A SYSTEM FOR TRADING THE DOW 30 STOCKS

I read a discussion of securities analysis described in a paper titled “Random Walks: Reality or Myth” in the November 1967 issue of Financial Analysis Journal. According to the author, Robert Levy, his technique produced a 20% per year return over the 5-years covered in a simulation. It looked at hundreds of stocks and included complex Buy/Sell rules. I decided to adapt the method to rank the Dow 30 and simplified it to select only the top stock in the Dow 30.  Under the modified system, one would hold the highest ranked stock until another replaced it at the top level. In short, this is a momentum methodology that looks at current price relative to past prices and picks a winner each day. I publish the data daily at the Navigate the Stock Market Blog.

My father was a fan of the Dow stocks and he regularly owned the higher dividend stocks in the Dow.  The chart below shows a momentum based rank, but we need to keep in mind that these stocks are the Dow 30 after all, and are fairly staid when compared to the real momentum stocks such as Facebook, Amazon and Google (Alphabet).  

 

My point here is to note that the Dow stocks can have a momentum component and this analysis provides another data point for a dividend/Dow investor. Hopefully, this type of analysis would be a reminder not to hold any stock forever – just look at GE! – or provide some impetus for owning the better performing Dow stocks. The Dow stocks generally pay a decent dividend while the true momentum stocks pay none.

 

Further, this strategy can produce some surprising results.  Following the strategy from 1 May 2017** would have produced about a 43% return (1 May to 7 November) if one had owned the #1 ranked stock during that period (excluding dividends and trading costs).  Holding times would have been:

Apple (AAPL): 1 May-24 May;              4% gain.

McDonalds (MCD): 25 May -5 July;      2.2% gain

Boeing (BA): 2-days;                            0.4% gain

McDonalds (MCD): 2-days;                  -0.4% gain

Boeing (BA): 12 July – 24 Oct;             32.8% gain

Caterpillar (CAT): 3-days;                    0.7% gain

Intel (INTC): 30 Oct-7 Nov;                   2.8% gain

TOTAL = 42.8% GAIN in a little over 6-months (APPROXIMATE).

 

I’ve noted the gain as approximate because the analysis assumes one owned the #1 stock on the day it became #1.  In practice that’s not possible since my analysis is based on closing values. Further, I wouldn’t get these exact values because I tend to wait a day or two before switching to the new #1 ranking since the rankings can bounce around a bit as the leadership changes. Still, this is a compelling endorsement of the system especially since it follows the ETF methodology that I back tested over several years.

 

**I’ve only back tested this system for about 6 months because it takes a lot more work to load enough data to produce a longer test.

 

The top ranked stock, Intel (INTC) in the example on the above chart, receives 100%. The rest are then ranked based on their momentum relative to the leader.  While momentum isn’t stock performance per se, momentum is closely related to stock performance. As noted above, over the 6-months May thru early-November 2017, investing in the #1 ranked stock would have produced nearly a 43% gain.