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Using the Dow Theory Today

Comments on “Charles Dow’s Theory Still Valid for the 21st Century,” by Jack Schannep, in the September 2012 AAII Journal:

In the sophisticated computer-driven market of today’s world, volatility reigns supreme. Too-big-to-fail investment firms with computerized algorithms can cause market disruptions and massive moves that destroy the basis for any theory, but this is a good lesson in how the market should work if an equal playing field existed (and it may work well—but for small and micro-cap stocks, if such a tracking system exists for them).

Since transportation stocks are less likely to be manipulated, they might be more important to follow than the industrials. And, in today’s world, the service and tech sectors play a much bigger role in our economy than they did in the past. Their relationships to the Dow must also be taken into consideration when investing wisely.

It is a much more complicated environment today than in the 1900s, when manufacturing ruled

—David Heffelfinger from Pennsylvania

Are 19% and –16% the buy and sell signals, respectively?

—Fernando Robles from Florida

Jack Schannep responds:

I use +19% and –16%, attained by both the Dow Jones industrial average and S&P 500 index, as the minimum levels to qualify as a bull or bear market for a number of reasons. In the article, I mentioned they are reciprocal numbers, unlike the +/–20% traditionally used. In addition, when markets rise 19%, they have gone on 93% of the time to at least a 29% gain (one-half have risen over 80%). Conversely, when markets lose 16%, they have gone on 81% of the time to at least a 24% drop and been followed 77% of the time by recessions. Therefore, IF a Dow Theory signal has not been completed by the time these levels are reached, I use that as a “stop-point” to complete the signal. This is explained more fully in the free area of my website www.thedowtheory.com.

Finding Value in the Current Market

Comment on “Uncovering Opportunities in a Tumultuous Market,” by Christine Benz, in the September 2012 AAII Journal:

This is a very good analysis of the current market situation with specific recommendations for each analytical point of view.

—Edward Kaminski from Indiana

Ratios Delineate Industry Differences

Comment on “16 Financial Ratios for Analyzing a Company’s Strengths and Weaknesses,” by Z. Joe Lan, CFA, in the September 2012 AAII Journal:

Another great article! It is good to underscore the vast differences between industries. I look forward to receiving the hard copy to keep on my desk. Thank you!

—Steven Sears from Iowa

Keep Focus on Long-Lasting Value

Comment on “The Top ETFs Over Three Years: Real Estate Dominates,” by Charles Rotblut, CFA, in the September 2012 AAII Journal:

It always seems to boil down to one thing: “Be greedy when others are fearful,” the most important thing Warren Buffett ever told me. But you must be greedy and buy those things that will always have value; not just everything that has lost all its value. Real estate, Apple, etc.

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So why doesn’t the average Joe buy things that he knows will eventually recover due to its intrinsic value? Because the other thing that Buffet taught us: “Investing is more about temperament than intelligence!” What is it right now that nobody wants, but will always eventually be valuable? That is worth the time to explore.

—John Gorsline from Washington

Adequate Resources for Retirement

Comment on “Poor Advice About Social Security,” Briefly Noted item in the September 2012 AAII Journal:

If you have adequate resources—pensions and/or company-provided retirement benefits to include health insurance—and these resources combined provide 100% of your current income, you can retire at age 62 if you want to.

You should have additional savings to take care of additional expenses along the way.

—Barry Slatton from Alabama


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