Dow makes a new high… should we care?

Yesterday, Sept 25, the Dow Jones Industrial Average came 2 points awa from breaking its previous all-time high set in January, 2000.  That is six and a half years to surpass its old record.  Today, Sept 26, it briefly traded above that old high at the open but has traded below that mark as I am typing this.

 

Is the Dow making a new high a significant event?  Typically, when an index makes a new high it is a sign of strength in the market, and I would argue this is no different.  The market is finally recovering after a 6-year correction and the economy is reflected in the market.  However, I wouldn’t get too excited about the Dow for a couple of reasons:

1. The Dow is a collection of only 30 stocks.  30 stocks is not necessarily representative of the market as a whole. 
2. Survivorship bias – in the past years stocks ha been added to and removed from the Dow.  Presumably, good stocks have been added and poor ones have been removed.  Microsoft is on the Dow, for example, and while the Dow is where it was at 6 years ago, Microsoft is only 50% of were it was 6 years ago.
3. Inflation – the value of $11,722 today is worth less than it was six year ago.  Inflation has eroded the buying power of the dollar, so adjusted for inflation the market is still a little ways off its high.

There are better indexes to check other than the Dow to gauge market strength, like the SP-500, Nasdaq Composite Index, Russell 1000 or Russell 2000, SP-600 Small Cap Index and so forth.  Still, the Dow at 11,722 represents an important psychological level that cannot be ignored and I’m watching it closely.

It’s not enough for the Dow to simply poke its head above is all-time high.  It has to close above it and stay above it for a period of at least a few days.

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Can the Democrats retake the House in November?

This November are the mid-term 2006 Congressional and Senate elections.  The Democrats currently hold minority positions in both Houses.  With the unpopularity with President Bush in recent months the Democrats are hoping that they can take advantage of this momentum and retake possibly both Congress and the Senate.  They need to pick up at least 15 seats in Congress and 6 seats in the Senate.

 

A few weeks ago the Republicans looked like they were in trouble.  However, in the last two weeks or so President Bush seems to be recovering a little bit in the Presidential approval polls.  I think that this bodes poorly for the Democrats for a few reasons.

1. The President’s approval ratings are improving, so less people are unhappy with him (this is obvious).  However, his approval rating seems to be inversely related to the price of oil.  When oil goes up, ratings go down, and vice versa.  Seeing as how the President doesn’t really have control over the price of oil this is a little odd, but I guess people have to blame somebody.
2. As low as the President’s approvals are, Congress’s are worse.  Only 25% of people approve of the way Congress is handling their jobs.   If the Democrats think everyone hates Republicans but loves them intead, there aren’t any numbers to confirm this.
3. Voter turnouts are lower in election years.  Both parties have to get their bases out in order to win.  But is the Democrat base large enough to displace the Republicans?
4. In 1994, Republicans came to power after marketing their "Contract With America", their plan to run the country.  The Democrats don’t really have anything like, they do not currently have a central plan.  They seem to be all over the place (the Republicans are as well but the Democrats are the ones at a disadvantage since they want to retake power).
5. Republicans were miffed at the President for a few reasons: (1) The Harriet Miers nomination for the Supreme Court, (2) The response to Hurricane Katrina, (3) The Dubai ports deal.  While I think all 3 are over-reactions, these three things are fading from memory.  The occurred in the "distant" past.
6. In other countries where people were unhappy with their elected leaders who brought them into the war in Iraq (Britain and Australia), the leaders of both countries were re-elected by smaller margins than previous elections.  In countries that stayed out of the war (Germany and Canada), opposition parties who supported the United States have been elected.  Thus, anti-war sentiment is not enough to win an election, and unpopularity of the current leader appears to be much ado about nothing (or at the very least, overstated).

All five of these points are a reversal of fortune for the Democrats.  Whereas they were able to ride along the momentum when Bush and the Republicans were stumbling, it looks like the Republicans have gotten their shirt together and it won’t be a cake-walk for the Democrats after all.  Come November, I think that the Democrats will pick up seats but will have a hard time gaining the majority.

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Scanning for stocks

The main method of investing that I use (on the long side) is the CAN SLIM method, first described by William O’Neil in his book How to Make Money in Stocks. This method works well is a strong, uptrending market but it doesn’t work so well in a choppy sideways market like what we have experienced in 2006. I have gotten whipsawed 10-ways from sun down over and over and over again this year by following that system. So, this past year I have tried to learn a new, short-term approach for trading stocks, holding them for maybe a few days. This is still a work in progress and so far I have had mixed results.

However, I have not given up on my CAN SLIM method, since I think that is the best way to invest. Not that much work once you get all your picks in. To do this, I go through my daily edition of Investor’s Business Daily, the electronic edition, and scan for all stocks with strong fundamentals. The way I do this is copying and pasting the entire edition from a pdf file to a text file. I then wrote a script a few months ago that will scan that text file for all stocks that meet my specific criteria. I usually require a minimum EPS rating of 85, a minimum relative strength rating of 85 and a composite rating of 90. I can specify my parameters at the command line when I run the file so I can run my script over and over again. I try to get the list down to under 100 stocks so I can actually go through them.

I’ve included the results from my latest scan.  I had to make the font size super small in order to get it to fit on-screen.  If you really are curious what the results are, copy and paste this to a text file.  I’d have put this in a text file but there’s no way to upload files on this blog.

Update: I have deleted the results from my latest scan on Sept 12.  They don’t fit in the margins anyways.

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Short term bullish on the market

Today (Monday, Sept 11, 2006) was an up-day on the Nasdaq stock market but a down day on the SP-500 and Dow Jones indexes.  Reading around some of my preferred trading forums and blogs, a lot of seasoned traders seem to be short term bearish on the markets.  I think this is justifiable as September is the worst trading month of the year.Oil and gold have pulled back quite a bit today, with oil at the lowest level since mid-March.  Gold suffered a huge decline today, as did Silver.  These factors would normally add up to bullish conditions but as we have seen over and over, oil always holds at its 200-day moving average and the decline in metals is often just a fakeout.

I actually bought a silver stock last week with the intention of holding it for a few days and selling it for a quick gain (Silver Wheaton).  I was right and was up to $12.02 from my $10.98 buy point and watched it stage a reversal last week.  I knew it was at the top of a channel and thought that I should make a move.  I acted too late; I bought put options on it last Friday when I should have done it during the day on Thursday.  I should have sold the stock Friday afternoon but instead I sold it today after it declined another 9%.  In the end, my put options roughly offset about 75% of my losses in the stock so I guess I did okay.  Still, hesistation cost me dearly.

Here’s where things get interesting: I knew SLW was in trouble when it staged a shooting star reversal pattern on a candlestick chart and more importantly, hit the top of an up-channel.  I figured the run was over.  Now, SLW has retraced all the way down to the bottom of the channel and has hit the 50-day moving average, a place where it has more-or-less found support since late June.  This looks like a tempting place to go long on the assumption that stocks move in channels.  Silver and Gold took a beating today; SLW has moved down almost 20% since its peak on Wednesday.  That’s a 20% decline in 4 trading days.  In my opinion, that is too much and statistical analysis tells me that the odds favour a short-term move up than down.  That’s why I can say I am bullish, stocks that get beaten down really quickly often retrace a portion of their losses.  Not always, but that’s why I am betting fairly small on this one.

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I’m not much of a team player

One of the activities that I take part in on a weekly basis is badminton.  I’ve been playing for a couple of months now, and a few years ago I also played for several months.  In other words, I have retaken up the game.

The people I play with mostly are my friends.  What I have learned is that since I have the most experience at the game, I am the best at it.  Everybody I play with is bigger than me, stronger than me or faster than me (I’m not a very big guy, shorter than average) but in one-on-one action I am definitely the best.  This is because I have learned to use technique rather than speed or power.  I use positional playing and place my shots around the court rather than smash it at my opponent every time.  I call myself a touch player.

So, while I am pretty good in singles I am pretty bad in doubles. I played doubles last week and I was really bad.  My timing was off and I found it difficult to hit shots that my partner missed.  I found that my style of game play was off; I like to drop shots while my partners prefer to return them.  In short, I am not a team player but instead am an individual competitor.  I have decided that I really need to get in more practise with double competition because I want to become more well-rounded.

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My other website

I’ve actually maintained another web page for over a year and a half giving my weekly stock market commentaries (sometimes bi-weekly).  It’s on an old ezboard discucsion board; it was actually a religious board but another friend gave it to me and I converted it into a stock market discussion board (on which nobody but me participates, apparently).

 

I’ll put up the link sometime.

 

I actually prefer the ezboard format as opposed to the blog format for the time being for my commentaries, but that may change.  It’s difficult to run multiple webpages.

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My other blog

I have a blog on MSDN (the Microsoft Developers Network).  It is more technical in nature, but not too technical.  You can view it here.

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