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Friday, September 7, 2018

Dow Paradox Strikes Back


Dow Paradox has been my modus operandi for many years.

Five years ago, almost to the date, I wrote here (link):
The purposeful manipulation of index components is designed to produce positive outcome, thus creating an upward equity slope - an illusion of increasing wealth and prosperity - The Dow Paradox!
In a sense of this phenomenon,  2018 is off the charts. A great calamity started in a beginning of this year, when S&P Global (the main purveyor of indexes galore) and MSCI (the other snake oil peddler) announced massive changes to their industry classification structure - GICS. The monumental reshuffle of sectors and industry groups (started with removal of REITs from Financial sector not so long ago) continues with introduction of all new and shiny Communication Services sector.
https://us.spindices.com/documents/index-policies/sector-classification-system-dj-indices.xls?force_download=true

I am not about to second guess wizards of S&P Global, besides it makes a whole lot more sense to keep Google and Facebook out of Technology sector, but this thingy will have quite an eclectic mix. Alongside of presently defined Telecoms (like AT&T and Comcast), new sector will also include publishing, movies, entertainment and interactive media - companies taken from Tech, IT and Consumer sectors.

I will be updating and revising System9 Consolidated Watch List, once 'rotation of 2018' is over. These type of changes are nothing new to me and don't cause any disruption to my investment process, because I operate strictly according to Dow Paradox and generally geared towards capitalizing upon its nature and reality. As for everybody else - watch out when walking under tall buildings - they will be tossing all that laborious intermarket relationship research and weighty sector rotation models right out the fucking windows.

Current S&P500 allocation, according to Spiders (link):
 
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On June 19, Walgreens pharmacy (WBA) replaced General Electric (GE) in Dow Jones Industrial Average. GE had been a longest continuous member of DJIA, stayed in it from very beginning, but visibly lost its way over past couple of decades. Formerly the bluest of blue chips, and seemingly perpetually biggest industrial company in the World, is now a pale reflection of itself. GE never recovered from the financial crisis (GFC), moreover - it sits now near 2009 lows, priced at 1/5 of its 2000 high. (chart from Yahoo)


This is not the first rotten 20 years stretch GE had to endure. Presented in a chart below is a period from 1962 to 1982 (prices adjusted for splits and dividends, i think), with big green candle of August 1982 that kicked out a monster 60x bull run culminated in a chart above.

Before my dear readers (all two of you) get all hot and bothered about long term prospects of banned light bulb maker, jet engines and locomotives and nuclear reactors builder, hospital and biomed equipment manufacturer, lending bank and more of god knows what - I want to remind that all this gobbledygook and squiggly wiggly lines on a chart means exactly dick (for making money in trading). GE is sort of an index of itself - a gigantic conglomerate of businesses that changed hugely overtime. So much so, that essence of Dow Paradox must be applicable to this single and somewhat unique stock.

From the same article of 2013:
What is a point of doing long term technical analysis on a price chart of $INDU or DIA, or SPX, or many other so called 'indexes' ,when composition changes so much - its not the same index, not even close. Companies dropped from major index suffer massive outflows, sometimes for years, and often even go bankrupt (remember Kodak).
I don't think that fate of Kodak will befall upon General Electric.  Unlike Kodak (who's product went extinct), GE still makes important things, employs 300 thousand people, with sales of over 100Bil (P/S is 0.89!), almost 4% divi, and presence in 180 countries (out of 196 total).

I will not be making any predictions about GE future price movements, nor I will offer a trade recommendations. Rather, I want to make an observation - GE was one of 12 biggest stocks in USA for years. As such, its been a permanent member of System12, and I traded it on several occasions with last trade sold a bit over $30 in September 2016 (post link). System Rules never provided a new entry into GE up until October 2017, when this thing fell off Mega Dozen, tumbled through Second Dozen and became disqualified from System12.
Read more about System12 here (link).


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