Dow Theory Forecasts: Destroying Wealth?

| About: SPDR Dow (DIA)

I received a sample issue of the Dow Theory Forecasts newsletter (dated September 20, 2010) in the mail as a teaser to induce me to subscribe. Apparently they don’t even read their own material before sending it out. If they did, they would have been embarrassed to have anyone see it that didn’t already have access.

Here is a summary of their ‘Market Commentary’ section from that issue along with a chart of the DJIA over the past six months.

They first explained that their Dow Theory had turned bearish on June 30th (!) because both the DJIA and the DJ Transports closed below the June 7th lows of 9,816 and 4,037. So, they were bullish from 11,205 down to 9,686 only to then sound the alarm that it was time to get defensive. Brilliant.

A reader questioned them asking, “ So why is the Dow Theory Forecasts telling investors [now] to watch for a breakout above this year’s respective highs of 11,205.03 and 9,686.48 or below the July lows of 9,686.48 and 3,906.23?”

Summary of advice: If the market goes above the year’s previous highs then they’d have to turn bullish again (after the move) but if the averages broke below the year’s lows then they’d be convinced that things didn’t look too good. Brilliant once again.

They wait until the money has been made or lost before getting you in or out. That’s a sure path to financial ruin unless the indices continue into (rare) 20% plus uninterrupted moves in one direction only.

Dow Theory Forecasts explained further,

The longer the averages avoid a breakdown to new lows, the more significant the July lows become- and the greater the likelihood that the June 30th bear-market signal was premature. Still, the primary trend is presumed intact until proven otherwise, so moves to new highs above 11,205.03 and 4,806.01 are needed to put the Dow Theory in the bullish camp.

Just a quick glance at the chart of the DJIA shows how destructive their advice has been. You couldn’t have had worse market timing if you had actually tried to find a way to lose money.

They kept their subscribers out of the market at the exactly July low when the values were best. They went even further in explaining,

Of the portion of your portfolio allocated to equities for the long term, hold 25% - 30% in a relatively low-risk bond fund…

They actually cut back on even the permanent equity allocation in favor of bonds with close to their lowest yields in our lifetimes.

Even more ironically, (just a few paragraphs later) they had the gall to say,

We expect stocks to deliver much improved relative returns over the next decade. While we’re not convinced now is the optimal time to be fully invested in stocks, we expect stocks tom outperform bonds handily over the next 10 years.

So, they expect equities to beat bonds handily over the long term yet they specifically recommended switching an additional 25% - 30% of your stock market allocation into bond funds right at the market’s low point.

Anyone buying the Dow Theory Forecasts after reading this sample issue should have his head examined.

Disclosure: No positions

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