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Jan 15, 2007 - Issue #041

Dogs of the Dow are back?

DJ-30: 12556.08 +158.07 +1.27%. In the Real World: 52.24 +0.65 +1.27%.

UP: 23 (+10), Down: 7 (-10).

Trends (weekly): This is the subjective part.

Rising 16 (+2):

BA, C, +*DD, +*DIS, GE, HON, HPQ, IBM, JPM, KO, MCD, MO, +*MSFT, +*PG, VZ, WMT.

Consolidating 12 (-1):

+*AA, AIG, AXP, GM, HD, INTC, JNJ, MRK, PFE, -*T, UTX, -*XOM.

Declining 2 (-1):

CAT, MMM.

+/- denotes change of direction.

* denotes change of category.

Dogs of the Dow are back?

In case you're unaware, the so-called Dogs of the Dow theory consists of the 10 highest yielding stocks in the Dow. The 5 stock Dow Dogs are the 5 lowest priced stocks among the 10 highest yielders.

Whether you buy the 10 stock or the 5 stock list, the idea is to rebalance the portfolio at the end of each year and then go play golf for the rest of the year.

The theory automatically generated returns of 15-18% annually for many years. Not bad for a bunch of blue chips!

When this theory first became popular, most of the Dow components were large dividend payers and there were always changes in the lists. Over the years, many of the components have been replaced by stocks that paid little or no dividends.

The result was the list never changed. The same stocks kept appearing over and over again, results suffered, until even the author of the theory declared it to be "dead".

Now that dividends are back in favor, many of the low payers have increased or started paying dividends for the first time causing a "resurrection" of the theory.

However, because many of the components still do not make the top 10, the results are still not what they used to be. So much for getting rich automatically. It looks like we're going to have to work for it.

Which is why I favor relative strength and significant trend line analysis utilizing different time frames for selection and timing purposes. Besides, I don't play golf.

Speaking of which, the price surge this week has caused many trend lines to increase their angle of ascent which is the markets' way of indicating where to exit if the trend lines are violated.

Putting in accurate trend lines is subjective and laborious and, therefore, not generally practiced. Which is precisely why I do it.