/down market and multiplying that factor by 100.” Therefore, the higher the up-market capture ratio and the lower the down-market capture ratio the better. The period tested spans from 12/31/1970 to 12/31/2020. It compares the Composite’s

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return (as it stood on our website on February 2021) to the Dow Industrials (inclusive of ). The Dow Industrials may be found on our website under “RESOURCES”. Year-end data was compared. A year was considered bearish if the Dow Industrials had a negative performance on 12/31 each year. By the same token, a year was deemed to be bullish if Dow Industrials had a positive year. In bearish years, the down-capture ratio for the Composite was 0.045, which is tantamount to saying that on a year-end basis, the Composite declined only 4.5% as much as the Dow Industrials, which is a drawdown reduction of 95.5%. This is the adage “cut your losses ” in action. Of course, on an intra-year basis, drawdowns, while much smaller than those of Buy & Hold, may be greater than the huge 95.5% reduction when computed with a one-year perspective. However, even if we compare “intra-year” drawdowns, the Composite has managed to cut the drawdowns experienced by Buy & Hold. In bullish years, the up-capture ratio for the Composite was 0.936, which implies that on a year-end basis, the Composite managed to “capture” 93.6% of the gains made by Buy & Hold. By definition, the Composite, being trend-following (that is, never getting in at the bottom), can never capture 100% of an up-swing. Hence, a ratio of 93.6% is really as close as one can get to perfection. Another fascinating figure is total percentage points lost during bear years and total points won during bull years. By “total” we mean the addition of the percentage won or lost each year. For instance: A 20% decline plus a 30% decline plus a 50% decline plus a 15.66% decline would add up to -155.66% as shown. It does not mean a single market decline was -115.66% which is of course impossible. Let’s take a closer look at the bearish years. On a year-end basis the Composite lost an average of 0.5% on “bearish” years, whereas Dow 30 total return lost on Bear Market Performance (1971-2020, 10 Bear Market Years) average -11.57%. The total of the Dow Jones Industrial Average percentages lost by Buy & Hold Composite Buy & Hold was 115.66% whereas the Total of Percentage Losses -5.20% -115.66% Composite merely lost a total of its Average Loss -0.5% -11.57% percentages of 5.2%.

In bullish years, the Composite managed to “capture” most of the gains made by Buy & Hold. On a year-end basis the Composite Bull Market Performance (1971-2020, 39 Bull Market Years) won 17.73% on “bullish” years, Dow Jones Industrial Average whereas Dow 30 total return made Composite Buy & Hold on average 18.94%. The total Total of Percentage Gains 691.5 738.65 percentage won by B&H was Average Gain 17.73 18.94 738.65% whereas the Composite won 691.5%.

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Both ratios are hardly beatable. Think about them. The DT21 and STI have nothing to do with moving averages, breakout systems, etc. It is like comparing a spaceship with a Ford Model T. Maybe in a future Letter, we will explain why both indicators conceptually cannot be matched by moving averages or other timing systems, and, more importantly, why it is likely they will continue to work in the future. Not a statistical fluke! I insist all the preceding is not to brag about our accomplishments. I feel our Subscribers need to know that they have an excellent timing Letter in their hands (validated by third parties as you can read HERE and HERE). Not to boast, but to strengthen their faith so that they stick to the indicators when the going gets tough. We should not underestimate human frailty. A prop is needed more often than not. So, we should endeavor to transmit to our Subscribers the faith and confidence necessary to trust the DT21, STI, and the Composite when conditions are challenging. Update on Precious metals: A “line” formed for both gold (GLD) and silver (SLV). SLV broke down below the line lows on 3/29/21 unconfirmed by GLD. On 4/8/21, GLD broke topside the line highs and on 4/21/21, SLV confirmed. So a bullish breakup was confirmed. Robert Rhea wrote that the breakup (down) of a line indicates: “a change of the general market direction of at least secondary, and occasionally even of primary, character”.(The Dow Theory, 1932, Barrons, page 80).

We feel in this specific instance, the change of the trend is likely of primary character for the following reasons:

1. The secondary trend was already bullish within a primary bear market. Thus, the breakup of the line does not change the secondary trend from bearish to bullish. It instead adds to the already existing secondary bullish trend. While two secondary bullish readings do not necessarily equate to a primary bullish trend, I feel it increases the odds for changing the primary trend from bearish to bullish. 2. There has been divergence and a non-confirmation of lower lows. 3. The secular trend is bullish (so there is a tail-wind for bullish movements). 4. Since the last primary bull market top, SLV & GLD have been declining for ca. 8 months. So time-wise, the primary bear market is getting old; particularly when measured against a secular bull market. 5. The off the respective primary bear market lows has proceeded smoothly (and hence took several days until the final breakup; it was not a flare). We favor (and research confirms) rallies with gentle daily advances and a majority of “up” days, rather than rallies with abrupt “up” days followed by “down” days. The less "zig-zag", the more likely the trend will continue into the future. 6. Finally, for a trader as opposed to an investor, taking a trade right now has a relatively tight stop-loss (last recorded lows). If a good rally materialized, we would be having a good risk-reward.

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Those willing to get a more in-depth explanation for gold and silver may go HERE. As to SIL and GDX (silver and gold miners ETFs), the primary trend remains bearish.

The BOTTOM LINE: Consumer Confidence continues to jump higher and has now reached the average level of previous peaks (see our Special Report). And why not, the economy is also continuing to grow and is likely peaking in this 2nd quarter of 2021 (also shown below): The U.S. economy continues to expand. In fact, the current quarter may be the best of this economic recovery and the best of many past years, and perhaps future years as well. Growth is expected to continue, but at a diminishing rate, as you can see from this forecast from Goldman Sachs Global Investment.

It’s actually a pretty picture, just not an upward and onward forever growing economy. The economy doesn’t work that way, neither does the market. Jack Schannep Editor Manuel Blay Co-Editor for TheDowTheory.com Team

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Historically we have tracked the performance of one of Jack’s ACTUAL ROTH IRA portfolios, fully following the Composite Timing Indicator’s signals which is currently 100% invested. Its current status is shown below:

For longer-term results see The Composite Timing Indicator which we use for timing in our Portfolio verses Buy & Hold. FYI, over the last 65 years Buy & Hold has grown at a 10.6% annual rate whereas The Composite has grown at a 13.3% rate. The problem with showing this real-money Portfolio is that it represents only what I am doing, which could be very different from others. Subscribers use this letter for Market Timing, which could include shorting, going long, even utilizing leveraged investments that could double or triple – in either direction. These results have been monitored by several independent sources that track our performance such as Hulbert Financial Digest, DowTheoryInvestments.com, CXO Advisory Group and TimerTrac.com.

This Letter concentrates on the big picture, the trend of the major stock market indexes which usually influences the price direction of most individual stocks.

The Dow Theory is a form of that relies on detecting trends in the stock market to determine an investment strategy. The detection of these trends may be interpreted differently by different analysts and the opinions expressed on this website may not be shared by other individuals who apply the same principles of The Dow Theory. Past performance is not an indication of future returns. It should not be assumed that any recommendations made will be profitable or without the risk of loss or will equal the performance of the benchmark portfolio. All investments involve the risk of potential investment losses as well as the potential for investment gains. The performance of any portfolio or investment strategy should be viewed in the context of the broad market and prevailing economic conditions.