AlphaDow

Archive for October, 2009|Monthly archive page

“BE SIMPLE. TAKE THE GRAND VIEW.” – ANGAS

In Uncategorized on October 1, 2009 at 3:06 pm

A unique part of the Dow Theory is the “principle of confirmation”.  When I speak to people about the 30 Industrials (DJIA) being the “makers of stuff”, and the 20 Transports (DJTA) as the “shippers of stuff” I generally see the light bulb go on.  The “ahhhh” coming out of their mouths generally signals when they “got it”.  It makes intuitive sense.  If you have a bunch of companies making stuff and no one selling or shipping it to the stores or end user, you are going to have a whole pile of stuff sitting around – and that’s no good for the econonmy.  Economics at it’s finest.  It took me about 8 years to distill this information into a useable format.   If my economics professors at the University of Western Ontario had the same synthesizing intelligence they could have saved me a lot of time and money.  Or as Matt Damon so eloquently says in Good Will Hunting  “you’ll spend $150,000 on an education you could have got for $1.50 in late fees at the public library.”  But I digress, let’s look at the charts:

NDT 1 OCT 09

 

As you can see by the dark blue horizontal lines, the orthodox Dow Theory Buy signal came on 23 July 09 when the Industrials (in the top frame) confirmed the new high in the Transports.  This came just before our mechanical New Dow Theory buy signal on 7 Aug 09 indicated by the blue arrow and blue word “BUY”.   What could be more simple.  The Primary Trend has been UP since then.  Period, full stop.  This is the “grand view”. 

QUESTION: “I feel like I’ve missed the rally.  What do I do with all that cash?”

ANSWER: Most people succumbed to what I call I.C.S.IA. market timing — “I can’t stand it anymore.”  They panicked out somewhere around the October or March lows because some talking head on TV (maybe Kevin O’Leary or Jim Cramer) told them to.  Or their broker was tired of hearing them complain about their losses and couldn’t stand it anymore herself and she let them sell.  If you want a simple solution, call your broker and recite the following:  “the tide is now rising and we are sitting in too much cash.  I want you to purchase an index fund that tracks the blue chip index.  Take 25% of the cash in my account and buy it today.  Buy another 25% in a month.  The other 50% we will monitor together and deploy on any minor ripple that doesn’t take the index down below its June close of 8146 on the Dow.” 

Whew.   That took courage.  And you know what?  You have a better than one-third chance of being wrong.  That’s the cost of equity investing.  The panic you feel when you do the right thing.  Because the easy thing is the wrong thing to do.  The easy alternative is buying a 0.5% GICs and paying 43% tax on that 0.5%.  And that’s a guaranteed trip to the poor house if and when inflation rears its ugly head in the next economic expansion.

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