Long-term investing for years
One well known and quite profitable investing system that has been back tested over many decades is the Dow Theory of inter-market
confirmation. The version outlined here with PPO as a momentum indicator is simple and captures most of the gains with little of the
risk since the 1980's under many market conditions. The minimum gains reported in the table below can be greatly enhanced using
asset allocations to each index depending on which one is giving the current signal, and which one is expected to overperform based
on relative strength cycle studies below. Performance can also be enhanced by buying under weakness and selling into strength as
each signal is given. We are on a Buy signal from the Utilities since November 2003, and relatove strength studies favor the
Industrials over the Tranports and Utilities until early 2008.
Dow Theory of inter-market confirmation
Charles Dow's precept was simple: if the economy is performing
well, then he expected the Industrials and Transports to do well together. As such he looked for them to be trending and making new
highs or lows together to confirm a primary Bullish or Bearish trend.
Today the situation is a lot more complex with most manufacturing being done in Asia, but the Industrials are still a significant sampling of the US economy, and with global trade the Transports are more important than ever. Since his precept was about measuring a Bullish or Bearish primary trend, I use momentum indicators on all three major Dow indices to confirm a strong Bullish or Bearish trend.
When all three indices show positive PPO then we have a confirmed Buy signal, with one index negative we have a Reduce on Strength signal or Accumulate on Weakness (when coming up from a Wait in Cash signal), with two indices negative we have a Wait in Cash signal, and when all three indices are negative we have a confirmed Short on Strength signal. The system is rarely short and quick to cover to minimize risk since the markets typically go up with inflation over the long term.
Monthly charts give long term investing signals
| Signal Date | Slow Signal | Dow Index | Index Value | Dow Gain/Loss | Annualized |
| Nov 2003 | Buy | Utilities | 250 | ^ | |
| Aug 2003 | Accumulate on Weakness | Industrials | 9416 | 0 | |
| Jul 2003 | Wait in Cash | Transports | 2623 | 20% | 10% |
| Jul 2001 | Short on Strength | Utilities | 350 | 0 | |
| Feb 2001 | Wait in Cash | Industrials | 10495 | ||
| Nov 1999 | Reduce on Strength | Transports | 2910 | 160% | 22% |
| Sep 1995 | Buy | Utilities | 214 | ^ | |
| Feb 1995 | Accumulate on Weakness | Transports | 1596 | 0 | |
| Nov 1994 | Wait in Cash | Transports | 1443 | ||
| Jan 1994 | Reduce on Strength | Utilities | 226 | 35% | 10% |
| Jan 1991 | Buy | Transports | 1069 | ^ | |
| Nov 1990 | Accumulate on Weakness | Industrials | 2560 | 0 | |
| Sep 1990 | Wait in Cash | Industrials | 2453 | ||
| Aug 1990 | Reduce on Strength | Transports | 901 | 40% | 14% |
| Apr 1989 | Buy | Utilities | 192 | ^ | |
| Jan 1988 | Accumulate on Weakness | Transports | 764 | 0 | |
| Dec 1987 | Wait in Cash | Industrials | 2169 | -1% | -6% |
| Oct 1987 | Short on Strength | Utilities | 183 | 0 | |
| Oct 1987 | Wait in Cash | Transports | 757 | ||
| Oct 1987 | Reduce on Strength | Industrials | 1994 |
Charts courtesy of StockCharts.com
Charts courtesy of StockCharts.com
Using the Dow Theory relationship to maximize buy and hold profits
The 4 year cycle is even more apparent in the relative charts of the Dow Theory components, and we can use asset allocation to
increase our rate of return on long term retirement funds. We can use a basket of stocks or sector funds to increase our exposure
to the most favored component while decreasing our exposure to the weakest one. Until early 2008, this will mean to increase our
exposure to the Dow Industrials while reducing our exposure to the Utilities and especially the Transports.
Charts courtesy of StockCharts.com
Charts courtesy of StockCharts.com