World Stock Market Research

Dow Bands… Dow Tracker

Dow Bands 2012F

It started out from curiosity.  Is it applicable now?  Then it became a necessity as deep uncertainty frequently haunts stock markets.  After five months of research in February 2011, we completed a fund-management tool made for investors of equities to see if the stock market was at low or at high levels.  The concept was like this.  Investors are like pilots flying in their aircraft at night.  They can’t see so they need an altimeter to determine if they’re flying too low or too high to maintain safety.  Fly up when you’re too low or dive when you’re too high.  Buy low, Sell high.

Before the start of an investment year, many analysts give their index forecasts for the following year.  The forecast each give is one number.  It is one number that the index may hit for just one second or several times during the year.  Even if the index hits it for one second during the year, it proves that the analyst’s forecast is right.  However, it is not that helpful for investors as the index average for the year may be way off that one single forecast.

The PSEi Bands is a valuation of the PSEi represented by five values, a depressed low, low, central, high and euphoric high value.  The investor is recommended to buy below the central value and hold or sell above it.  It is like the pilot’s altimeter helpful at night flying.  After a successful 2010 back-test and a year and a half’s actual testing, the PSEi Bands prove to be reliable and became one of our firm’s main products as Big Mac is to Mcdonald’s and Mickey Mouse is to Disney.  Speaking of MCD and DIS, we have just now completed another five month-long project, the Dow Bands.

It has the same concept and treatment as the PSEi bands.  Take each of the 30-stock components.  Value them at market level or at 16x PER and 1.5x PBV.  Compute the corresponding Dow values based on the highest and lowest corporate bond yield in the last one year, and you have your euphoric high and depressed low.  The average of the two gives your central value.  The Dow’s central value for 2012F is 14,602.  The Dow was 13,073 last night between the depressed low and the low value.  This means a Strong Buy on the US market.

Here are some observations.  So far in 2012, the Dow has hit a low of 12,101 and a high of 13,269.  The Dow has so far remained at depressed lows in 2012.  The 30-stock Dow components have an average discount of 17% to market level.  The three most undervalued stocks are HPQ, JPM and TRV.  The most expensive stocks are BA, KO and IBM.  Average earnings growth from 2009 to 2012F is 9.61%.  What can boost the Dow are higher earnings and lower bond yields.  What can sink the Dow further are the inverse of the two.  In comparison with the PSEi Bands, the PSEi is at euphoric high levels.  The PSEi is also expensive.  The contrast between the Dow and the PSEi reflects funds’ flight to high-growth stock markets and countries with low debt to GDP ratios.  It’s the flight to safety, flight to quality concept running.  So if it’s low, how come the Dow has not yet rallied even up to the central value?  The answer follows.  Now that you have an altimeter, you need a tracker.

Dow Tracker as of Monday, July 30, 2012

=0.90%

Since October 2008, we noticed that if the S&P 500’s margin of safety (MoSafety) is greater than 1.50%, the S&P 500 eventually rallies.  So to benefit from a rally by buying stocks before it, you track the S&P 500’s MoSafety.  We did this by making the S&P 500 Tracker and even the PSEi Tracker.  In the PSEi’s case, it is a 0.50% MoSafety from data going back April 2006.  The PSEi tracker has been effective calling the PSEi rallies and highs beforehand.  The S&P 500 tracker required adjusting as the US ten-year note is artificially low and kept low not by market factors.  In fact it’s in the lowest level since the 1940s.  To complement the Dow Bands, we made the Dow Tracker.  The Dow Tracker as of last night is 0.90%.  It is below the 1.50% mark calling a market rally so it signals market weakness than strength.  Again, what can boost the Dow are higher earnings and lower interest rates.  What can sink it are the inverse of the two.  There is no rally yet seen for the Dow.  The Dow Tracker is like an aircraft’s targeting system.  It lights up and tracks when a target appears, and in our case, when a market rally or run-up is seen.

Documented for Testing

Being new, the Dow Bands and the Dow Tracker need time to be tested.  We just documented them now to be monitored for the rest of the year for reliability and accuracy.  The PSEi Bands proved to be reliable and accurate in the last one and a half years.  It is documented in articles in our website.  In fact, the PSEi Bands’ 2012F euphoric high of 5,479 is 1.40% or just 73 points away from the PSEi’s actual 2012 high of 5,406 on the fourth of July.  In the past six months, we had 133 views from the US, 133 views on a small stock market in the Pacific from where the biggest stock market is in the world.  We proceeded with the Dow Bands and Dow Tracker because all stock markets are related to one another regardless of distance.  By having the Dow Bands and the Dow Tracker, they help give calls on the PSEi.  The two can also be used for US investors in equities as the PSEi Bands and Tracker are with us.

Disclaimer

The Philippine Stock Market Research report is solely for information. It should not be constituted as an offer for solicitation for the purchase or sale of securities mentioned. The information herein has been obtained from sources believed to be reliable. Whilst every effort has been made to ensure accuracy, we do not guarantee the accuracy or completeness of the report. All opinions and estimates expressed herein constitute our judgment as of this date made on a reasonable basis and are subject to change without notice. No liability can be expected for any loss arising from the use of this report or its contents. As this is general information, it does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may obtain this report.