Charles Dow, founder of the Wall Street Journal, once said:
Another example of how to determine what is fair is said in this way:
To better illustrate how this concept works, let us use the peak of the Dow Jones Industrials on October 2007 at 14,164.53 to the most recent low of 6440.08 on March 9, 2009. According to Dow's theory the market should go back to the 9375.37 for a 38% reaction (bear market rally) or 10,302.31 for a 50% reaction (bear market rally). Since we cannot say for certain that the decline is over at the 6440.08 level, the best we could do is to buy as the market is moving up, when Industrials and Transports go up together on strong volume.
What would I buy if I were investing based on the expectation of a rebound in the stock market? The best option for "trading" purposes is to buy the Diamonds (DIA) which are supposed to replicate the movement of the Dow Industrials. However, I prefer individual Dividend Achiever stocks which pay me while I wait. On March 10th, I bought Helmerich and Payne (HP) when both the Industrials and Transports reversed their direction. At $22.56 the price of HP was reasonably low. Not knowing where the top would be I sold my position in HP at $26.22 on March 26th for a gain of 16%.
After I sold HP, the stock went as high as $34.50. Basically I gave up the opportunity to receive a 53% gain. However, Dow's idea of "fair profits" means that I must be satisfied to receive the 16%. While I could have bought Citigroup (C) or Bank of America (BAC) I couldn't justify putting my money into stocks that weren't transparent and had discontinued their dividend increasing policy. After selling HP, I bought Meridian Biosciences (VIVO), a Dividend Achiever that had reached a 1 year low on the same day.
In the example that I've just given it is important to know that according to Dow, a gain of 5% was considered to be "fair profit." I guess if "guaranteed" money rates can easily be exceeded in a stock transaction then it might be worth the investment. Touc
The most essential piece in this concept is the idea of fairness in stock investing. For some, this idea might seem like a quaint notion however it exemplifies an essential quality that is necessary for all stock market participants. What exactly is "fair profits?" Dow covers this concept over and over again. Dow says:
"...secure stock at a time and at a price which will give fair profits on the investment."
"A 10-point decline under such conditions would be almost certain to bring in a bull market more than 5 points recovery and a full 10 points would not be unreasonable..."
"A much more practicable theory is that founded on the law of action and reaction. It seems to be a fact that primary movement in the market will generally have a secondary movement in the opposite direction of at least three-eights of the primary movement. If a stock advances 10 points, it is very likely to have a relapse of 4 points or more. The law seems to hold good no matter how far the advance goes. A rise of 20 points will not infrequently bring a decline 8 points or more."In the preceding examples, when a stock or index is rising or falling, we should be able to expect a decline or rise to retrace at least 38% to 50% and quite possibly 100% of the move. To be fair, we should be willing to accept that we'll never catch the exact bottom. Therefore, we should content ourselves with getting between 15% to 25% of any movement.
To better illustrate how this concept works, let us use the peak of the Dow Jones Industrials on October 2007 at 14,164.53 to the most recent low of 6440.08 on March 9, 2009. According to Dow's theory the market should go back to the 9375.37 for a 38% reaction (bear market rally) or 10,302.31 for a 50% reaction (bear market rally). Since we cannot say for certain that the decline is over at the 6440.08 level, the best we could do is to buy as the market is moving up, when Industrials and Transports go up together on strong volume.
What would I buy if I were investing based on the expectation of a rebound in the stock market? The best option for "trading" purposes is to buy the Diamonds (DIA) which are supposed to replicate the movement of the Dow Industrials. However, I prefer individual Dividend Achiever stocks which pay me while I wait. On March 10th, I bought Helmerich and Payne (HP) when both the Industrials and Transports reversed their direction. At $22.56 the price of HP was reasonably low. Not knowing where the top would be I sold my position in HP at $26.22 on March 26th for a gain of 16%.
After I sold HP, the stock went as high as $34.50. Basically I gave up the opportunity to receive a 53% gain. However, Dow's idea of "fair profits" means that I must be satisfied to receive the 16%. While I could have bought Citigroup (C) or Bank of America (BAC) I couldn't justify putting my money into stocks that weren't transparent and had discontinued their dividend increasing policy. After selling HP, I bought Meridian Biosciences (VIVO), a Dividend Achiever that had reached a 1 year low on the same day.
In the example that I've just given it is important to know that according to Dow, a gain of 5% was considered to be "fair profit." I guess if "guaranteed" money rates can easily be exceeded in a stock transaction then it might be worth the investment. Touc
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