Dow Theory for the 21St Century

Dow Theory for the 21st Century

TECHNICAL INDICATORS FOR IMPROVING YOUR INVESTMENT RESULTS

Jack Schannep

John Wiley & Sons, Inc.

ffirs.indd iii 4/25/08 9:51:44 AM ffirs.indd ii 4/25/08 9:51:44 AM Dow Theory for the 21st Century

ffirs.indd i 4/25/08 9:51:44 AM ffirs.indd ii 4/25/08 9:51:44 AM Dow Theory for the 21st Century

TECHNICAL INDICATORS FOR IMPROVING YOUR INVESTMENT RESULTS

Jack Schannep

John Wiley & Sons, Inc.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada

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Library of Congress Cataloging-in-Publication Data

Schannep, Jack, 1934 - Dow theory for the 21st century : technical indicators for improving your investment results / Jack Schannep. p. cm. Includes index. ISBN 978-0-470-24059-5 (cloth) 1. Investment analysis. 2. Stock price forecasting. 3. Speculation. I. Title. HG4529.S33 2008 332.63'2042--dc22 2008006125

Printed in the United States of America 10 9 8 7 6 5 4 3 2 1

ffirs.indd iv 4/25/08 9:51:45 AM To Helen, the love of my life and my life ’ s partner, I dedicate this book on the occasion of our 50th wedding anniversary. To our wonderful and successful family, Bart and Marcella, Dwight and Christy, Tim and Mary Beth, and Marie and Mark Manor. To our eight terrific grandchildren, Rob and bride Robin, Kayla, Sarah, Allison and Jack Schannep, and Zach, Mitch and Brett Manor. To investors everywhere, may your financial success be increased with the help of the concepts and indicators from this book.

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Acknowledgments ix

Introduction: The What and Why of this Book xi

Part I The Traditional Dow Theory

Chapter 1 By Way of Background 3

Chapter 2 Signals Described 17

Chapter 3 A Look at the Record 25

Chapter 4 Give-and-Take about the Theory 37

Part II Bulls and Bears

Chapter 5 Bull Markets 53

Chapter 6 Bear Markets 61

Chapter 7 Bull and Bear Markets of the Twentieth and Twenty-First Centuries 69

Part III The Dow Theory for the Twenty-First Century

Chapter 8 Capitulation: The Selling Climax 79

Chapter 9 The Heart of the Theory 97

vii

ftoc.indd vii 4/25/08 6:26:55 PM viii Contents

Part IV Other Important Indicators

Chapter 10 Schannep Timing Indicator: The Other Major-Trend Indicator 123

Chapter 11 “Three Tops and a Tumble”: Leading Topping Indicators 129

Chapter 12 Bonus Indicators 145

Part V The Epitome of Synergy

Chapter 13 The All-Inclusive Composite Indicator 169

Chapter 14 Practical Uses: Putting It All Together 177

Appendix A “Official” Complete and Detailed Record of the Original Dow Theory 183

Appendix B Capitulation Indicators Detailed Record 195

Appendix C CPA Verification of the Schannep Indicator 203

Appendix D Complete Record of the Composite Timing Indicator 207

About the Author 217

Index 219

ftoc.indd viii 4/25/08 6:26:56 PM Acknowledgments

Thanks to: Charles Bassetti, editor and coauthor, Technical Analysis of Stock Trends , and Zoe Arey of Taylor & Francis Croup, LLC for permission to use excerpts from the eighth edition. Dave Garrett, Principal, TimerTrac.com, for monitoring the record of my indicators since 1998. Mark Hulbert, editor, Hulbert Financial Digest, for monitoring the record of my indicators since 2002. Steve LeCompte, Managing Partner, CXO Advisory Group LLC, for permission to include his “Trading Calendar” and for tracking the record of my newsletter. Kelly O ’ Connor, Development Editor, John Wiley & Sons, Inc., for attempting to make a readable book from my writings. Jim O ’ Shaughnessy, President, O’ Shaughnessy Asset Management, author, What Works on Wall Street and others, for suggesting I get in touch with John Wiley & Sons to publish my book. Stephen Reitmeister, Executive Vice President, Zacks Investment Research, and Jon Knotts for including me in their “ Featured Experts ” section, where many have been introduced to my newsletter and book. Bart Schannep, Principal, Schannep Investment Advisors, for his computer and investment knowledge and attempts to edit my early efforts. Tim Schannep, Vice President, CBIZ Wealth Management and Business Retirement Division, for his efforts on my behalf with publishers and agents.

flast.indd ix 4/25/08 9:52:22 AM x Acknowledgments

Mark Shepardson, President, Fraser Publishing Company, for permission to quote liberally from Robert Rhea’ s The Dow Theory. Stacey Small, Senior Editorial Assistant, John Wiley & Sons, Inc., for help in walking this novice author through the maze of publishing and developing the book’ s cover. Johnathan Stein, subscriber and e - mail friend, for producing a number of the charts in the book, a task I was unprepared to under- take on my own. Ron Surz, President and CEO, PPCA, Inc., for permission to use “ History for Common Stocks (Adjusted for Inﬂ ation). ” Dr. Gerald Swanson, Professor of Economics, University of Arizona, author, America the Broke and others, a personal friend, for giving me advice on dealing with a publisher. Aaron Task, Correspondent, Yahoo! TechTicker, formerly Editor at Large, TheStreet.com, and Jordan Goldstein, Vice President, for permission to include “ Dow Theory: It’ s Alive! Alive! And Bullish!”

flast.indd x 4/25/08 9:52:22 AM Introduction: The What and Why of this Book

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.

Charles H. Dow wrote those words over 100 years ago on January 31, 1901, and they are as true for the twenty - fi rst century as they proved to be for the twentieth century. No book on the Dow Theory should start or fi nish without his classic quotation, as it is the very essence of the theory. For the record, the rest of the quote that appeared in the Wall Street Journal that day continued: “ The aver- age of twenty stocks is the peg which marks the height of the waves. The price- waves, like those of the sea, do not recede at once from the top. The force which moves them checks the infl ow gradually and time elapses before it can be told with certainty whether high tide has been seen or not. ” I wrote this book so that a serious investor will be able to fi nd almost all he or she needs to know about the stock market and how to become fi nancially successful in one place. I don ’t pretend to know all there is to know about either subject, but I have been an avid market student and successful personal investor all my professional life. If you have aspirations to know the important things about the stock market and are not interested in the fl uff, then this book is for you.

flast.indd xi 4/25/08 9:52:22 AM xii Introduction

You will soon recognize that most of this book is not sexy or even exciting, and some of it may not even be interesting to you, but it con- tains a wealth of valuable insights, historical precedence, and useful and usable information. I am not a writer by trade, so I apologize up front for any shortcomings in that department. I have spent a lifetime with the stock market, starting in college and extending through a short military career, a full fi nancial business career, and even longer “ working ” retirement. I started writing a market timing letter to col- leagues in the stockbrokerage business in 1977 at the behest of senior offi cers in my fi rm, a letter that I continued after I retired. Out of that grew an Internet subscription letter that has attracted subscribers from most of our United States and numerous foreign countries. The purpose of my market letter and of this book is not to make money personally— the Web site www.TheDowTheory.com is owned by other members of my family who are occasionally surprised by a dividend. My wife and I have been fortunate to have been fi nancially secure for many years, and now it is time to share the “ family secrets” with the rest of you. Do not be afraid to skip over segments of the book (such as the background of Charles Dow or William Peter Hamilton’ s Editorial, or my own, and other perhaps tedious subjects); you can always come back to them. Concentrate on the big picture and review those areas that don’ t at fi rst sink in. In the end, I think you will feel much better prepared to face the stock market than ever before. I sincerely hope this book will show you the way to a better understanding of the ingredients that make up the world of fi nance, specifi cally the American stock market, and that understanding will lead you further to great investment success.

flast.indd xii 4/25/08 9:52:22 AM PARTI THE TRADITIONAL DOW THEORY

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