dow jones


Take the 1000 Dow level @ 1970 add 40yrs @ 3% inflation with say 3% average dividends and the PV = 10,250’ish. Unless something within the fundamentals changes, we could be back and forth for a while. Of course you can substitute earnings yield for dividends, and see what value pops out.

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Dow Theory as espoused by Charles Dow was all about the primary trend, modified by the secondary trend ignoring the daily fluctuations, with confirmation from both sets of indices. So lets look at the primary trend and the confirmation, or lack thereof.

From Robert Rhea;

Under Dow’s theory the primary trend, once authoritatively established as bullish, is considered to be continuing in force until negated by a confirmed bearish indication such as would be the case when, after a reaction of full secondary proportions in a bull market, a rally fails to lift both averages to new high ground, and a later decline carries both averages below the preceding secondary low.”

William Peter Hamilton – “The movement of both the railroad (now the Transports) and industrial stock averages should always be considered together. The movement of one price average must be confirmed by the other before reliable inferences may be drawn. Conclusions based upon the movement of one average, unconfirmed by the other, are almost certain to prove misleading.”

William Peter Hamilton – “Dow’s theory stipulates for a confirmation of one average by the other. This constantly occurs at the inception of a primary movement, but is anything but consistently present when the market turns for a secondary swing.”

William Peter Hamilton – “When one breaks through an old low level without the other, or when one establishes a new high for the short swing, unsupported, the inference is almost invariably deceptive.”

William Peter Hamilton – “Indeed it may be said that a new high or a new low by one of the averages unconfirmed by the other has been invariably deceptive. New high or low points for both have preceded every major movement since the averages were established.”

William Peter Hamilton – “The two averages may vary in strength, but they will not vary materially in direction especially in a major movement. Throughout all the years in which both averages have been kept, this rule has proved entirely dependable. It is not only true in the major swings of the market, but it is approximately true of the secondary actions and rallies. It would not be true of the daily fluctuations, and it might be utterly misleading so far as individual stocks are concerned.”

Robert Rhea – “The most useful part of the Dow theory, and the part that must never be forgotten for even a day, is the fact that no price movement is worthy of consideration unless the movement is confirmed by both averages.”

Robert Rhea – “The Dow theory deals exclusively with the movement of the railroad and industrial stock averages, and any other method would not be Dow’s theory as expounded by Hamilton.”

Robert Rhea – “A wise man lets the market alone when the averages disagree.”

Robert Rhea – “When the averages disagree they are shouting ‘be careful’.”

With regard to the Industrials, a new Bull trend was in play with the breaking of the previous high of 2000. The low of 2003 constitutes a Low, that would indicate a new Bear trend [primary] Currently what we have is a secondary movement, which is a corrective movement, but, not a new primary trend.

The transports far more clearly demonstrate the lack of a new Bear primary trend, and are simply in a secodary trend, very near a continuation point for the primary trend.

Thus, the economy as a whole, remains, as far as Dow Theory, in a corrective phase, or secondary movement. Until a new primary trend is indicated and confirmed by both indices, we remain in a corrective phase.

Sept. 18 (Bloomberg) — Kraft Foods Inc., the world’s second-largest foodmaker, will replace American International Group Inc. in the Dow Jones Industrial Average after the biggest U.S. insurance company was taken over by the government.

Kraft, whose top shareholder is Warren Buffett’s Berkshire Hathaway Inc., will replace AIG on Sept. 22. News Corp.’s Dow Jones Indexes said it declined to add another financial company to the 112-year-old stock average “because of the extremely unsettled conditions” in global markets.

Buffett, that crafty cockney, smells of roses again. This was just recently spun-off.

Still no confirmation twixt the DJIA & DJ Transports

Some long term data to provide some context.

GDP Nominal 1885-2007……………………..+5.97% compounded
Dow Jones 1885-2007………………………+5.05% compounded
Inflation 1885-2007………………………….+2.58% compounded

Thus we can see that the DJIA has tracked the growth of the economy quite closely, returning a positive real return. This does not include dividends, which would increase the return substantially. From a viewpoint of Dow Theory however, the data correlates.

Chicago & North Western
Delaware, Lackawanna & Western
Lake Shore
Louisville & Nashville
Missouri Pacific
New York Central
Northern Pacific Pfd
Pacific Mail
St Paul
Union Pacific
Western Union

Pacific Mail was a Steamship company.
Western Union was a Telegraph company.
All the other constituents were Railways.

By tracking the constituents of the index, and later Transports and Industrials indices, it can be analysed with regard to Dow Theory. By tracking the changes through history, and their relevance to the economy at the time, eventually the current index can be evaluated in terms of the Dow Theory.

Greatest DJIA Daily % Gains
of All-Time
Rank…… Date………………. Close….. Net Chg.. Chg%
1……….. 15/03/1933………. 62.10….. +8.26….. +15.34
2……….. 06/10/1931………. 99.34….. +12.86… +14.87
3……….. 30/10/1929………. 258.47… +28.40… +12.34
4………. 21/09/1932………. 75.16….. +7.67….. +11.36
5………. 21/10/1987………. 2,027….. +186….. +10.15
6………. 03/08/1932………. 58.22….. +5.06…. +9.52
7………. 11/02/1932………. 78.60….. +6.80…. +9.47
8……….. 14/11/1929………. 217.28… +18.59… +9.36
9……….. 18/12/1931………. 80.69….. +6.90….. +9.35
10……… 13/02/1932………. 85.82….. +7.22….. +9.19
11……… 06/05/1932………. 59.01….. +4.91….. +9.08
12……… 19/04/1933………. 68.31….. +5.66….. +9.03
13……… 08/10/1931………. 105.79… +8.47….. +8.70
14……… 10/06/1932………. 48.94….. +3.62….. +7.99
15……… 05/09/1939………. 148.12… +10.03… +7.26
16……… 03/06/1931………. 130.37… +8.67….. +7.12
17……… 06/01/1932………. 76.31….. +5.07….. +7.12
18……… 14/10/1932………. 63.84….. +4.08….. +6.83
19……… 15/03/1907………. 81.33….. +5.10….. +6.69
20……… 20/06/1931………. 138.96… +8.65….. +6.64

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