The Dow Report: Dogs of the Dow and the Top Ten Index
By Tim W Wood CPA, July 7, 2006
The "Dogs of the Dow" is a subset of the Dow Jones Industrials. This subset is a portfolio of such that is selected every year and is based on the Ten dividend yielding stocks within the Dow 30 as of January 1st of each year.
For 2006 the Dogs of the Dow portfolio includes:
Thus far this year the Dogs are up 6.50% verses 3.48% on the Industrials. A couple of the individual big winners within the 10 Dog stocks is GM up 51%, Merck up 16.22% and AT&T up 13.27%.
Below I have plotted the Dow Jones Industrial Average in the upper window and the Dow Jones Top Ten Index, which is an index that approximates the Dogs of the Dow in the lower window. These charts are as of the close on July 7, 2006. The last time we looked at the Dogs of the Dow there were some long-term non-confirmations in place that had been in existence since 2004. This long-term non-confirmation has since been corrected because on July 3, 2006 the Dow Jones Top Ten Index bettered its December 23, 2004 high. As a result of this move, the Top Ten Index has now reconfirmed its Secondary Trend as being bullish. Therefore, on a Secondary level the Top Ten Index is now in sync with the Secondary Trend of the Industrials, which turned positive in January.
But yes, it seems that there is always a "But" involved and here the but is that now we have a short-term non-confirmation in place. As you can see on the chart below, the July advance carried the Top Ten Index to new recovery highs when the May high was exceeded and again, that is great because the Secondary Trend is now positive on both indexes. The "But" is that the Industrials have thus far not bettered their May highs. Therefore, this leaves us with the Secondary Trend of both indexes positive, "but" we now have a short-term divergence in place. If the Industrials can better their May highs the short-term will be back in gear with the intermediate to long-term Secondary Trend. Until such time, I can only view this short-term non-confirmation cautiously, because after all, this non-confirmation is telling us that at least one-third of the Industrials are not being confirmed.
Next, I want to take a quick look at breadth. Below I have plotted my intermediate-term advance decline line along with the Industrials. There are a number of points I want to make here. The first one is that this advance/decline line topped out June 2003 and each advance since then has occurred on poorer and poorer breadth. Next, I want to point out that as the market rolled over into the June intermediate-term bottom that we were expecting, this indicator moved to oversold levels bottoming out at levels in which the last several intermediate-term lows have occurred. Now we have the advance that we have been looking for and once again, breadth has thus far expanded, coming out of that low. This expansion of breadth is obviously a positive for the market and as long as it continues, then obviously this is a healthy sign for the market as the advance to retest the May highs continues. One of many things I'm watching for is a contraction. If breadth begins to contract before the May highs can be bettered, then take warning because that will be the beginning of the 5th advance on diminishing breadth. The health of this advance is very important because a failure here could carry significant consequences and I'm watching it closely.
Thus far, my 2006 forecast has been right on the mark. I have guided subscribers through each crook and turn with my unique Cycle Turn Indicator. Based on the data that I see, the market is soon going to be facing some challenges. I have outlined the expectations for the remainder of 2006 in the June issue of Cycles News & Views. The July issue is now also available, and in it I update these expectations. If you are interested in a statistical and technical based source that also provides turn points for gold, the dollar, bonds and the stock market, then Cycles News & Views may be for you. Please see www.cyclesman.com/testimonials.htm.
Tim W. Wood
© 2006 Tim Wood