Ducks of the Dow Update
Dow Jones Industrial Average 10,274
Value Line Arithmetic Index 1791
30-Year Treasury Index 4.22%
The Big Picture for Stocks
The bull market phase of this 4-year cycle is probably over.
Technical Trendicator (1-4 Month Trend):
Stock Prices Down
Bond Prices Down
Our "Ducks of the Dow" strategy for the five stocks selected one year ago outperformed the Dow average. The five stocks a year ago were American Express, Caterpillar, Disney, SBC, and Verizon. The average performance for the five was up 3.15% compared to down 1.54% for the Dow as a whole. The Ducks of the Dow strategy is ahead of the market since inception in 1999 a bit less than 1% per annum. While this is out of our goal range of being 2-4% better than the Dow as a whole, at least we can say that the model has beaten the market over a significant period of time.
Remember that this approach is not a very dynamic one, as we have arbitrarily limited ourselves to exactly 12-month time periods for holding each stock. Each quarter we use 15 technical and fundamental criteria to select 5 stocks in the Dow Jones Industrial Average that we think have the potential to perform above the average of all 30 stocks in the Dow. The model is largely formula driven, with very little subjective input except as needed to interpret the data. See the spreadsheet in the Archives and Performance section of our website for complete details.
My five picks for the next 12 months are
American International Group (AIG, 58.10)
Honeywell (HON, 36.63)
Coke (KO, 41.75)
Merck (MRK, 30.80)
SBC (SBC, 23.75)
Actually, it is hard to get excited about any Dow stock. They all look like losers for the next year, as far as I can see. Almost every stock in the Dow is losing fundamental or technical momentum - or both. The ones selected are the best of the lot, which will hopefully hold up OK versus the market.
From the Fed's statement today, it looks like they are purposefully moving our economy into recession. They expressed concern about inflation, and as they have done in the past, they are trying to generate a moderate recession to hold down prices. They presumably think that if they can keep the recession mild, it is a better alternative than a steep one later.
I am not as hopeful as they are. I think they are between a rock and hard place in this cycle. If they don't hold back the money supply, the commodity boom and housing bubble will get out of hand. But causing a recession now, given the debt load in the economy will only accelerate our deficit - and thus our problems. The consumer is on overload with debt and spending, and when he cools off, the economy could enter a terrible tailspin. If the economy was not so leveraged, the fed could maneuver a soft landing. But there is an awful lot of doubt that the current situation will permit them to accomplish what they want to accomplish.
One more fun thought. I suspect that the stock market bubble of 2000 has not been fully wrenched out in the economy. After bubbles like that in the past, any country so affected has gone through decades of economic hardship and stock market malaise. Even though the NASDAQ is way down from its 2000 high, the Dow is not that far off its all time highs. And averages like the midcap index (MDY) or the Value Line Arithmetic Index have recently reached all-time highs! And real estate is crazy, at least on the two coasts.
My guess is that sooner or later the Dow will again approach its 2002 low in the mid 7000 range, if not go lower than that.
Continue to stay short the recommended ETF's and long our Special Situations stocks. There are ample opportunities to buy microcap and precious metals situations. To date, all closed position on our Special Situations list have returned comfortably in excess of 100% per annum.