Is the Dow Flashing a Buy Signal?
Kurt Brouwer July 29th, 2009
According to various market commentators and pundits, this rally is either a cyclical or secular bull market, a ‘dead cat’ bounce, a reaction rally or any one of a number of other descriptions. If this article from Bloomberg [emphasis added] is correct, more gains are ahead:
Dow Sends Buy Signal That Has Worked Since 1921 (Bloomberg, July 29, 2009, Eric Martin and Michael Patterson)
The Dow Jones Industrial Average is sending a buy signal that has foreshadowed gains of 18 percent during the past nine decades.
The 30-stock gauge climbed to more than 10 percent above its mean level from the previous 200 days, rebounding from 34 percent below the so-called 200-day moving average in November, according to data compiled by Bloomberg. Eighteen of the last 21 times the Dow rallied from at least 10 percent below the 200-day level to 10 percent above, it posted gains during the next 12 months, Bloomberg data since 1921 show.
…The Dow posted an average advance of 18 percent during the 12-month period following buy signals since 1921, Bloomberg data show. In the six-month period, there were 17 advances for an average gain of 8.2 percent. In three months, it climbed 18 times, averaging an increase of 5.7 percent…
The statistics mentioned in the piece are below. The font is rather small, but that’s the best I could do without messing up the columns. If you want to increase the size, hit Ctrl+.
Returns by the Dow Jones Industrial Average 12, 6 and 3months after the buy signal.Buy Signal 12 Months 6 Months 3 MonthsJune 11, 2003 13.36% 8.98% 3.01%Jan 8, 1999 19.49% 15.38% 5.75%March 5, 1991 9.05% 1.21% 1.11%Jan 27, 1989 10.18% 13.46% 4.14%Sept. 3, 1982 31.38% 23.02% 11.67%July 18, 1980 3.78% 5.34% 3.48%Aug. 9, 1978 -3.74% -7.76% -9.83%March 7, 1975 26.43% 8.63% 9.11%Dec. 7, 1970 4.73% 12.75% 9.69%May 8, 1967 1.02% -6.60% 1.41%Jan. 25, 1963 15.20% 1.18% 5.68%July 24, 1958 33.51% 19.91% 8.53%Dec. 13, 1949 16.26% 15.04% 3.15%Nov. 6, 1942 16.66% 18.21% 8.29%Sept. 11, 1939 -16.61% -4.49% -5.20%July 6, 1938 -3.05% 10.95% 7.49%Feb. 18, 1935 43.10% 19.09% 8.06%Apr. 19, 1933 54.47% 23.53% 51.63%Aug. 29, 1932 37.72% -31.68% -21.87%Aug. 18, 1924 35.82% 14.36% 5.46%Dec. 12, 1921 21.89% 12.53% 8.12%Average 17.65% 8.24% 5.66%
Via: Jesse J. Segreto
Barron’s expresses skepticism on this signal here:
…I have my doubts that the signal is meaningful for investors. More likely, it seems to be just an academic exercise looking backward in time to tell investors what they should have done weeks ago.
In my February column, I questioned the overall validity of tracking these two indexes in the modern world. Neither index really represents the same sectors they did when Charles Dow formulated his famous averages more than a century ago (see Getting Technical, “Be Leery of Dow Theory,” Feb. 19, 2009)…
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Did you enjoy this article?
If one is willing to enter and leave the market based on various conditions – play the market, as it were – those buy signals seem to be indeed a pretty good indication.
I am a long term investor type (the much maligned buy-and-hold’er). I think, looking at about half of those instances though, that the market was exhibiting the proverbial dead cat bounce or bear rally.
I’d prefer to just buy companies that I like and trust and let the market indices do their thing. So far, this has served me pretty well.