Revisiting the DOW Theory

2011 is coming and with full optimism we look forward on having a bull run for the PSE.


Let me revisit the DOW theory as I quote some words from our very friendly Wikipedia.org (some personal explanations in parenthesis and in red)

Charles H. Dow

source: http://blogs.wsj.com

Six basic tenets of Dow Theory

1. The market has three movements
   

   (1) The "main movement", primary movement or major trend may last from less than a year to several years. It can be bullish or bearish. (2) The "medium swing", secondary reaction or intermediate reaction may last from ten days to three months and generally retraces from 33% to 66% of the primary price change since the previous medium swing or start of the main movement. (3) The "short swing" or minor movement varies with opinion from hours to a month or more. The three movements may be simultaneous, for instance, a daily minor movement in a bearish secondary reaction in a bullish primary movement.

   

    source: http://www.aboutcurrency.com

   (Trend can vary thus an investor or trader should look at a stock's primary trend to have an idea of the stock's general direction.Is it going up for the  past years of is it going down or has it been stagnant for 3-5 years)



2. Market trends have three phases
   

   Dow Theory asserts that major market trends are composed of three phases: an accumulation phase, a public participation phase, and a distribution phase. The accumulation phase (phase 1) is a period when investors "in the know" are actively buying (selling) stock against the general opinion of the market. During this phase, the stock price does not change much because these investors are in the minority absorbing (releasing) stock that the market at large is supplying (demanding). Eventually, the market catches on to these astute investors and a rapid price change occurs (phase 2). This occurs when trend followers and other technically oriented investors participate. This phase continues until rampant speculation occurs. At this point, the astute investors begin to distribute their holdings to the market (phase 3).

   (stock trading/investment has a basic cycle that is accumulation-participation-distribution. In other terms buying at low price-holding or trading sideways-profit taking)



3. The stock market discounts all news
   

   Stock prices quickly incorporate new information as soon as it becomes available. Once news is released, stock prices will change to reflect this new information. On this point, Dow Theory agrees with one of the premises of the efficient market hypothesis.

   ( a stock price reflects current events in a corporation. When there is a news or rumor of upcoming dividends distribution, good Quarter reports and the likes it would likely affect the stock's price. Same as well for bad news thus bad news can pull down a stock's price when it is out in the open)



4. Stock market averages must confirm each other
   

   In Dow's time, the US was a growing industrial power. The US had population centers but factories were scattered throughout the country. Factories had to ship their goods to market, usually by rail. Dow's first stock averages were an index of industrial (manufacturing) companies and rail companies. To Dow, a bull market in industrials could not occur unless the railway average rallied as well, usually first. According to this logic, if manufacturers' profits are rising, it follows that they are producing more. If they produce more, then they have to ship more goods to consumers. Hence, if an investor is looking for signs of health in manufacturers, he or she should look at the performance of the companies that ship the output of them to market, the railroads. The two averages should be moving in the same direction. When the performance of the averages diverge, it is a warning that change is in the air.

   Both Barron's Magazine and the Wall Street Journal still publish the daily performance of the Dow Jones Transportation Index in chart form. The index contains major railroads, shipping companies, and air freight carriers in the US.

   

    source: http://t3.gstatic.com

   (this is the concept of stock index and understanding the correlation of indexes. Also it tells us about the correlation of a major stock market like the Dow to the PSE thus we have the joke "Bumahing lang ang Dow trangkaso na sa PSE")



5. Trends are confirmed by volume
   

   Dow believed that volume confirmed price trends. When prices move on low volume, there could be many different explanations why. An overly aggressive seller could be present for example. But when price movements are accompanied by high volume, Dow believed this represented the "true" market view. If many participants are active in a particular security, and the price moves significantly in one direction, Dow maintained that this was the direction in which the market anticipated continued movement. To him, it was a signal that a trend is developing.

   (a stock's price increase should be validated with an increase  of volume. If the stock's price surge without a confirmation of a higher volume it could mean so many things or it could also mean that the stock is being played by the jockeys)



6. Trends exist until definitive signals prove that they have ended
   

   Dow believed that trends existed despite "market noise". Markets might temporarily move in the direction opposite to the trend, but they will soon resume the prior move. The trend should be given the benefit of the doubt during these reversals. Determining whether a reversal is the start of a new trend or a temporary movement in the current trend is not easy. Dow Theorists often disagree in this determination. Technical analysis tools attempt to clarify this but they can be interpreted differently by different investors.

   (a stock's trend  may be different from the rest but soon it will follow the general trend with the help of indicators one can predict if the stock is following the trend or if it has shifted to another trend thus ending the current trend)

   

   source: http://www.thehindu.com

   TRADE AT YOUR OWN RISK

Revisiting the DOW Theory

2011 is coming and with full optimism we look forward on having a bull run for the PSE.


Let me revisit the DOW theory as I quote some words from our very friendly Wikipedia.org (some personal explanations in parenthesis and in red)

Charles H. Dow

source: http://blogs.wsj.com

Six basic tenets of Dow Theory

1. The market has three movements
   

   (1) The "main movement", primary movement or major trend may last from less than a year to several years. It can be bullish or bearish. (2) The "medium swing", secondary reaction or intermediate reaction may last from ten days to three months and generally retraces from 33% to 66% of the primary price change since the previous medium swing or start of the main movement. (3) The "short swing" or minor movement varies with opinion from hours to a month or more. The three movements may be simultaneous, for instance, a daily minor movement in a bearish secondary reaction in a bullish primary movement.

   

    source: http://www.aboutcurrency.com

   (Trend can vary thus an investor or trader should look at a stock's primary trend to have an idea of the stock's general direction.Is it going up for the  past years of is it going down or has it been stagnant for 3-5 years)



2. Market trends have three phases
   

   Dow Theory asserts that major market trends are composed of three phases: an accumulation phase, a public participation phase, and a distribution phase. The accumulation phase (phase 1) is a period when investors "in the know" are actively buying (selling) stock against the general opinion of the market. During this phase, the stock price does not change much because these investors are in the minority absorbing (releasing) stock that the market at large is supplying (demanding). Eventually, the market catches on to these astute investors and a rapid price change occurs (phase 2). This occurs when trend followers and other technically oriented investors participate. This phase continues until rampant speculation occurs. At this point, the astute investors begin to distribute their holdings to the market (phase 3).

   (stock trading/investment has a basic cycle that is accumulation-participation-distribution. In other terms buying at low price-holding or trading sideways-profit taking)



3. The stock market discounts all news
   

   Stock prices quickly incorporate new information as soon as it becomes available. Once news is released, stock prices will change to reflect this new information. On this point, Dow Theory agrees with one of the premises of the efficient market hypothesis.

   ( a stock price reflects current events in a corporation. When there is a news or rumor of upcoming dividends distribution, good Quarter reports and the likes it would likely affect the stock's price. Same as well for bad news thus bad news can pull down a stock's price when it is out in the open)



4. Stock market averages must confirm each other
   

   In Dow's time, the US was a growing industrial power. The US had population centers but factories were scattered throughout the country. Factories had to ship their goods to market, usually by rail. Dow's first stock averages were an index of industrial (manufacturing) companies and rail companies. To Dow, a bull market in industrials could not occur unless the railway average rallied as well, usually first. According to this logic, if manufacturers' profits are rising, it follows that they are producing more. If they produce more, then they have to ship more goods to consumers. Hence, if an investor is looking for signs of health in manufacturers, he or she should look at the performance of the companies that ship the output of them to market, the railroads. The two averages should be moving in the same direction. When the performance of the averages diverge, it is a warning that change is in the air.

   Both Barron's Magazine and the Wall Street Journal still publish the daily performance of the Dow Jones Transportation Index in chart form. The index contains major railroads, shipping companies, and air freight carriers in the US.

   

    source: http://t3.gstatic.com

   (this is the concept of stock index and understanding the correlation of indexes. Also it tells us about the correlation of a major stock market like the Dow to the PSE thus we have the joke "Bumahing lang ang Dow trangkaso na sa PSE")



5. Trends are confirmed by volume
   

   Dow believed that volume confirmed price trends. When prices move on low volume, there could be many different explanations why. An overly aggressive seller could be present for example. But when price movements are accompanied by high volume, Dow believed this represented the "true" market view. If many participants are active in a particular security, and the price moves significantly in one direction, Dow maintained that this was the direction in which the market anticipated continued movement. To him, it was a signal that a trend is developing.

   (a stock's price increase should be validated with an increase  of volume. If the stock's price surge without a confirmation of a higher volume it could mean so many things or it could also mean that the stock is being played by the jockeys)



6. Trends exist until definitive signals prove that they have ended
   

   Dow believed that trends existed despite "market noise". Markets might temporarily move in the direction opposite to the trend, but they will soon resume the prior move. The trend should be given the benefit of the doubt during these reversals. Determining whether a reversal is the start of a new trend or a temporary movement in the current trend is not easy. Dow Theorists often disagree in this determination. Technical analysis tools attempt to clarify this but they can be interpreted differently by different investors.

   (a stock's trend  may be different from the rest but soon it will follow the general trend with the help of indicators one can predict if the stock is following the trend or if it has shifted to another trend thus ending the current trend)

   

   source: http://www.thehindu.com

   TRADE AT YOUR OWN RISK

Christmas season

 source: http://siebel-essentials.blogspot.com/

We celebrated Christmas yesterday and the PSE has been closed since Dec 24 till Dec 28 in observance of the holidays.

So what have you thought during these days? Most people spend Christmas with parties and buying here and there. There is nothing wrong with enjoying the holidays, the thing is even though it is a once in a year celebration one should always keep in mind one's goals. It is okay to buy gifts as long as it is the thought that counts rather than the monetary value. 

Give gifts of value. 

 source: http://affordableutahweddings.com

Something that the person you gave will cherish for a long time and from time to time will look back and remember  and smile.

sources:www.pravsworld.com & http://www.ayesha.thalassemia.com.

Most little ones at this time might receive money from their lolo, lola, auntie and uncle. Why not teach them to save up those small monetary gifts from  lolo and tell them that if such is accumulated to at least Php 5,000.00 they can open an online brokerage account at Metrobank and start buying stock with intrinsic value while their young, remember TEL years back was only at 250 per share but now its already at 2400.

But above all remember the reason why we celebrate this event. God loves us that much that He gave His own Son for us. How about you what can you share this Christmas?

We thank you for helping us give some to our poor kababayan in Isabela as well as for the CCVF project. We hope to actively give what ever we can to the least of our brethren if we have some extra. No matter how small it is when we put it together it becomes a bigger chunk.

Give not because you want something in return, give because you want to give. Give without expecting any in return.

source: http://www.abchomepreschool.com/PreschoolEducationBlog/

Christmas season

 source: http://siebel-essentials.blogspot.com/

We celebrated Christmas yesterday and the PSE has been closed since Dec 24 till Dec 28 in observance of the holidays.

So what have you thought during these days? Most people spend Christmas with parties and buying here and there. There is nothing wrong with enjoying the holidays, the thing is even though it is a once in a year celebration one should always keep in mind one's goals. It is okay to buy gifts as long as it is the thought that counts rather than the monetary value. 

Give gifts of value. 

 source: http://affordableutahweddings.com

Something that the person you gave will cherish for a long time and from time to time will look back and remember  and smile.

sources:www.pravsworld.com & http://www.ayesha.thalassemia.com.

Most little ones at this time might receive money from their lolo, lola, auntie and uncle. Why not teach them to save up those small monetary gifts from  lolo and tell them that if such is accumulated to at least Php 5,000.00 they can open an online brokerage account at Metrobank and start buying stock with intrinsic value while their young, remember TEL years back was only at 250 per share but now its already at 2400.

But above all remember the reason why we celebrate this event. God loves us that much that He gave His own Son for us. How about you what can you share this Christmas?

We thank you for helping us give some to our poor kababayan in Isabela as well as for the CCVF project. We hope to actively give what ever we can to the least of our brethren if we have some extra. No matter how small it is when we put it together it becomes a bigger chunk.

Give not because you want something in return, give because you want to give. Give without expecting any in return.

source: http://www.abchomepreschool.com/PreschoolEducationBlog/

Going Fundamental: Common Size Ratio Analysis

I'm back! Sorry for the long absence. I have just made the greatest investment in my life, finding the one.

So lets go back then where we were. If ever you are in a seminar about stock investing they could probably discuss some accounting stuff like the one above.

Common Size Ratio analysis is basically comparing one company to another by the percentages. The basic comparison will be the FS analysis express in ratios. This analysis primarily focuses on the Profit and Loss statement or also known as Income or Loss Statement.

For example Company A and B using basic data.

Looking at the two company only at the amounts one can say that Company A is better due to its higher sales but looking at percentages we now see the difference of the the two company. Company B is better than Company A in terms mark up and management of expenses thus though Company A and B ended up with the same profit Company B shows a better management of cost and better pricing or market penetration.  

Going Fundamental: Common Size Ratio Analysis

I'm back! Sorry for the long absence. I have just made the greatest investment in my life, finding the one.

So lets go back then where we were. If ever you are in a seminar about stock investing they could probably discuss some accounting stuff like the one above.

Common Size Ratio analysis is basically comparing one company to another by the percentages. The basic comparison will be the FS analysis express in ratios. This analysis primarily focuses on the Profit and Loss statement or also known as Income or Loss Statement.

For example Company A and B using basic data.

Looking at the two company only at the amounts one can say that Company A is better due to its higher sales but looking at percentages we now see the difference of the the two company. Company B is better than Company A in terms mark up and management of expenses thus though Company A and B ended up with the same profit Company B shows a better management of cost and better pricing or market penetration.  

Ways to be debt free: Discipline

source: http://drunksongs.blogspot.com

So here I am again talking about being debt free, well who doesn't want to be debt free?

To recap we discussed acceptance that one is buried in debt and one has to take inventory of personal assets and liabilities.

So we start the third one which deals with what we call discipline.

As usual lets define discipline and I got this definition from http://wordnetweb.princeton.edu

• S: (n) discipline (a system of rules of conduct or method of practice) "he quickly learned the discipline of prison routine"; "for such a plan to work requires discipline";
• S: (n) discipline (the trait of being well behaved) "he insisted on discipline among the troops"
• S: (n) discipline (training to improve strength or self-control)

Why one needs discipline to be debt free? Well in all activities we human beings do we must always have this trait. To be disciplined means having a system that one follows strictly to achieve self-control.

Discipline will be one's day to day guide. It will be the reminder that one will see the moment they wake up from sleep. It is self control.

I know its hard to not to tame the "buy it now" attitude of most of us. We buy things we don't essentially need now even if we don't have the capacity to purchase specially when you are buried in debt. 

The very best means that I made to tame myself from spending money is to see where it is going and how much is it as time passes by. I got this idea from Bo Sanchez's book   Simplify and live a Good life. 

 source: http://www.shepherdsvoice.com.ph

When you see how much money you are spending you will have thoughts  of unbelief after seeing how could a small amount spent for something insignificant  became budget eaters when presented in accumulated basis and at the same time how will one appreciate on savings made on stopping or avoiding spending on unnecessary things.

source: http://www.thirstyblogger.com

Here is what you gonna do. Buy a notebook small enough to fit in your pocket or better yet if you have those Starbucks planner use it for this one. Carry a pen always and the moment you make a cash out or spending write it down. Put the date, the nature of spending, and the amount. Do this for all spending you make including credit card purchases.

source: http://squatchabyss.blogspot.com

After a week list down this spending data and organize them into similar expenses and categories like cash or credit card etc. After a week you can see where you are spending. And I bet you this will be an eye opener.You might find out that you might be spending Php 1,000.00 on cigarette which for me is a very non-essential thing and yet you are very willing to spend for. Imagine if you could have quit smoking you could have probably bought a new Levi's pants in 4 weeks.

Do you see what I am driving at? Probably small spending does not hurt or even does not require your attention. But if such is accumulated over a period of time you will realize what a waste it was.

Back then I wrote all expenses even the jeepney fare I pay for. After summing up all my expenses I was able to see my spending pattern. For their I was able to make my monthly budget(since my salary back in my old job is monthly) after deducting my "average" spending it shows that I have a saving of Php 500.00 for my monthly salary...and that is so small saving.

Well after knowing all that I search means and ways to be able to have savings of Php 1,000.00 a month. This means cutting of my unnecessary spending which was Internet usage in Netopia and cutting my coffee addiction to half. It doesn't mean you have to cut all your unnecessary spending all at one time I tell you that would be traumatic. 

Do small steps.

For example what I did was to only access Internet every two weeks  and cutting my coffee to only in the morning( I drink coffee when going to work and after work... this was my only addiction :) ). So savings from Php 500.00 went up to Php 1,000.00.

This is what we call discipline. It doesn't necessarily mean it's a punishment by not getting or cutting of your usual things. It just requires one to practice it on a small scale daily basis which in the long run will train one to live it as if its already second nature.

So from now on jot down those spending and you might find where to discipline your spending to save more...

Ways to be debt free: Discipline

source: http://drunksongs.blogspot.com

So here I am again talking about being debt free, well who doesn't want to be debt free?

To recap we discussed acceptance that one is buried in debt and one has to take inventory of personal assets and liabilities.

So we start the third one which deals with what we call discipline.

As usual lets define discipline and I got this definition from http://wordnetweb.princeton.edu

• S: (n) discipline (a system of rules of conduct or method of practice) "he quickly learned the discipline of prison routine"; "for such a plan to work requires discipline";
• S: (n) discipline (the trait of being well behaved) "he insisted on discipline among the troops"
• S: (n) discipline (training to improve strength or self-control)

Why one needs discipline to be debt free? Well in all activities we human beings do we must always have this trait. To be disciplined means having a system that one follows strictly to achieve self-control.

Discipline will be one's day to day guide. It will be the reminder that one will see the moment they wake up from sleep. It is self control.

I know its hard to not to tame the "buy it now" attitude of most of us. We buy things we don't essentially need now even if we don't have the capacity to purchase specially when you are buried in debt. 

The very best means that I made to tame myself from spending money is to see where it is going and how much is it as time passes by. I got this idea from Bo Sanchez's book   Simplify and live a Good life. 

 source: http://www.shepherdsvoice.com.ph

When you see how much money you are spending you will have thoughts  of unbelief after seeing how could a small amount spent for something insignificant  became budget eaters when presented in accumulated basis and at the same time how will one appreciate on savings made on stopping or avoiding spending on unnecessary things.

source: http://www.thirstyblogger.com

Here is what you gonna do. Buy a notebook small enough to fit in your pocket or better yet if you have those Starbucks planner use it for this one. Carry a pen always and the moment you make a cash out or spending write it down. Put the date, the nature of spending, and the amount. Do this for all spending you make including credit card purchases.

source: http://squatchabyss.blogspot.com

After a week list down this spending data and organize them into similar expenses and categories like cash or credit card etc. After a week you can see where you are spending. And I bet you this will be an eye opener.You might find out that you might be spending Php 1,000.00 on cigarette which for me is a very non-essential thing and yet you are very willing to spend for. Imagine if you could have quit smoking you could have probably bought a new Levi's pants in 4 weeks.

Do you see what I am driving at? Probably small spending does not hurt or even does not require your attention. But if such is accumulated over a period of time you will realize what a waste it was.

Back then I wrote all expenses even the jeepney fare I pay for. After summing up all my expenses I was able to see my spending pattern. For their I was able to make my monthly budget(since my salary back in my old job is monthly) after deducting my "average" spending it shows that I have a saving of Php 500.00 for my monthly salary...and that is so small saving.

Well after knowing all that I search means and ways to be able to have savings of Php 1,000.00 a month. This means cutting of my unnecessary spending which was Internet usage in Netopia and cutting my coffee addiction to half. It doesn't mean you have to cut all your unnecessary spending all at one time I tell you that would be traumatic. 

Do small steps.

For example what I did was to only access Internet every two weeks  and cutting my coffee to only in the morning( I drink coffee when going to work and after work... this was my only addiction :) ). So savings from Php 500.00 went up to Php 1,000.00.

This is what we call discipline. It doesn't necessarily mean it's a punishment by not getting or cutting of your usual things. It just requires one to practice it on a small scale daily basis which in the long run will train one to live it as if its already second nature.

So from now on jot down those spending and you might find where to discipline your spending to save more...