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February 19, 2006

A Sweet Deal, Going Sour
by Mark Taylor

At dowtheoryproject.com our primary interest is in Dow Theory. Our mission of course is to invest our funds at a time when value can be found in the companies we own. True value is had when a company pays a fair dividend (6% or higher) while insuring that the original investment is secure. To protect our investment the company must be consistent in its earnings over a long period of time and have a fair stock price relative to those earnings. This price to earnings ratio is historically sound when it is below 12 and is a bargain near 8. With the Dow Transports and Industrials at an average P/E ratio of 20 and 18 respectively, and an average dividend yield near only 2%, a Dow Theory buy signal is far away.

These high P/E ratios and low dividend yields remove us from the security of being thoughtful and prudent Investors in the overall market. Rather than relying on sound fundamentals to gain a return on our investments, we become solely dependant on the notion that stock prices will continue to rise. This is not investing, it is speculation. Here at the Dow Theory Project, we recognize this fact and move into safe stocks away from the crowd. A sound portfolio of good dividend paying stocks can bee seen by our subscribers at the home site. I might add that it is a negative implication as to market condition that not one of these stocks is a component of either the Industrials or the Transports.

Sometimes it gets a little boring watching the wheels of the market spin by so I'll put the MPC (Market Participation Calculator) to work in markets that look like this.

Sure it looks like a blow off top, but so did Google at $350. Patterns like this require that we pay close attention as to who is doing what and why. The MPC identifies specific members of a group and as usual, the Trend Chasers have seemingly woken up one day to crowd into the market. They will often bolt out just as fast and that's the end of it. There are however, times when other participants will continue the trend upward in an effort to bring the Trend Chasers back into the market and more often than not; they are successful in doing so. Success times six is the score at this point and the Trend Chasers are in deep. The MPC also recognizes behavior typically exhibited by this neurotic group of traders as they bottleneck the exits.

A long term look at the RSI reveals a historic level that has nowhere to go but down. Watch out Trend Chasers, Zorro's MPC has got your number again and it's sugar #11.....a sweet deal, going sour.

dowtheoryproject.com offers valuable information to its Subscribers on weekly basis with interim updates as needed. Sometimes the information is worth tossing on the desk of your licensed Investment Advisor just to see if he gets a perplexed look on his face.

Mark Taylor aka Zorro
dowtheoryproject.com

Copyright © 2004-2006 Mark Taylor

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