According to Charles H. Dow:
"The point of importance for those who deal in industrial stocks is whether the capitalization of the companies into which they propose to buy is moderate or excessive, when compared with the aggregate earnings of the various concerns forming the combination in a period of depression. It is probable that consolidated companies will be able to earn as much in the next period of low prices as the companies forming the combine were able to earn in the last one; hence the very foundation of investments in industrials should be knowledge of what these companies earned, say in 1893 to 1896, making, perhaps, reasonable allowance for economies under consolidation (Dow, Charles H. Review and Outlook. Wall Street Journal. April 27, 1899.)."
Dow’s point? To gauge the extent of a potential decline we need to consider the prior depressed levels as the benchmark for the next period of low prices and earnings.
How does this tie into the SPDR Dow Jones REIT ETF (RWR)? Below are the Speed Resistance Lines for RWR in the period from 2001 to 2009.
The downside targets were:
-
$79.20 (conservative target)
-
$56.24 (mid-range target)
-
$33.29 (extreme target)
In the last period of decline, RWR achieved all of the downside targets. While achieving the extreme downside target of $33.29 is ideal, it isn’t the norm. For this reason, when the extreme downside target is achieved it stands out for what could happen in the next period of decline.
Below we provided the downside targets for the SPDR Dow Jones REIT ETF based on the price action from 2009 to 2020. Continue reading