Stolen Stuff.....
IBD: "Indexes Post Gains But Uncertainty Lingers" + "Strong Dogs Of The Dow"
Rearranged for emphasis.
>>>The Big Picture
Thursday, December 28, 2000
Indexes Post Solid Gains But Uncertainty Lingers
Investor's Business Daily
The stock market cobbled together some decent gains Wednesday as it tried again to break free of the bear.
Led by an unlikely alliance of retail and chip stocks, the S&P 500 and Nasdaq composite followed through on a rally that began Dec. 21. The big-cap S&P climbed 1% while the tech-heavy Nasdaq rose 1.8% on a big jump in volume from Tuesday’s light post-Christmas trading.
A follow-through confirmation has heralded every new bull market. But the indicator has flashed more than a few false positives in recent years. Volatile trading, especially on the Nasdaq, can trigger a large gain in higher volume that ultimately goes nowhere.
While never a green light to buy with abandon, follow-throughs require more patience and discipline these days. Have investors shown the telltale signs of panic? What’s the Fed doing? Are quality stocks breaking out of bases?
One sign of investor fear, which typically hits a crescendo at market bottoms, has flashed a curious reading. The put/call volume ratio spiked up to 1.1 on Tuesday, a level that could not be confirmed by that day’s press time. It was the highest reading since the bottom of the 1998 bear market. (The mutual fund cash position chart takes the place of the put/call ratio in today’s print edition)
But Tuesday was a quiet session, with little movement in the averages and light volume. Not the sort of trading that causes a panic among option traders. Indeed, the reason for the high reading was a relative lack of calls, not a big jump in bearish puts, according to Schaeffer’s Investment Research, which specializes in sentiment analysis.
In all likelihood, Tuesday’s 1.1 anomaly was a product of the sleepy post-holiday session. It certainly WASN'T confirmed by the put/call premium ratio, which showed no signs of panic.
Bullishness still reigns supreme among investment advisers. This week’s Investors Intelligence survey of newsletter writers found that bulls dropped to 51.4% while bears climbed to 36.2%.
These two contrarian indicators are moving in the right direction. But they’re nowhere near the extreme levels of pessimism that usually coincide with major market bottoms.
While sentiment is still an open question, the futures market is beginning to bet the Fed will cut rates before it meets at the end of January.
Traders are also gaining confidence that rates will be a half-point lower after the Jan. 30-31 meeting.
So what about buying opportunities?
...Not many stocks are poised to break out yet.
...It might take weeks until they complete their bases and rush to new highs.
... They are the ultimate confirmation of a new bull market.
But a few got off to an early jump on Tuesday. Raymond James Financial cleared a seven-week base, running up 3 7/8 to 37 1/4 in more than twice its usual trade. The brokerage hits its first new high since April 1998.
Raymond James wasn’t the only financial stock to do well. The NYSE financial index hits its second straight new high.
Insituform Technologies bolted out of an eight-month base. The company, which specializes in "trenchless" pipe repair, increased per-share earnings by 42% in the latest quarter as sales rose 19%
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>>>Mutual Funds & Personal Finance
Thursday, December 28, 2000
Dogs Of The Dow Are Running Strong Again
After three years of underperforming, strategy is back out in front
By Ken Hoover
Investor's Business Daily
The Dogs of the Dow strategy has underperformed the Dow in four of the past five years. Is it time to send the dogs to the pound?
No, says its creator, Miami money manager Michael O'Higgins. The dogs are growling again after four years of underperformance.
"It's had a big comeback, just about the time it was abandoned," said O'Higgins.
In the dogs strategy:
... you buy the 10 highest-yielding stocks in the Dow Jones industrials.
... Each year, you toss out any that are no longer among the highest yielding and replace them with the ones that are.
...The idea is you pick stable companies that are temporarily out of favor.
O'Higgins has a variation he calls the Flying Fives:
...You have just five stocks that are the lowest priced among the 10 highest yielding.
... Since low-priced stocks are more volatile, you get more bang for your buck, he says.
It's simple, mechanical and has a cute name. That helped make it popular after O'Higgins described it in his 1991 book, "Beating the Dow."
Its popularity became part of the problem in recent years. Too many people used it, so it didn't work anymore, O'Higgins says. The book sold 300,000 copies. The talking heads on cable TV yapped about it constantly. The dominance of Internet stocks, growth strategies and the Nasdaq also muzzled the dogs along with other value strategies.
But this year is different. The dogs were up 6.79% through Thursday, including dividends. The Flying Fives were up 11.84%, while the Dow was down 4.31%.
The top dog was the mangiest mutt of all and helped the Flying Five take wing: Philip Morris, up 97%. It yields 4.7% (8.35% at the end of last year when it would have been bought).
The dogs strategy doesn't guarantee you'll make money.
It doesn't even guarantee you'll outperform the Dow in any given year.
But the theory asserts that you have a good chance of outperforming the Dow over the long haul.
Since the beginning of 1973, the dogs outperformed 18 of the nearly 28 years through Thursday for an annualized return of 17.01%. That compares with 13% for the Dow, with dividends reinvested, O'Higgins says. The Flying Fives averaged 19.38%.
The dogs inspired some canine knock-offs. Motley Fool, the investment Web site, came up with its own version, the Foolish Four.
A few mutual funds looked to the kennel for their stock picking. One is Payden & Rygel Growth & Income Fund. It invests half in the dogs and half in exchange-traded funds, mainly those that track the S&P 500.
Hennessy Balanced Fund has half dogs and half T-bills. Hennessy Leveraged Dogs Fund is 75% dogs and the rest T-bills. Hennessy Balanced was up 5% and Leveraged up 7.1% going into Thursday, according to Morningstar. The Payden & Rygel fund is down 4.9%.
But by then the dogs were largely abandoned by many investors. They underperformed the Dow from 1996 through 1999. The pure dog strategy posted returns of 10.6% in 1998 and 3.6% in 1999, way below the Nasdaq's 37.9% and 87.9% those two years.
The talking heads talk of it less. Motley Fool abandoned its Foolish Four portfolio this month after studying 50 years of data and concluding it beat the Dow by only 1.74% annually over that period. Given taxes and trading costs, that's not enough to justify the strategy, concluded Fool researchers. An investor would be better off in an index fund.
Even O'Higgins was down on his pet strategy for awhile. In the 1997, he told supporters he didn't think the dogs would work for the foreseeable future.
The dogs have plenty of critics. Two Brigham Young University professors, Grant McQueen and Steven Thorley, say the dogs are an example of "data mining." That means O'Higgins searched history until he found a pattern. But just because a pattern is discovered doesn't mean it will work in real life in the future, say the professors.
Others noted that three Dow stocks, Disney, McDonald's and Microsoft, don't have dividends. Six others pay out less than 1%.
And dividends generally have become uninteresting to investors. The yield in the Dow is now 1.7%, far below the historical average of 4.4%.
But the dogs started running loose just about the time the Nasdaq topped on March 10.
Neil Hennessy, who runs the doggie funds that bear his name, says his leveraged fund rose 14% from March 10 to Dec. 20. The balanced fund was up 11%.
Hennessy says that long after the dot-com companies have disappeared, the dogs will still be around.
"People will still need Exxon and General Motors to get to work. They'll still need International Paper so something comes out of their computer's printer," he said. "These companies have real life revenue and real life earnings."<<<
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