Market Wrap-Up (02-06-2004)

FSO ^ | 2/6/2004 | Tim Wood

[Orangedog]

THE DOW REPORT
"A Brief Technical Review"

The current technical setup of the Dow Jones Industrial Average remains uncertain and at a crossroads. The sell off in the Dow Jones Transportation Average has now brought it down below the November lows. This break down did a lot of technical damage to this market and is thereby suggesting that we have now seen an intermediate term reversal in the Transports.

The NASDAQ 100, the NASDAQ Composite as well as the Dow Jones World Stock Index have violated their January 13, 2004 trading cycle lows. This is a sign that a reversal has also occurred in these indexes as well. However, these reversals do not yet signal that a reversal of intermediate degree has occurred. Such a reversal in these indexes will only be confirmed with a break below the November lows. My intermediate term technical indicators are negative. However, until price breaks down and confirms these indicators any decline could still be limited.

I am still suspect that we are making a top of significance. At this time, this suspicion can only be confirmed in the Dow Jones Transportation Average and is only beginning to be confirmed in the other indexes. Therefore, it appears that this decline is now being lead by the Transports, followed by the NASDAQ indexes with the Industrials thus far failing to confirm. We are now in wait and see mode. The technical deterioration is beginning. We now have to sit tight and observe to see if further weakness materializes. If so, we could be in for a nasty decline. But, if this decline remains limited, as the longer-term technical indicators work off their overbought condition, we could see another advance. The bottom line is that we now just have to see what transpires over the next week or so.

Beating the Dow Part II

Last week I introduced one of Michael O'Higgins' methods of 'Value Investing.' In doing so, I created a model buy-and-hold portfolio without regard to any timing methods. Last week's portfolio is based on Price/Book ratios.

This week I want to look at another one of Mr. O'Higgins' methods for picking stocks and 'Beating the Dow.' This method is centered around a 12-month holding period. In this method the portfolio is re-evaluated every 12 months. All 30 of the stocks in the Dow Jones Industrial Average are examined and the portfolio is then adjusted for the next 12-month holding period.

This method is known as the 'Basic Method.' The stock selection process for this method is simple. First, you list all of the 30 DJIA stocks on a spreadsheet with their closing price. Second, you list the dividend yield in a column next to the price column. Third, you identify the 10 stocks with the highest yield. Next, of the 10 stocks from step 3, you identify the 5 stocks with the lowest closing price. Lastly, you identify the next to the lowest priced stock of the 5 with the highest divided.

At this point we basically have three groups of stocks. The first group is the 10 highest yielding stocks in the DJIA. The second group is then selected from the first group of 10. The second group simply consists of the 5 stocks with the lowest closing price out of the first group. The third group is a single stock selected from the list of 5 from the second group. This single stock is the next to the lowest priced stock in the previous group of 5.

Now that we have our three stock groups, we have to decide which group we want to include in our portfolio. The first group (10 highest-yielding stock portfolio) is the most conservative in that it has the most stocks in it. The second group (5 high-yield/lowest-price stock portfolio) is a riskier selection because it has fewer stocks. The third group (Penultimate Profit Prospect or PPP) is by far the most risky in that it is a single stock, which is chosen because it is the second lowest priced high yielder.

During the period from 1973 to June 30, 1991 Mr. O'Higgins shows that the first group returned 1,753.14%. The second group returned 2,819.41% and the third group yielded 6,245.49%. The diversification risk can clearly be seen by these returns. In our model portfolio I am going to choose the second group. The stocks that meet this criteria are listed below. These values were taken from www.quicken.com after the close on February 4, 2004.

Basic Year to Year Closing Price Method

Stock	Dividend Yield	Stock Price
Exxon Mobil (XOM)	2.5	40.35
AT&T (T)	4.9	19.14
General Electric (GE)	2.4	33.18
J.P. Morgan (JPM)	3.5	38.92
SBC Communications (SBC)	4.8	25.56

I will also utilize the method presented here, as well as the one last week, and create an additional portfolio utilizing each method when my technical work turns positive. In other words, I will use technical analysis to time the entries and exits of the other two portfolios. We will then compare the buy and hold results with the results of the portfolios in which we utilize technical analysis for timing.

Tim W. Wood

Copyright ' 2004 All rights reserved. Tim W. Wood, CPA Editor, Cycles News & Views www.cyclesman.com Expert Page Editorials Commentary Archive The Dow Report on FS Newshour

Home  l  Broadcast  l  Market Monitor  l  Storm Watch  l  Sitemap  l  About Us  l  Contact Us

Copyright ' 

[Orangedog]

Well we've all had some time to chew on this morning's jobs data. I was a little puzzled over some of the hi-fiving reactions that some people had to a report that not only came in well below expectations, but was also well below the 150,000 figure that is needed just to keep up with new entrants into the job market.

And then there was the revision last month's job data from 1000 to 16,000...once again, well below the original expected number of 200,000. And there was even more pom-pom waving over that as well. Of course the stock markets loved this news, since it pretty much undoes any worry of of a Fed interest rate hike until the 2nd half of the year at the soonest. This also clobbered the dollar vs both the euro and yen while causing the metals and miners to spike up.

[spokeshave]

We now have to sit tight and observe to see if further weakness materializes. If so, we could be in for a nasty decline. But, if this decline remains limited, as the longer-term technical indicators work off their overbought condition, we could see another advance. The bottom line is that we now just have to see what transpires over the next week or so.

Exactly

[lelio]

but was also well below the 150,000 figure that is needed just to keep up with new entrants into the job market.

What's bugging me about these numbers is the 496k "increase" in the household employment numbers -- what makes up the 380k difference from the 112k business increase? Is everyone at home running their eBay business?

Is there a one stop shop to get all the various raw economic figures? I'm particulary interested in personal bankruptcies, average debt, self employment, and small business numbers. And I want the raw ones as I don't trust the government's massaging ("seasonally adjusted" or "chaining" in GDP) of the numbers.

[Steven W.]

It depends on whose expectations to which you're referring because the typical analyst expectations are always skewed; economies move at the speed of blue whales, slow & methodical. market watchers are prone to desire instant gratification and are always left wanting every time we have an economic recovery which always starts out frustratingly slow & "jobless".

[imawit]

causing the metals and miners to spike up.

Okay, but did you see that 'buy everything in sight' stampede at the end of the day. Also a little more than a spike up when the day was done. Both the HUI and the BUGS burst thru some near resistances.

[B4Ranch]

Dollar Index Cash (NYBOT:DXY0)02/06/2004 after close

[Orangedog]

If this were a year ago, I could chalk it up to just being impatient. The problem is we are way into this recovery. Record low interest rates, back to back increases in GDP (if you believe the figures), profits are up, tax cuts, stocks are up, productivity has been up for quite a while. With all of those things in place, the economy should be churning out 250,000 to 300,000 a month...but it's not. What else could possibly produce more jobs? There isn't much on the horizon that can help. There is no pent-up demand because people borrowed their way through the past few years. There can't be too much more in the way of consumer spending increases because of all the debt they piled up to get through that time. Personal savings is just about zero and incomes are not rising fast enough to allow consumers to service much more debt than they already have.

[Beck_isright]

Just ignore the month to month fluctuations and watch the long term trends. History has a bad habit of teaching lessons.

[Orangedog]

Kinda looks like Niagra Falls.

[Orangedog]

LOTS of buying near the close. Volume on some of the miners I watch was good, but not what I've been accustomed to seeing on some of the previous runnups. Monday morning should be interesting.

[Orangedog]

Just ignore the month to month fluctuations and watch the long term trends.

The trend is your friend...unless you're looking for a job right now. ;)

[Orangedog]

Looks like Ike may have helped out Tim with tonights wrap-up...but then there would be charts...lots of charts.

[superloser]

Ike needs to have his crayons taken away from him!

[B4Ranch]

Lots of charts! One day to long term, everything for chart lovers(or guys who just love pictures more than text)

The monthlies are updated on the last Friday of the month.

[B4Ranch]

Did Johnny Cash say that when he was sober?

[dalereed]

"Ike needs to have his crayons taken away from him!"

Better include the pens, pencils, and chunks of charcoal also!

If that doesn't work, handcuffs are in order.

[imawit]

Volume ... was good, but not what I've been accustomed to seeing on ... runnups.

Not a runnup yet. Just kicked off the cement boots and broke water.

Monday morning should be interesting.

I'm a gonna be ready ! This will be the runnup or not phase. My guess is it will be it. Don't recall ever seeing an asymptotic buy out at the end of the day like this on miners.

By the way I got in at 3:30 just before it began in prep for Monday and after the BIG SCARY MEETING of the BIG & SCARY G7 monsters this week end. Or is that the BIG SCARY financial & monetary OMNIPOTENT GODS.

[imawit]

Another 'by the way'. My charting shows that POG broke out at $408. This will be an additional dynamic to watch on Monday.

pssssst, dale. We also have to take his PC away, pull the plug.

[Mr. Jeeves]

I was a little puzzled over some of the hi-fiving reactions that some people had to a report that not only came in well below expectations, but was also well below the 150,000 figure that is needed just to keep up with new entrants into the job market.

I think we've entered the era when the reaction of certain big players to economic reports has a bigger impact on subsequent market activity than the actual data in the reports. ;)