Category Archives: Dow Theory

Dow Theory, This Is Not

Posted on July 13, 2016 by | 2 comments

Dow Theory is only a theory.  Therefore, it is necessary to take all indications with a tremendous grain of salt.  However, it has been our endeavor to determine the qualitative nature of the work as presented by anyone who writes on the topic.  One individual that we’ve found of interest is Manuel Blay on SeekingAlpha.com.  Mr. Blay provides commentary on elements of Dow Theory and in this piece we’d like to examine the performance of the market calls associated with the concept of Dow Theory.

How do we arrive at performance data?  We take the date that a primary trend bull/bear market is indicated and looked for the date for when the indicated stock, ETF or index next received a change to the primary trend bear/bull market indication.  This seems the best way to gauge the concept of performance even though we understand that there are nuances to actual start and end dates.  The very end of this article has the internet links and dates associated with the collection of performance data.

Anyone interested in Dow Theory should make it their goal to identify, whenever possible, what the primary trend of the stock market is based on the movements of the Dow Jones Industrial Average and Dow Jones Transportation Average.  The goal of identifying the primary trend is to maximize profits while avoiding as much loss as possible.  In the case of Mr. Blay, he has applied Dow Theory to ETFs and individual stocks as well as the usual stock market indexes.

For each bullet point below, we only took the date of the call for a “primary bear market” or “primary bull market” and measured the respective stock, ETF, or index for percentage change.  If it was a bear market and the percentage change was negative from the primary bear market signal to the subsequent primary bull market signal then, on the whole, we’d consider that Dow Theory met expectations as a tool for profitable investing (green font).

Alternatively, if it was a bear market and the percentage change was positive from the primary bear market signal to the subsequent primary bull market signal then, on the whole, we’d consider that Dow Theory did not meet expectations (red font).

There may be errors in our ability to identify any subsequent bull or bear market article, however, below is our best effort to identify any change to the primary trend based on the work of Manuel Blay (We’d give a margin of error +/-1% to any estimate.):

  1. Bear Market: –31.54% for GDX
  2. Bear Market: –26.08% for SIL
  3. Bull Market: –24.91% for GDX
  4. Bull Market: –26.95% for SIL
  5. Bull Market: –5.24% for HAO
  6. Bear Market: +7.46% for DJT
  7. Bear Market : +6.21% for DIA
  8. Bear Market: +7.00 for SPY
  9. Bull Market:  -9% for GDX
  10. Bull Market: –23% for SIL
  11. Bull Market: –11.30% for GLD
  12. Bull Market: –16.01% for SLV
  13. Bear Market: +8% for DIA
  14. Bear Market: +7% for SPY
  15. Bear Market: +8% for DJT
  16. Bear Market: +4% for  HAO
  17. Bull Market: +2% for  DIA
  18. Bull Market: –9% for GLD
  19. Bull Market: –11% for SLV
  20. Bear Market: +17% for GLD
  21. Bear Market:+10% for SLV
  22. Bear Market: +2.60% for DIA
  23. Bear Market: +52% for GDX
  24. Bear Market: +58% for SIL
  25. Bull Market: –4.39% for DIA

It could be argued that the date that the primary trend changed was not the same as the publish date of the article.  However, as a person interested in Dow Theory, you probably could only act on what is published and not the literal date that the market made a presumed bull or bear market primary trend change.

Among all 25 instances of a bull or bear market primary trend indication, only three (#1, #2 and #17) had performance that was expected of Dow Theory.  All of which leads to the obvious question, why would Dow Theory provide such disastrous results when the whole point of Dow Theory is to take advantage of primary trends in the stock market?

Primary Trend Bull Markets

Our view on the lack of performance at the conclusion of a primary trend bull market is best stated by Charles H. Dow himself when he said:

"We have frequently demonstrated that the stock market, while full of short fluctuations [also known as secondary reactions], has a continuing main movement, which often runs in one direction for three or four years at a time. (source: Dow, Charles H. Review and Outlook. Wall Street Journal. September 13, 1900)."

We believe that the primary trend indications provided by Mr. Blay are not long enough to be meaningful and advantageous.  The lone exception, in terms of time, HAO from September 13, 2013 to August 21, 2015, still garnered a performance that was counter to the goal of Dow Theory (primary trend bull market but lost –5.24%).

When a signal is given in a period that is less than a year for a primary trend bull market, we would reassess the current and previous interpretation to determine where we went wrong, because clearly, calling a full cycle of a (bull-bear-bull) primary trend WITH negative returns does not augur well for Dow Theory analysis.  If the (primary trend bull market) is less than a year then something is wrong.

Primary Trend Bear Markets

Alternatively, it is known that primary trend bear market last ⅓ to ½ as long as the preceding bull market.  Therefore, we cannot hold primary trend bear market signals to the same time criteria as primary trend bull markets.  A collapse in the market (a la 1987) resulted in a bear market to bull market signal in less than 5 months.

Do you short bear market for additional gains?  If the performance data for Mr. Blay is any indication, we wouldn’t recommend short selling primary trend bear markets.  Only in the very first case (#1) were we able to see a bear market with declines by the end of the bear market period.

Dow Theory in Three Steps

What does a Dow Theory primary trend bull or bear market look like, in theory?

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Again, this is a theoretical look at the way primary trends should transpire.  Anyone who plays the “Dow Theory” game will need to accept some missed opportunities like the very top and very bottom of a market move.  Notice that  each primary trend indication occurs after a peak or trough.  This is the point at which a low or peak has been reached, is then retested but not violated, then continues in opposition to the previous primary trend.

What does the above primary trend chart mean?  It means that as an investor who attempts to apply Dow Theory, you should see some investment gain no matter which market you’re in.  While the amount of the gains will vary, the net result should be positive percentage change in a primary trend bull market and negative percentage change (for short sellers) in a primary trend bear market.

Mr. Blay’s performance of 12% correlation with the primary trend suggests that either Dow Theory doesn’t work, that the analysis was incorrect or that Dow Theory AND the analysis don’t work.  We’d argue in defense of Dow Theory being reasonably accurate and the interpretation being incorrect in this instance.  An investor cannot be faced with 88% of calls not correlating with the primary trend.

A Line or Trading Range

Missing from the above chart is the period of time that the market wallows in a trading range. The concept of trading range or “line” does get addressed by Charles Dow and is best described by William Peter Hamilton, fourth editor of the Wall Street Journal, as indicated in the following commentary:

“Such a narrow fluctuation, to the experienced student of the averages, may be as significant as a sharp movement in either direction.” Rhea, Robert. The Dow Theory. Barron’s (1932). page 82.

Hamilton suggests that a trading range is equal to or greater than a parabolic move up or market crash.  The current market environment has provided us with what we believe is a trading range which began in February 2014.

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With a range of 6.70% between the middle of the line and the top/bottom, any breakout above or below the range should result in exceptional change in the index.  However, these processes are a function of market sentiment which generally plays out over time.  A line can last for quite some time and Dow Theory has been clear in saying that the previous trend is still in effect until the line is broken.  (the Dow Jones Industrial Average isn’t the only element necessary to achieve a Dow Theory primary trend change.)

Conclusion

It is very clear that Mr. Blay is dedicated to the work he does in Dow Theory.  He writes on the topic almost every other day.  However, Dow Theory moves at a glacial pace and requires stepping away from the topic.  None of the great Dow Theorists (Russell, Schaefer, Omerod, Fritz, Shumate, Rhea, Hamilton, Nelson, and Charles H. Dow) carried an account of market action with primary trend changes with the frequency that has been displayed by Mr. Blay.

There is no way that a person could be applying Dow Theory and come away with, at least on paper, results that are the exact opposite of each call in the change of the primary trend.  As shown in the cycle chart above, there is a theoretical sweet spot where a gain will be made if you go long in a primary trend bull market and go short in a primary trend bear market.  Yet, in neither case, except in the three out of 25 instances cited above, was it possible to demonstrate gains.

For anyone interested in Dow Theory, when you see primary trend changes at such a high frequency you have to be very critical of the work.  When you see the above performance that is attributed to Dow Theory analysis, then you should know that you’re not witness to Dow Theory at all.

References:

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Posted in Dow Theory, Dow Theory Bull Market indication, Manuel Blay

Review: HP Achieves Downside Target and Rebounds

Posted on July 2, 2016 by | Leave a comment

On September 14, 2015, we posted to our site an article about Helmerich & Payne (HP).  At the time we had the following investment conclusion:

“We advise that investors consider HP at the ascending $39.43 level or below.”

HP fell to the level indicated in our posting and has since increased +37% from the article date and +50% from the date of when the stock crossed below the ascending $39.43 level.  Below is the updated Speed Resistance Lines and our perspective on the potential for the stock going forward.

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Posted in 50% principle, Dow Theory, Edson Gould, Helmerich & Payne, speed resistance line, SRL

Dover Corp.: Review

Posted on June 21, 2016 by | Leave a comment

On September 10, 2015, we posted an article which reviewed the fundamentals of Dover Corp. (DOV).  Our conclusion on the stock was as follows:

“Considering that there are only two remaining downside targets, the downside risks are “contained” for the most part.  At most, we think that the next downside target is at the ascending $38.51 level.  A two stage purchase plan should be entered into at the below the ascending $46.87 and  $38.51 levels ($56 and $44, respectively).”

Since September 2015, the following is the updated Dow Theory chart that was referenced in the above quote:

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What should stand out is the fact that once DOV declined below the ascending $46.87 downside target, losses have been contained. Subsequently, Dover has risen to the current price of $70.97.  Our best guess is that DOV is facing resistance at the ascending $59.40 line (approx. $80).

As best we can tell, the use of Dow Theory could be coincidental to what ultimately happens to the stock.  However, depending on the quality of the stock (ideally blue chip stocks), Dow Theory is an appropriate tool for consideration of downside risk.

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Posted in DOV, Dover, Dow Theory

Dow Theory: Are We There Yet?

Posted on January 15, 2016 by | Leave a comment

In our last Dow Theory assessment dated May 17, 2015, we said the following:

“We’re looking for a bear market indication with a declining of the Industrials, Transports and Russell 2000 below their respective February 2015 lows followed by a decline below the October 2014 lows. In addition, we’re looking for the revised data in the Industrial Production Index to continue in the current declining trend.”

Since May 2015, there has been a lot of action but not a lot of substance.  Below is our Dow Theory update explaining why a bear market was not signaled in August of 2015 and what to watch for going forward.

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Posted in Dow Theory, Dow Theory Confirmation, Industrial Production Index

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Quick Take: Dover Corp.

Posted on September 10, 2015 by | 1 comment

According to Yahoo!Finance, “Dover Corporation manufactures and sells a range of equipment and components, specialty systems, and support services in the United States. The company operates in four segments: Energy, Engineered Systems, Fluids, and Refrigeration & Food Equipment. The Energy segment provides solutions and services for the production and processing of oil, natural gas liquids, and gas to drilling and production, bearings and compression, and automation end markets.”

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The price of Dover Corp. (DOV) has declined by –32.46% since the early July 2014 peak.  Looking at the stock, it appears that the downward spiral is locked in.  The following are some thoughts about the stock.

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Posted in Altimeter, Charles H. Dow, DOV, Dover, Dow Theory, Edson Gould, Quick Take

Dow Altimeter Review

Posted on September 8, 2015 by | Leave a comment

On May 20, 2014, we said the following about the Dow Jones Industrial Average Altimeter based on the work of Edson Gould:

“Currently, the Altimeter is closing in on the 2007 peak of 47.37.  If the Dow were to attain the 47.37 level in the Altimeter, the index would sit at 17,062.67.  There is no rule that says the Dow Industrials must stop at the prior turning point.  However, our cautious nature instinctively pushes us to wonders if the run from the 2009 low is about to come to an end.”

Since that time, the Altimeter for the Dow peaked at 47.03 on March 2, 2015, just short of the 2007 level of 47.37, and has declined below the 32.05 support level.  From a performance standpoint, the Dow Industrials has fallen -11.95% since March 2, 2015.

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Naturally we can’t say that we predicted any of the changes in the market since May 2014.  However, our primary goal is to observe indicators that most accurately guides our thinking about possible scenarios for the stock market.  In this case, we believe that the best way to assess the possible scenarios is by applying Dow Theory to Gould’s Altimeter, as seen below.

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Posted in Dow Altimeter, Dow Theory, Edson Gould

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Dow Theory: The Misunderstood Barometer

Posted on May 24, 2015 by | 1 comment

Dow Theory is a fickle beast.  While the theory is sound, those that interpret it have their challenges.  A recent article dated May 21, 2015 titled “Transportation Average – A Big Concern for Stock Bulls?” by Chris Ciovacco presents some of the difficulties with the topic of Dow Theory. In this article, we’ll attempt to clarify some issues that should be discussed when making interpretations of Dow Theory.

The article by Ciovacco starts off by pointing out the recent divergence between the Dow Jones Transportation Average and the Dow Jones Industrial Average.  A divergence exists when one index makes new highs or lows while the other index fails to go in the same direction.  According to Dow Theory, if there is a divergence, it could indicate that the previous trend will be reversed.  As the prior trend in the stock market from 2009 to 2015 has been bullish, the implication is that the bull market could be coming to an end.

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In explaining whether investors should be worried about the “non-confirmation” exhibited by the divergence between the Industrial and Transportation Averages, the article identifies the period from 1989 to 1993 when there appeared to be a divergence between the same indexes.  However, at the time of the divergence, according to the author, the S&P 500 managed to gain as much as +25%.  What is not shown or discussed are the key indications of a bull or bear market in the period from 1989 to 1993.  These elements will complete a picture that is necessary for anyone hoping to understand and possibly benefit from Dow Theory.

Identifying the Bear Market

Below is a charting of the period 1989 to 1993 in smaller segments for a more accurate Dow Theory assessment.  First is the indication of a bear market based on Dow Theory which occurred on October 13, 1989.

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Our ex post interpretation of when a bear market was signaled by Dow Theory is supported by the Dow Theorist Richard Russell in his Dow Theory Letters publication. In his official investment stance on October 4, 1989, Russell said:

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This is contrasted by what Russell said in his October 18, 1989 posting:

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Russell made clear that from a Dow Theory perspective, a bear market had been signaled.  As a side note, Russell’s PTI or Primary Trend Indicator did not confirm the bearish signal until February 7, 1990 (four months later).  The PTI is not a part of Dow Theory but has proven to be a useful market tool.

Identifying the Bull Market

Using our own ex post analysis of the charts of the Dow Jones Industrial Average and the Dow Jones Transportation Average, we find that a new Dow Theory bull market was signaled on January 18, 1991.

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Richard Russell was suspicious of the Dow Theory bull market that was signaled on January 18, 1991 and chose to wait for his PTI to give the all clear.  Russell said the following on February 6, 1991:

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But even the preceding commentary was buried by the following overriding thoughts by Russell:

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The question is ultimately asked by Ciovacco, “Would it have made sense to sell all our stocks because the Dow Transports failed to make a new high?”  The point being, why get caught up in a “signal” that potentially will result in lost investment gains? After all, the S&P 500 index increased by +25% in the period when it appeared that there was a divergence between the Dow Jones Industrial Average and Dow Jones Transportation Average.

This is where a significant problem comes up in the analysis of Dow Theory.  First, if we assume that a divergence did occur in Ciovacco’s selected time frame, rather than a bear market indication, then an adherent of Dow Theory would accept that a divergence is merely a caution signal.  This would have meant that whatever the previous trend of the market was, it remains in place until a definitive reversal occurs.  In our most recent market action, a bull market was still the indication and thus there would be  no need “… to sell all our stocks…”

Another issue not mentioned is that Dow Theory does not give buy or sell signals as we pointed out in our July 25, 2011 article. Among the many things overlooked about Dow Theory is that it is intended to reflect the changes in the stock market, investment values, and the economy.  As a barometer, it merely indicates the direction that the stock market and economy might go three to nine months into the future. Those who take bull or bear market indications as buy or sell signals still need to be well versed in understanding values and compounding and their role in investing. If a person, not versed in values and compounding, believes that any indication means that they can haphazardly buy or sell stocks then they are most likely to suffer severe losses and quickly become disenchanted with the accumulation of assets.

Identifying Recessions

In the past, Dow Theory was often heralded as a peek into the future for the economy.  In the 1989 example above, the Dow Theory bear market preceded the National Bureau of Economic Research’s (NBER) definition of a recession by nine months.  Dow Theory signaled a bear market in October 1989 and the NBER indicated that a recession began July 1990.  However, the NBER announced their conclusion about when the recession began on April 25, 1991, a full year and a half after the Dow Theory bear market signal and nine months after their own designation of when the recession began.  Additionally, Dow Theory indicated that a new bull market was in place on January 18, 1991 or three months before the NBER announced that the recession ended in March 1991.

Final Thoughts

What some market bears would like to accomplish with Dow Theory is to anticipate scenarios where divergence leads to an actual bear market of significant magnitude like what happened in the period from 1972 to 1974.

DT '72

The decline experienced from the respective peaks was –59% and –44% for the Transports and Industrials.  Since the outcome of a divergence cannot be accurately anticipated, it is far “safer” to wait for the confirmation of the trend before considering any potential actions.  However, if investors had sold their stocks on October 13, 1989 and repurchased stocks on January 18, 1991 (and held until December 31, 1993), the gains would have been +40%, +41% and +76.04% for the S&P 500, Industrials and Transportation Index, respectively.

What some market bulls would like to accomplish without Dow Theory is not selling if the net effect is for the market to ultimately climb well beyond the point of the initial divergence.  As an example,  if we take the October 13, 1989 date and calculate the returns for the S&P 500, Dow Industrials and Dow Transports until December 31, 1993, we find that the returns were +39%, +46% and +25%, respectively.

Dow Theory only works as a barometer for the stock market when taken in the context of investment values and compounding.  As an indicator of coming recessions, as defined by NBER, Dow Theory has an unrivaled track record.  The translation of these ideas often get confused as recessions don’t necessarily result in jarring –50% declines in the stock market every time.

Our tactic on the divergence is to dump more funds into the cash portion of the brokerage account so that we can make large purchases if a precipitous decline ensues.  If a decline does not materialize, we will continue our slow and selective investment buying program for compounding purposes.

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Posted in Dow Industrials, Dow Theory, Dow Theory Letters, Dow Theory Non confirmation, Dow Transports, Richard Russell

Dow Theory: Industrial Production Tipping the Scales

Posted on May 17, 2015 by | Leave a comment

This is our first update to Dow Theory review since October 17, 2014.  At the time, we closed with the following commentary:

“All reasonable interpretations of Dow Theory should indicate that we are in a bear market.

“Most Dow Theorists would suggest that investors sell all stock holdings in order to avoid losses.  However, we only use Dow Theory as an asset allocation tool.  Therefore, we will add cash to our holdings and trim some positions.  Outright selling of all stock positions is not conducive to the concept of compounding income, which is our long-term goal.

“Finally, all is not lost.  In order to change the view that we are in a bear market, the Dow Industrials, Transports and Russell 2000 only need to exceed their previous all-time peaks.  This partially explains the reason why it may not be advisable to sell all positions based on a Dow Theory bear market indication.”

Our assessment of a Dow Theory bear market indication was supported by an October 19, 2014 posting by Dow Theorist Tim Wood.  In his review of Dow Theory, Wood said:

“This all said, on Friday, October 10, 2014, the Transports closed below their August 7th Secondary Low Point. On Monday, October 13, 2014, the Industrials followed with a close below their August 7th Secondary Low Point. In the wake of this development, I have sat quietly to see what, if anything, would be written on this development. The current Dow Theory chart can be found below. As a result of this joint close below the previous secondary low points, an orthodox Dow Theory Primary Bearish Trend change has been triggered (Wood, Tim. Dow Theory Update. October 19, 2014.)”

Seven months later, the changing market conditions indicate that commentary on Dow Theory is necessary.

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Posted in Dow Theory, Dow Theory Non confirmation

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Scary 1929 Chart Nearly One Year Later

Posted on January 9, 2015 by | Leave a comment

In February of 2014, a widely publicized chart circulated about the similarity between a 1928-1929 stock chart and a 2012-2013 chart.  According to Tom McClellan of the McClellan Market Report:

“…between now [February 11, 2014] and May 2014, there is plenty of reason for caution.”

Since February 11, 2014, the Dow Jones Industrial Average has increased +11.06%.  In the period from February 11th to May 31st the index gained +4.52%.  So far, the scary 1929 chart has not held up to the lofty claim of presaging a bear market or a even a –10% decline.  We offered up our own interpretation regarding the chart and said the following:

“We love a declining stock market as much as the next value investor. However, implying that an -89% decline is in the works because the pattern appears similar to 1929 is ignoring the path to far more achievable downside targets.”

Our preliminary downside targets seemed reasonable at the time but were never achieved.  One downside target that we thought was important was the ascending trendline from the 2009 low.

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We still think that investors should watch the ascending line in the chart above, which currently sits at the 15,780 level.  An additional downside target is the Dow Theory 50% Principle level of 12,286.68.

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Posted in 3PDh, 50% principle, Dow Theory, downside

Dow Theory: October 17, 2014

Posted on October 17, 2014 by | 1 comment

NOTE: In our  Dow Theory posting of May 18, 2014, we revealed an issue with Dow Theory that has gone unaddressed since S.A. Nelson’s book, The ABC of Stock Speculation, coined the term “Dow’s Theory.” We believe the acknowledgment of this issue adds clarity to the writings of Charles H. Dow and may produce new insights that have not previously been explored.

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Posted in bear market, Dow Theory, Robert Rhea

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Dow Theory: September 18, 2014

Posted on September 19, 2014 by | Leave a comment

NOTE: In our  Dow Theory posting of May 18, 2014, we revealed an issue with Dow Theory that had gone unaddressed since S.A. Nelson’s book, The ABC of Stock Speculation, coined the term “Dow’s Theory.” We believe the acknowledgment of this issue adds clarity to the writings of Charles H. Dow and may produce new insights that have not previously been explored.

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Posted in Dow Industrials, Dow Theory, Dow Theory Confirmation, Dow Theory Non confirmation, Dow Transports, Russell 2000

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Apple meets NLO Upside Target

Posted on August 19, 2014 by | Leave a comment

On August 19, 2014, Apple (AAPL) stock price rose as high as $100.66.  When Apple was trading at $61.61 on March 9, 2013, we said the following with the accompanying chart:

“Apple Inc. (AAPL) is at the top of our watch list as it is within 5% of the one year low.  In our April 14, 2012 test of the quality of Edson Gould’s Speed Resistance lines, Apple fell from $636 [adjusted price of $90.85] to our projected level of $424.15 [adjusted price of $60.59] (found here).  Now that the stock has achieved our downside target, we expected that a reaction to the upside is likely.”

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On July 17, 2013, when Apple was trading at $61.47, we re-affirmed our view of the upside potential for Apple with the following commentary:

“Currently, Apple is demonstrating a basing pattern that if successful, could result in a breakout to the upside.  At the current levels, we wouldn’t be opposed to buying some shares of Apple with the expectation that the stock could decline an additional –25% to –35%.”

The work of Edson Gould has proven to be astounding when considered in its context.  On April 14, 2012, we posted an article titled “Considering the Downside Prospects for Apple”.  At that time, we were revising the previous estimates of downside risk done on February 5, 2012 (third party source available here).

What was mentioned on February 5, 2012 is critical to understanding how Edson Gould’s downside projections work.  At the time, we said:

“The very first thing that we look for, to determine speed resistance lines, is the most recent peak in the price. Because AAPL is continually making new highs, we only need to use the latest price of $455.68 [post split price of $65.09] as our starting point….As the price of Apple increases, so too does the SRL lines based on the work of Edson Gould.”

This means that as long as the price of the stock increases to a new high the speed resistance lines are expected to increase as well.  Only when the stock starts on a declining trend can we expect that the stock price might go to the conservative and extreme downside targets.

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On April 14, 2012, when Apple was trading at $90.89 (pre-split price of $636.23), we said the following:

“…we believe that, based on the current speed resistance lines, no one would expect Apple to decline to our conservative downside target of $424 (post split price of $60.57)...”

The strength of Gould’s downside risk estimates is that we didn’t even have the peak price of $100.71 set on September 18, 2012 but we were still able to see the conservative downside target of $60.57 achieved.  Had we used the peak price, we would have achieved the $67.14 conservative downside target much earlier than the $60.57 level.

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Posted in AAPL, Charles H. Dow, Dow Theory, Edson Gould, speed resistance line, SRL

Dow Theory: August 14, 2014

Posted on August 14, 2014 by | Leave a comment

In our last Dow Theory posting on May 18, 2014, we revealed an issue with Dow Theory that had gone unaddressed since S.A. Nelson’s book The ABC of Stock Speculation coined the term “Dow’s Theory.” We believe the acknowledgment of this issue adds clarity to the writings of Charles H. Dow and may produce new insights that have not previously been explored.

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Posted in Dow Theory, Dow Theory Bull Market indication, Dow Theory Confirmation, Russell 2000

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Priceline.com Overpays for Ctrip.com

Posted on August 7, 2014 by | Leave a comment

It was recently announced that Priceline.com (PCLN) would take a stake in Ctrip.com (CTRP) (found here).  However, we believe that PCLN is vastly overpaying for Ctrip.com as we recommended consideration of CTRP when the stock was trading at $23.10.  At the time, we suggested that Ctrip.com would decline to $14.16 level in our December 16, 2011 Nasdaq 100 Watch List with the following commentary (found here):

“Ctrip.com International (CTRP) is on a pace to replicate the performance from the high in April 2008 to the low of January 2009 which equaled a loss of 72%. A similar decline in CTRP from the high of $50.57 would bring the price down to $14.16.Suffice to say, the stock “only” needs to decline another $8.94 or 38% from the current price of 23.10.This seems very easy considering the high volatility of Chinese stocks.We believe that unless CTRP is summarily dismissed from the Nasdaq 100 index, there may yet be life in this company.”

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Ctrip.com achieved our downside target and is now trading nearly 3x the 14.16 level.  True to form, a company has stepped up to nibble at Ctrip.com just when, in our opinion, the stock is overpriced.  Obviously this is a boon for investors of Ctrip, however, this isn’t such a good deal for Priceline.com investors.  As can be seen in the chart below, Priceline has had ample opportunities in July 2013 and January-February 2014 to acquire two and three times the current amount (based on the relative price change of Priceline and Ctrip).

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Dow’s Theory on when to consider a stock would have done Priceline.com shareholders a lot of good.  Now the shareholders of PCLN can only be expected to continue to pay up.

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Posted in CTRP, Dow Theory, PCLN

Review: Family Dollar

Posted on August 5, 2014 by | Leave a comment

Today it was announced that Dollar General (DG) is considering a bid for Family Dollar (FDO).  This recent indication only adds to the hype that has suddenly fallen upon FDO.  On March 31, 2014, we wrote a Quick Take on Family Dollar that had the following conclusion:

“Investors interested in FDO could break their investment into at least two purchases, the first being 60% of the intended amount now and the second purchase of 40% at either of the two indicated support levels at $44.95 or $34.83.”

It appears that our indication to consider FDO at the $57.88 range was appropriate as the stock never reverted to any of the suggested downside targets and now trades at $77.47 or +33% higher.  This is the second call in a row that FDO has delivered for us.  FDO appeared on our watch list of February 17, 2013 which prompted our research and subsequent purchase on March 5, 2013. There is significant room for fine tuning which we will eventually examine going forward with these recommendations.

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Posted in Dow Theory, FDO, review