Ask Colin

We now(April 2001) have a signal on the Dow Jones Industrial Average, but not the S&P500 or the Nasdaq. What does that mean?

Yes, there is no doubt that the DJIA Coppock has turned up from below zero. This is the classic signal.

It is also the case that there is no signal on the S&P500 or the Nasdaq Composite Index, which are below zero and still falling.

Like you, I am suspicious of the DJIA signal. The Coppock has a great record on the DJIA, so we must be careful not to discount what we do not want to see (shoot the messenger). Then again, it may be one of the rare "false" signals.

As I have been writing in my articles in Shares magazine and Shares Weekly on the Net, the present market is rather unusual in the way the DJIA has held up so long against obvious bear markets in the S&P and Nasdaq. The DJIA has so far very little bear market to reverse, so it is not surprising that a strong rally will turn the Coppock up. So, it may be unusual circumstances and a rare "false" signal.

Against this, we need to consider that there are some people who believe there is still one more major leg to the great bull market from 1974 still to come. I have no idea what this is based on. However, if they are right, then it could be that the DJIA is giving us an EARLY signal and that it will be confirmed by the S&P and Nasdaq in coming months.

There is no way to prove either argument. So, what do we do? We devise a strategy to deal with the situation. This might be to:

1. Tentatively look for undervalued stocks (that make profits and pay dividends) that are trending up after a long decline. I would only put a small proportion of capital into them at this stage.

2. If the DJIA goes to new all-time highs, showing strength, step up buying.

3. If the Nasdaq and/or S&P start to trend up (preferably with a Coppock signal), step up buying further.

An alternative strategy, if the DJIA continues to be the only strong index among the three, is to look at making moderate investments using the "Dogs of the Dow" strategy outlined by O'Shaughnessy - buy the 10 highest yielding DJIA stocks.

The situation will need careful monitoring and constant reappraisal as more evidence comes it.

At this point, my view is that there is more downside to come and we are looking at a major bear market rally. I have been wrong before and will change my mind quickly if events show I am on the wrong side.

Keyword: