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Dow Attribute Study

Dow Attribute Study

| August 29, 2018
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This industry is (and has always been) overrun with "Buy" recommendations and a scarcity of "Sell" recommendations to go along with all of those purchase ideas. Take the 30 stocks in the Dow Jones as a sample group. Currently, fundamental analysts rate each and every Dow Stock as a "Buy," "Overweight," or "Hold". This “buy side” bias is not only a limitation to traditional research, but also provides us at Petra Financial Solutions an opportunity to differentiate ourselves by offering a logical, organized, sell discipline based upon methods grounded upon supply & demand, such as Point & Figure and Relative Strength.

What are Technical Attributes?

Before we get to the value that implementing Technical Attributes can provide, we first want to walk through the tenets of this rating system. When evaluating a stock (or any investment vehicle for that matter), the two components we are most concerned with are relative strength and trend analysis. The Technical Attribute Rating system is nothing more than an effective means for quantifying the presence (or absence) of those attributes at any point in time.

There are a total of five technical attributes any given stock can attain, which we have outlined below:

5 Positive Technical Attributes

  • Relative Strength chart versus the Market on a Buy signal
  • Relative Strength chart versus the Market column in Xs
  • Relative Strength chart versus its Peer group on a Buy signal
  • Relative Strength chart versus its Peer group column in Xs
  • Trading above the Bullish Support Line (i.e. in a positive trend)

If a stock has all five of these attributes, it is considered a technically strong stock and such stocks can often serve as market leaders. On the other end of the spectrum, stocks with zero positive attributes are considered the weakest of names. As a result, they tend to carry more risk and are often market laggards compared to other alternatives. It is not to say such a stock can't rise, but the odds of outperformance are much narrower with low attribute names versus high attribute names. On a similar note, it is impractical to want every stock you buy to have all five traits positive. Our general rule of thumb is that a ranking of 3 or more will be sufficient and increases the odds of success. 

Reviewing the Dow Industrials by Technical Attribute Rating

One of our major sources for technical information, Nasdaq Dorsey Wright, updates the Point and Figure charts and the Technical Attributes of thousands of stocks and funds after the close every business day.  On August 16, 2018, they performed a Technical Attribute study using the components of the Dow Jones Industrials Index DJIA. They began by separating the 30 components of the Dow into two categories: "weak attribute" stocks and "strong attribute" stocks. The objective was two-fold. First, they wanted to show how each component had done versus the market benchmark while in its respective attribute-based category; and secondly, to show that by using the technical attribute system, one can capture the important longer-term trends.

The results of this recent Dorsey Wright study convey several relevant pieces of information. For instance, it revealed that not ALL weak attribute stocks underperform, and not ALL high attribute stocks outperform.  Also, the attribute rating system is not a fail-safe solution to sidestepping underperformance, but the "averages" do speak to the real value added by this technical screening process. There are currently 12 Dow stocks with strong technical attributes. The average length of time the technical attribute rating has been "strong" (three or higher) for any given stock in this category is 1,488 days. The average outperformance for those 12 names versus the S&P Equal Weighted Index SPXEWI is roughly +154.02%.

On the other hand, the remaining 18 stocks in the Dow are categorized as weak attribute names (two or lower), and these stocks have been technically weak for an average of 873 days. That is to say, once a stock falls below the threshold of three positive attributes, this condition of lethargy can potentially persist for years. The average underperformance of these names is currently -22.13%.

The "story," in this case, is not "being right all the time." Instead, it is adding a level of analysis to our process that is unafraid to say "sell" when a security indicates that it has likely gone into hibernation. The story is also that while this technical attribute analysis will "miss" a number of modest periods of outperformance or underperformance, it will tend not to miss the important trends in the market.

Until next time, cheers!

Jim

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