Dow Theory

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Jan 3, 2010 11:11 am
SUNDAY MUSINGS
 
I've been studying Dow Theory and it interests me very much. I'm going to create some models to see if I can truly see market cycles via convergence and divergence of the DOW and Transportation. If I can it will add to the edge my options strategy enjoys.
 
 
Anybody use this theory in practice with any success?
Jan 3, 2010 2:29 pm
Adding to this thought; If you plot the long term charts of Money Market rates over the S&P Composite Index over the CRB Spot Raw Material Index it's AMAZING to see how they interact i.e. diverge/converge. Beginning in 1966 the market action of Money Market rates has been leading the S&P Composite Index which has then been leading CRB Spot Raw Material Index in that order consistently. If one can in fact determine the direction of the secular, primary, intermediate and short term market cycles via the Dow theory one may have a tremendous edge in buy/sell triggers allowing not only timing but when to take short positions as well. 
 
For my strategy this has gigantic implications if it in fact can be used. The probabilities  I use (must have at least an 85% chance of the desired effect as derived by the inverse of the hedge ratio) would be enhanced by having the wind at our back.
 
All thought & comments welcome.
Jan 3, 2010 3:59 pm

Another thought; If one can use a differential of the three and use it like I use the TRIN (Arm's Index). I currently plot the TRIN, EPREM, PREM, TICK, 2,5,10 treasuries & VIX to determine intra-day trend. The way I use the TRIN is anything below .8 is up, .8 to 1.2 is noise and above 1.2 is a downtrend.

 
When the VIX is down, the EPREM & PREM up, bond prices down, get an occasional +1000 TICK that is kicking off the program trades and the TRIN is below .8 you have a clear uptrend. If all of these agree I use it to great effect on getting decent fills. I contend I can pay a clients fees just by getting decent fills using this method.
 
If I (we) can put together something similar via DOW Theory and the Money Market rates over the S&P Composite Index over the CRB Spot Raw Material Index and anything else that would be additional confirmation that will indicate the direction of the various cycles the EDGE would be HUGE HUGE HUGE!!!!!!
 
Anybody up for some collaboration on such a project?
Jan 3, 2010 7:09 pm

Technical analysis.  It's only good until the next time it's not.  Behavioral Finance is the area you should be focusing on.  The only indicators I like to look at are inverted yield curves (3 month over 10 year treasury), bond spreads vs. historic spreads, and a few others.  I have found most technical analysis to be great when hindsight is 20/20, and very little more.

Jan 3, 2010 7:28 pm
rankstocks:

Technical analysis.  It's only good until the next time it's not.  Behavioral Finance is the area you should be focusing on.  The only indicators I like to look at are inverted yield curves (3 month over 10 year treasury), bond spreads vs. historic spreads, and a few others.  I have found most technical analysis to be great when hindsight is 20/20, and very little more.

So does this mean you are a disciple of Nick Murray? Serious question, not trying to be sarcastic. I am halfway thru his book, Behavioral Investment Counseling.
Jan 3, 2010 7:57 pm
rankstocks:

Technical analysis.  It's only good until the next time it's not.  Behavioral Finance is the area you should be focusing on.  The only indicators I like to look at are inverted yield curves (3 month over 10 year treasury), bond spreads vs. historic spreads, and a few others.  I have found most technical analysis to be great when hindsight is 20/20, and very little more.

 
Correct me if I'm wrong but the last inverted yield curve lasted a couple years(?) and was a year plus early. "Behavioral Finance" is pretty much technical analysis. I believe gaming theory to be even more pertinent.  It's clear you're not one that would like to engage in developing a method of capturing profits by riding trends. I hope your methodology serves you well. There as many ways to gain an edge as the mind can dream. I hope yours brings you much success.
 
Jan 3, 2010 10:51 pm

Game theory is strategic thinking for everything pretty much. Only recently has game theory used more behavioral methods. Most of game theory is that our choices would be made by what is in our best interests. New games such as Dominator, Ultimatum and Dictator have proven in field tests that a lot of the time, we don't act in our own best interests.



I'm not exactly sure that Behavioral Finance is the same as Technical Analysis, although statistical analysis can be used for both.



Gaddock has proven technical analysis works in any kind of market. A lot of people have. I wasn't a believer, until I tried some trades he fed me. It's not for me all of the time, but it sure works. Thanks G - that was a client maker.

Jan 4, 2010 10:12 am

How does CODMW2 factor into game theory?

Jan 4, 2010 10:28 am
Spaceman Spiff:

How does CODMW2 factor into game theory?



Depends on if you are playing the campaign, or multi-player.

Been talking to ice?

Jan 4, 2010 10:46 am

Let's play Global Thermonuclear War. 

 
Wouldn't you prefer a nice game of chess?
 
(Sorry ICE, probably before your time.  Sad.)
Jan 4, 2010 5:02 pm

That so many believe in technical analysis gives it weight. The tech guys are definately roll players in short term moves.

 
I noticed that Moraen said one trade was a client maker. I'm not downing anything anyone is doing here, i'm really not. I started in this biz as bondguy and then wandered off the reservation in search of the big buffalo and green green grass. Before coming back to being "just bondguy" I did a lot of things. One of those things was daytrading. Within that adventure was tech analysis and all it's wonders. I worked daytrading for almost two years. The good news was we made money. In fact, lots of money! Both me and the clients. The bad news was I was always only as good as my last trade. That and being married to the screen ended that portion of my education. Eventually, grayer, not necessarily smarter, in an effort to not become the oldest living cold caller on the planet, i came back to being bondguy.
 
So, while  I no longer offer trading as client attractor my hat is off to anyone who can do this, make a business out of it and keep their clients happy.
Jan 4, 2010 5:25 pm
Moraen:

Game theory is strategic thinking for everything pretty much. Only recently has game theory used more behavioral methods. Most of game theory is that our choices would be made by what is in our best interests. New games such as Dominator, Ultimatum and Dictator have proven in field tests that a lot of the time, we don't act in our own best interests.

I'm not exactly sure that Behavioral Finance is the same as Technical Analysis, although statistical analysis can be used for both.

Gaddock has proven technical analysis works in any kind of market. A lot of people have. I wasn't a believer, until I tried some trades he fed me. It's not for me all of the time, but it sure works. Thanks G - that was a client maker.

 
AWESOME!!!
 
Tech analysis can be many things. I play high probability trades, 85% or better in my favor. On any one trade the probabilities mean nothing. BUT the larger the sample the more relevant they become.
 
I dropped over 5,000 tickets in 2009. The probabilities fell in line. 85% is a huge edge IMHO.
 
Think of black jack. The odds are 48 to 52 at most casinos. One hand means nothing but look at their house compared to yours. Even a tiny edge like that is HUGE over larger and larger samples.
Jan 4, 2010 5:36 pm

Scratch that last post if you read it, BG.

I failed to read the rest of your post.  A failing of mine.  I scan.  Helps me post between actually working.

Jan 5, 2010 11:28 pm

The last inverted yield curve (3 month over 10 year) lasted only a week or so.  90% accurate indicator by the way.  I have seen Nick Murray once, but I have not read his newest book.  I'm going to give it a read.  I'm guessing it is more about managing client expectations than anything else. 

 
The behavioral attibutes I am talking about follow the "odd lot" theory.  Where the average investor is nearly always wrong.  Examples:  1. a barrage of clients wanting energy stocks in '07 when oil hit 148/barrel.  2.  40 calls a day from clients as the market bottomed Nov '08 and March '09.  3.  2-3 clients a day asking about gold right now (bubble).  4.  Mailman giving stock tips in '99.  5.  high volume of "Euro" questions right now.  6.  Real estate will never go down situation in '05/'06 (I thought it was going to crash a little earlier than it did.  And the list goes on. 
 
These indicators make me think there are lots of innefficiencies that can be found in the market over time.  Many of these indicators are difficult for someone that is not in an advisor position to quantify.