The Peabody Model: The Influence of the Dow
One of the basic principles of The Peabody Model is that 80% of the movement of the PFE price is not related to company pfundamentals. 50% is related to the Big Pharma sector environment and 30% is related to the general market as indicated by the Dow Jones. www3.techstocks.com
In this post, Mr. Peabody will examine the relationship between PFE and the Dow.
The Data
Did you ever know how PFE was doing by quickly checking the state of the Dow Jones? "Dow up 100, PFE must be up at least 2. Dow down 250, PFE has to be crushed by 3 points." Does history confirm these gut-feel relationships between the direction of PFE and the Dow?
Using the Wayback Machine for the 41 completed weeks in 1998, here are the 1998 weekly closes for the PFE and the Dow, % YTD changes for PFE and the Dow, and the PFE Premium (the YTD PFE change- YTD Dow change):
Max Points
.........Weekly..Weekly...YTD.....YTD.................................
............PFE.....Dow......PFE......Dow.... Premium
...........Close....Close....Chg.......Chg..... PFE/Dow
1/2/98...75.69....7,965....1.5%....0.7%.....0.8%
1/9/98...74.06....7,580....-0.7%...-4.1%....3.5%
1/16/98.77.00....7,753....3.3%.....-2.0%...5.2%
1/23/98.78.06....7,701....4.7%.....-2.6%...7.3%
1/30/98.81.75....7,907....9.6%.....0.0%....9.7%
2/6/98...81.00....8,189....8.6%....3.6%.....5.1%
2/13/98..83.63...8,370....12.2%...5.8%....6.3%
2/20/98..87.31...8,414....17.1%...6.4%....10.7%
2/27/98..88.50...8,546....18.7%...8.1%....10.6%
3/6/98...86.25....8,569....15.7%...8.4%....7.3%
3/13/98..86.00...8,603....15.3%...8.8%....6.6%
3/20/98..92.25...8,906....23.7%...12.6%...11.1%
3/27/98..95.50...8,796....28.1%...11.2%...16.9%
4/3/98...101.69..8,983....36.4%...13.6%...22.8%
4/10/98..99.25...8,995....33.1%...13.7%...19.4%
4/17/98..105.13..9,168...41.0%...15.9%...25.1%
4/24/98..118.00..9,064...58.3%...14.6%...43.6%
5/1/98...112.69..9,147....51.1%...15.7%...35.5%
5/8/98...111.19..9,055....49.1%...14.5%...34.6%
5/15/98..104.44..9,096...40.1%...15.0%...25.0%
5/22/98..105.44..9,114...41.4%...15.3%...26.2%
5/29/98..104.81..8,900...40.6%...12.5%...28.0%
6/5/98...108.38..9,038....45.3%...14.3%...31.1%
6/12/98..109.38..8,835...46.7%...11.7%...35.0%
6/19/98..111.25..8,713...49.2%...10.2%...39.0%
6/26/98..111.94..8,944...50.1%...13.1%...37.0%
7/3/98...107.50..9,025....44.2%...14.1%...30.0%
7/10/98..118.00..9,106....58.3%...15.2%...43.1%
7/17/98 ..115.63..9,338...55.1%...18.1%...37.0%
7/24/98..113.50..8,937...52.2%...13.0%...39.2%
7/31/98..110.06..8,883...47.6%...12.3%...35.3%
8/7/98...103.50..8,598....38.8%...8.7%....30.1%
8/14/98..101.19..8,425...35.7%...6.5%.....29.2%
8/21/98..105.88..8,534...42.0%...7.9%.....34.1%
8/28/98..101.63..8,052...36.3%...1.8%.....34.5%
9/4/98...95.13... 7,640....27.6%...-3.4%....31.0%
9/11/98..100.50..7,796...34.8%...-1.4%....36.2%
9/18/98..97.25...7,896....30.4%...-0.2%....30.6%
9/25/98 ..106.63..8,029....43.0%...1.5%.....41.5%
10/2/98..99.06...7,785....32.9%...-1.6%....34.4%
10/9/98..92.94...7,900....24.6%...-0.1%....24.8%
Total YTD, 1998............32.8%....8.0%....24.7%
2nd Half, 1998 ..............40.2%....6.2%...34.1%
Direction of PFE and the Dow
......................................#............% of
Direction.......................Weeks.......Total
PFE/Dow Same Trend.......26.......... 63%
PFE Up/Dow Up................16.......... 39%
PFE Down/Dow Down.........10......... 24%
PFE/Dow Different Trend......15.........37%
PFE Up/Dow Down.............. 5.........12%
PFE Down/Dow Up..............10........ 24%
Total.................................. 41........100%
Average PFE Premium Versus the Dow
..............................Average PFE
Dow Range.................Premium
7,000............................+18.3%
8,000............................+23.8%
9,000............................+33.1%
The Analysis
Changes in the Dow are directed correlated to changes in PFE (r=+.46). As shown above, PFE and the Dow move in the same weekly direction a total of 63% of the time and opposite directions 37% of the time.
Based on a comparison of the weekly YTD growth rates for PFE and the Dow, PFE has an average premium growth rate (YTD PFE growth rate-YTD Dow growth rate) of 24.7% for 1998. For the second half of 1998, this premium was higher (34.1%). The current PFE Premium (10/09/98) of 24.8% is on par with the 1998 average. The PFE Premium also increases as the Dow increases (7,000=+18.3%, 8,000=+23.1%, 9,000=+33.1%).
The PForecasts
Since PFE and the Dow are significantly correlated, is it possible to estimate PFE prices if you can accurately pforecast the Dow ?.. (Not an easy task!!). Other questions.... if the correlation between PFE and the Dow holds for the rest of 1998, what would you expect the price of PFE to be if the Dow drops to 6,500 or increases to 10,000? Here's an attempt:
The first step in this Model amendment is to pforecast the PFE Premium for weekly close levels below 7,500 and above 9,200...numbers not reached yet in 1998.
Based on the 1998 weekly and using statistical pforecasts, here are the PFE Premiums for a wide range of Dow levels:
.........................Average
Dow Range........PFE Premium
..6,000..................10.3%
..7,000..................18.3%
..8,000..................23.8%
..9,000..................33.1%
10,000..................39.9%
11,000..................47.2%
12,000..................54.6%
Based on the above PFE Premiums, the predicted PFE prices for various Dow levels are as follows:
....................Dow..Predicted......Predicted PFE
Actual.........% Chg...PFE..............% Change
Dow............98/97....Price................98/97
6,000..........-24.1%..64.25..........-13.8%
6,500..........-17.8%..68.97..........-7.5%
7,000..........-11.5%..79.67..........6.9%
7,500..........-5.2%...84.39..........13.2%
8,000..........1.2%....93.17..........24.9%
8,500..........7.5%....97.88..........31.3%
9,000..........13.8%...109.55........46.9%
9,500..........20.1%...114.27........53.2%
10,000........26.5%...124.01........66.3%
10,500........32.8%....128.72.......72.6%
11,000........39.1%...138.94........86.3%
11,500........45.4%...143.66........92.7%
12,000........51.7%...153.88........106.4%
As shown above, this model indicates that for PFE to reach 124 (+66.3%), the Dow will need to increase to 10,000, a 26.5% increase over 1997. Moreover, if the Dow drops to 6,500 (-17.8%), PFE is predicted to fall to 69 (a 7.5% decline over 1997).
Conclusion
As expected, it has been proven that the direction of PFE is directly correlated to the direction of the Dow. In the current Model, approximately 30% of the PFE trend is related to changes in the Dow. However, an additional 50% of the PFE trend is related to Big Pharma trends...which are in turn are related to changes in the Dow. For PFE to reach 150 in 1998, the Dow would need to jump to 12,000 (a 51.7% increase over 1997).
Comments and sugestions are always welcome!!!
Have PFun!
BigKNY3 |
