November 1st, 2014

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

October Not So Bad After All : 17,390.52

S&P 500: 2,018.05 NYSE: 10,845.01 OVERVIEW: The market action for the first two weeks after our last Letter was distressing; two words we’d never heard of earlier in the year took over the headlines: ISIS and Ebola. They pushed all other worries to the background: Ukraine, Iran, Syria, the Euro-economy, our own economy, and whatever else. For some reason these kinds of worries have historically occurred in the month of October, resulting in more than twice as many bear market lows (7) as any other month (3) of the year. October is traditionally at least a “dip” month when there is no bear market, as now. We certainly had a "dip" but that has now been totally made back up and the market is once again "in the clear". Beyond the scary parts of October (we’re not talking about Halloween here, at least not yet), there are a couple of VERY favorable things about this month that you need to be aware of. October is the traditional start of year-end rallies, a long-standing expectation. However, there is one particular time that is more dependable than usual: The 3 month market run of October through December in Mid-Term Election Years (like this one). Since 1934 the market has risen 90% of the time (18 out of 20) an average of 7.5% during those three months, 8.4% median gain. But that’s just 90% of the time, let’s look at a longer-term (18 months) timeframe when the market has risen 100% of the time. This was brought to my attention by a Subscriber (thanks to Craig S.) and subsequently brought to your attention in our October 26th e-mail to all Subscribers. There is an 18- month phenomenon that has shown a +45.4% average and median return that I had never heard of before. What, how, when, you say? It happens, and I can’t imagine why it happens, but every mid-decade since 1904 there is a period from September 30th of the 4th year to March 31st of the 6th year that has been profitable in all eleven such periods. Only twice (+5.6% and +10.2%) was the gain less than +36%, with four times over +64% for the 18 month timeframe. I found it amazing so I checked it out myself and it truly has happened. Consequently, we have written a Special Report entitled “The Best 18 Months”, be SURE to click on it and have a look for yourself. If you’ve already read it, did you notice from the graphs that there has never been a significant decline during that timeframe? I traced the mention of it to Jay Koeppel at JayOnTheMarkets.com, but am not sure where the originating credit belongs. There has been a “Decennial Cycle” phenomenon described in Trader’s Almanac showing that the 5th year of decades (i.e, 2015) has had the best average annual change (+28.3%) of any year of any decade, nearly twice the next best year. I suspect this 18-month phenomenon has expanded back from the 5th year record to incorporate the typical preceding year-end rally with the “Halloween Indicator” often described by in MarketWatch, which shows the seasonal strength from October 31st to the following May 1st. Additionally it skips on through the good 5th year toward the following “Sell in May, and go Away” resulting in an 18 month period with the wind at its back. And don’t forget that 2015 is a Pre-Election year and since 1833 (!) that has been, by far, the strongest growth year on average of the 4-year cycle. Will this 18-month cycle work in the next 18 months? Who knows, but I sure wouldn’t want to bet against it. Since all of our

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November 1st, 2014

Indicators are ‘long’ the market anyway at this point, we will plan on staying that way until and unless our Indicators tell us differently. The for the 21st Century: This indicator remains in a BULLISH mode (GREEN) with an average entry level of 15,548 from the July 18th, 2013 signal. In mid-October the setback qualified as a secondary reaction in the primary uptrend. As of today we have completed Step #3 and are now "in the clear". As always, we encourage you to check on the Subscriber’s Home page in-between Letters when a potential signal change might become eminent.

Step Dow Industrials S&P500 Index Dow Transports 9/18/1 Market Highs 9/19/14 17279.74 2011.36 9/18/14 8676.19 4 ≥3% Setback 16117.24 1862.49 7717.69 #1 10/16 10/15 10/13 on two indexes (-6.7%) (-7.4%) (-11.0%) Bounce ≥3% 17005.81 1984.97 8759.06 #2 on at least 10/28 10/28 10/28 (+5.5%) (6.6%) (+13.5%) ONE index Break-up all three or down #3 10/31 17390.52< 10/31 2018.05< 10/28 8759.06< on S&P plus one

In regards to The Original DOW THEORY, the question has arisen as to the significance of the October 21st lows extending below the “last major secondary reaction” on August 7th. Once we broke up over the previous highs on September 17th, the ‘in the clear’ signal ‘reset the clock’ for the next Secondary Reaction to begin. The guidance from Charles Dow, and Robert Rhea in his 1932 classic The Dow Theory introduced the concept of “bullish and bearish”, which does not necessarily mean a signal change as, obviously, a Secondary Reaction is bearish but NOT a signal change. We think we have it right in our interpretation of “Successive rallies penetrating preceding high points, with ensuing declines terminating above preceding low points, offer a bullish indication (NOTE: we had that in September). Conversely, failure of the rallies to penetrate previous high points (NOTE: “a rally…is defined as...movements resulting in a net reversal of direction exceeding three percent…we did NOT have that until now and it carried to new all-time highs, consequently no Sell signal occurred. This indicator remains a Buy and for those who felt there was a Sell signal two weeks ago they would need to reverse to a Buy now that all indexes are at new all-time highs".

Schannep TIMING ↓INDICATOR: This indicator remains in BULLISH mode (GREEN) with an average entry level of 11,746 from August-October of 2011 signals. The part of this Indicator turned sufficiently negative in mid-October to set up a potential signal coming, and is usually followed by a bounce which we are having now. With the monetary situation remaining positive, however, a signal change is unlikely, unless there would be a 16% market drop, in which case that would be a ‘stop loss’.

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November 1st, 2014

The COMPOSITE Timing Indicator: This indicator remains in a BULLISH mode (GREEN) as a change would be warranted only if one of the two Indicators above were to signal a Sell. The average entry level was 13,647.

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→ The BOTTOM LINE: Markets can move on the perception of future earnings. With Consumer sentiment reported in October at the highest level since July 2007, perceptions are clearly improving. And not just perceptions; the graph below illustrates the rising payments of dividends of the S&P500 over the past 12-months. We are reminded of the adage, “Profits are an opinion, while dividends are a matter of fact”.

Companies in the S&P 500 have increased their cash dividend payments to shareholders this year to a record high $38.49. While this is terrific it should be noted that the dividend payout ratio is still low at 33%, well below its historical midpoint average of 45%. Federated Funds calculated that the S&P500 index would be 36% higher if dividends were paid out at the 45% ratio, assuming the current dividend yield (1.9%) and earnings both remain unchanged.

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November 1st, 2014

Source: ISI Group

Mid-term elections usually lead to shake-ups, and as the chart below points out how poor political perceptions are right now, a good shake-up should be welcome.

As recently pointed out by BTN Research, since 1950 there have been just 6 calendar years when a Democrat was in the White House and Republicans controlled both the House and the Senate. The average total return for the S&P 500 during those 6 years was a gain of +21.3% per year. Regardless of your political persuasion, those results have got to get your attention. P.S.- Be a good citizen: VOTE !

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November 1st, 2014

Jack & Bart Schannep Editor and Contributing Editor for The Schannep team

PLEASE NOTE A CHANGE HERE: The Exchange Traded Fund NYC which tracked the NYSE Composite has been liquidated by its issuer and proceeds distributed to shareholders. We had used it as it tracks one of the three indexes that we use in our work, but since it had been a drag on our performance it is no loss. We have returned to using the E.T.F. that tracks the S&P500 along with the ones that track the DJIA and the equal-weighted S&P500. Yes, this is an emphasis on the S&P500 but we are comfortable with that as it IS our preeminent Index. We want indexes that are representative of the major U.S. market and that’s what we’ve got. At the end of each Letter in this space I show the performance of my REAL money portfolio (my actual IRA), fully following the Composite Timing Indicator’s signals which is currently 100% invested in approximately equal amounts of the E.T.F.s mentioned. For the last 12 months this portfolio with dividends reinvested is UP +13.1% vs. the Dow Jones UP +14.3% and the S&P500 UP +16.9% including dividends. The problem with such reporting 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. Our 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 indices which usually influences the price direction of most individual .

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

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