It Pays To Pay Attention To The Dow Jones Industrials Model (Part II)

Includes: DIA, SPY, TWM
by: The Other Street

See Part I

I stand corrected. Readership on the Model has increased three-fold in two weeks, and new followers are forcing The Other Street doors. Thank you, thank you, this is a much appreciated show of support, enough to keep me going. I put the Model together in 1995, so it's been through a few cycles -- let's hope it continues to work…

I ran it today at 14:00 EST, when the DJII was at 13179 and the S&P was at 1401. We have hit the upper end of the Trading Range expected on 8/2, despite last week's hiccup. Indeed, the Dow is up 2.3% and, as usual, the standard deviation of the 30 components individual relative returns is big, at 2.9% (all numbers are intraday). Five stocks had a positive relative performance greater than 3%: Hewlett Packard (NYSE:HPQ) plus 8.4%, Cisco (NASDAQ:CSCO) plus 6.2%, Bank of America (NYSE:BAC) plus 4.8%, Alcoa (NYSE:AA) plus 4.6%, and JPMorgan (NYSE:JPM) plus 3.5%. On the downside, four stocks had a negative relative performance lower than minus 3%: McDonalds (NYSE:MCD) minus 4.2%, Verizon (NYSE:VZ) minus 3.4%, AT&T (NYSE:T) minus 3%, and Pfizer (NYSE:PFE) minus 3%.. Overall, 14 stocks broke resistance, notably Cisco and Procter & Gamble (NYSE:PG), and only one broke support, McDonalds. As a result, most individual Trading Ranges are revised upwards, with the exception of Coca Cola (NYSE:KO), McDonalds, Verizon and AT&T.

This yields an overall Trading Range of 12888/13468, up from 12626/13209 on 8/2. Stocks are smack in the middle, with an Overbought/Oversold Ratio (OB-OS) of 0.51, and the Momentum Ratios are still in positive mode, with MAC (exponential moving average convergence) at 1.87, and AA (our proprietary modified RSI Oscillator, not Alcoa), at 1.70 -- scale 1 to 4: 1 for bottom, 2 for uptrend, 3 for top, 4 for downtrend. The Objective is 13211 but as we have now seen several times, this simply indicates the trend -- in this case, plus 0.25%. The odds are we won't stop there.

Net net, on 7/14, with the DJII at 12777, we increased our net long exposure from 30% to 50%. On 7/28, at 13176, we increased it further to 60%, and we have maintained it there since then -- aside from a very short term trading call on the downside last week (see comments on Part I and Instablog).

That being said, do not get me wrong. I am not managing our portfolios with Dow stocks, by and large, even though I missed the obvious sell signal on McDonalds yesterday -- see below: first indicator is MAC, the red line is our modified RSI Oscillator.

I use the Model to help with the overall trend, and apply the same methodology to monitor our portfolios short term. However, I mostly pick stocks on a fundamental basis. They are usually listed in the disclosure statement at the bottom of the articles. I have been particularly pleased with Exterran (EXH) yesterday, Ion Geophysical (NYSE:IO) and URS (NYSE:URS) today, and Wesco (NYSE:WCC) before that. I have partially covered my Ultrashort Russell 2000 (NYSEARCA:TWM) hedge, and tomorrow will be another day.

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