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  • Q&A: Richard Russell's PTI

    Subscriber F.H. asks:

    "[Have you] ever consider[ed] constructing a market trend indicator like Richard Russell's PTI?"

    Our Response:

    This is a great question and one that we've examined in the past.

    We are familiar with Russell's Primary Trend Indicator [PTI]. In fact, we know the exact constituents of the indicator. According to Richard Russell, editor of The Dow Theory Letters since 1958(, the PTI is a "technical spectrum of the stock market" that cannot be manipulated. Russell goes on to say "…you can fool one or two of these technical items, but you can't fool all eight of them, and that's what the PTI is all about." The goal of the indicator is to provide solid indications of market direction that cannot be manipulated.

    As a subscriber to Russell's Dow Theory Letters, you are well aware of the many times that the PTI was right and Russell was wrong about the direction of the stock market. However, we're more concerned with the fact of how much advantage does the PTI provide compared to simply using Dow Theory.

    Here is what we've found. According to Dow Theory, on July 23, 2009 a new cyclical bull market began. At the time we recommended investing in the highest weighted stocks of either the Industrials or Transports index or the purchase of ETFs for the Industrials (DIA) or Transports (IYT) (article found here).

    On the other hand, the Primary Trend Indicator [PTI] gave the first hint that we were in a cyclical bull market on August 25, 2009. In addition, the PTI didn't give the "all clear", in terms of being in a bull market, until November 30, 2009 (as seen in chart below). In fact, a good technical analyst would have had tremendous difficulty in getting a clear indication based on the PTI until after the December 8, 2009 rebound.

    (click to enlarge)

    There is an alternative view on interpreting an earlier signal than the Dow Theory indication using the PTI. However, you would need to apply Dow's theory in order to properly achieve the earlier signal based on the PTI movement. Using the purple line above, an individual could have interpreted that a cyclical bull market tentatively started as early as May 4, 2009, when the PTI exceeded the January 2009 peak. Subsequent to the May 4th peak, the PTI did not decline below the 89-day moving average on May 27, 2009, suggesting that more upside existed.

    However, when we refer back to Russell's June 3, 2009 issue there is no indication that a tentative new bull market was in play. No mention that May 4, 2009 or May 27, 2009 were possible indications of a new bull market in stocks. In fact, Russell commented that "…ridiculous but unseen green shoots is now repeated everywhere. I've stated that a true bear market bottom usually requires many weeks or even months before the crowd turns bullish." This comment along with the picture of a bear at the top of his newsletter was the only indication that we had that we were still in a bear market, according to Richard Russell.

    Because we have studied the PTI in detail, we've determined that it is not worth including in our work. In fact, we've found that it is more noise on the market when compared to correct, albeit conservative, interpretation of Dow Theory. If we get Dow Theory right, then we don't need another indicator to follow that could potentially confuse our primary indications based on Dow's work. Yes, we will take in as many views as possible, however, we will rely on Dow Theory as the primary indicator for market direction.

    Finally, to create an indicator that is supposed to be impervious to manipulation while at the same time practicing Dow Theory is doubling the effort necessary in watching the movements of the market. We've outlined in extensive detail the role that manipulation plays in the stock market and how the interpretation of Dow Theory mitigates the most extensive manipulation possible (found here).

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: DIA, IYT
    Jan 29 5:51 PM | Link | Comment!
  • A Tale Of Two Stocks: Dell Vs. Intel

    On November 2, 2012, our valued subscriber S.D. asked us about our thoughts on Dell being the second stock on our Nasdaq 100 Watch List. We said the following (found here):

    "From what I can see, Dell is within 13% of the 2009 low. This suggests that the stock is under considerable strain even though we're not in "crisis mode" as was the case when Dell bottomed in 2009. I expect that Dell will retest that low ($8), at minimum. The $4.15 level is the next technical support.

    "However, if you're interested in purchasing Dell, I would consider making the purchase in three stages with $8 and below as the starting point, with the understanding that it is a pure speculation. Dell appears much more speculative than I'd like and believe that there are reasonable alternatives that could take its place.

    "Contrast this with our most recent purchase of Intel (INTC). Essentially, we have taken the view that the PC is not dead and that there are values to be found. From a technical standpoint, INTC has maintained a solid uptrend from the 2009 low and has a better fundamentals, including dividend yield.

    "Whether HPQ or DELL come out ahead is of less concern since we believe the INTC will be the primary supplier of chips when the cycle turns."

    Since November 2, 2012, DELL and INTC have had the following performance (based on the closing price of January 17, 2013).

    (click to enlarge)

    As should be clearly seen in the chart above, DELL has risen +40.11% while INTC has actually lost value (-4%)based on trading lower on January 18, 2012. It is clear that subscriber S.D. was onto something when it was suggested that DELL was worth consideration. Little did we know that gains of +20% were in store for DELL in two months and +40% in 2 ½ months.

    In a follow-up piece on DELL from November 16, 2012, when DELL was trading at $8.86 we said the following (found here):

    "We believe that on a short-term basis DELL will rise on a possible market reaction. However, the intermediate-term seems to indicate that DELL will go to $8 before any 'true' indication of prospects is revealed, unless the company gets acquired which seems possible. Dell would be one of the best acquisition target of any computer manufacturer since Lenovo bought the personal computer division from IBM."

    The price action between DELL and INTC since November 16, 2012 is charted below (based on the closing price of January 17, 2013):

    (click to enlarge)

    DELL increased +44.70% while INTC gained slightly more that +5%. The gains at Dell are staggering and we applaud S.D. for bringing up the question so that we could see the potential of a stock that we'd otherwise overlook, even though it was prominently among the top five stocks on our November 2, 2012 watch list. As we've said many times in the past, stocks that appear on our watch lists have often been buyout candidates and therefore worthy of a second look.

    Again, thank you S.D. for your contribution to our site. We hope you benefited from your own intuition on DELL.

    Disclosure: I am long INTC.

    Tags: DELL, INTC
    Jan 18 12:41 PM | Link | Comment!
  • Golden Cross Points To Upside Reversal For Carbo Ceramics

    Carbo Ceramics (CRR) was one of the companies that appeared at the top of our dividend watch list for many weeks beginning in February 2012. The watch list served as a starting point for our research and we took a position in August (found here) at $65.02 (green arrow on chart below). Within three months, we saw shares of CRR rally to $74, a +13.8% gain. As such, we 'hedged' our position by selling the principal (found here) and let the profit run (red arrow on chart below).

    Recent activity in Carbo Ceramics' price suggests that, on a technical basis, the decline is over. Though a rally to its intraday peak of $180 is not expected, we believed there is a good opportunity for those interested in a short to medium-term speculative position in the stock.

    (click to enlarge)

    In our view, the biggest bull case, on a technical basis, is that the 50-day moving average has crossed above the 150-day moving average creating what some call a "golden cross." We rely on the 150-day versus the more popular 200-day moving average for the fact that it is the road less traveled and provides an indication ahead of the crowd.

    Currently, shares of Carbo Ceramics are trading just above the 50-day moving average, making this an ideal short-term transaction. For those who wish to trade this generally significant technical pattern, we'd consider selling if shares close below the 150-day moving average.

    From a fundamental standpoint, Carbo Ceramics provides long-term holders of the stock with the following attributes:

    • According to Value Line Investment Survey, the fair value for CRR is 14 times 2012 cash flow of $6.50, or a stock price of $91, a gain of +14% above the current price of $79.64. As an alternative, if the estimates by Value Line are correct, the 2013 fair value figure is $100.10, a potential gain of +25.69%.
    • Value Line indicates that Carbo Ceramics has increased the dividend for 12 consecutive years in a row.
    • Carbo Ceramics book value has had an annualized growth rate of +14.73% since 1995.
    • Carbo Ceramics has no debt.

    What Is the Downside Risk If I Want to Hold for the Long-Term?

    Dow Theory has the following downside targets for Carbo Ceramics:

    • $61.34
    • $44.39
    • $27.43

    Based on the work of Edson Gould, Carbo Ceramics has the following Altimeter:

    (click to enlarge)

    Carbo Ceramics would have to fall to $70.20 in order to be considered a buy using the Altimeter above. However, as has been the case in the past, seldom does the Altimeter decline to the buy level and then immediately reverse to the upside. therefore we'd expect a push below the $70.20 level for good measure.

    (click to enlarge)

    Edson Gould's Speed Resistance Lines have $65 as the downside support level.

    The most conservative of the three downside targets mentioned above is the Dow Theory level of $61. This seems be the most appropriate level to consider a first, or second, purchase if the desire is to hold Carbo Ceramics for the long-term.

    Disclosure: I am long CRR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Tags: CRR, long-ideas
    Jan 15 2:55 PM | Link | Comment!
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