As the Dow Industrials meander near all-time highs, it is necessary to review Edson Gould’s Altimeter for the index.
Currently, the Altimeter is closing in on the 2007 peak of 47.37. If the Dow were to attain the 47.37 level in the Altimeter, the index would sit at 17,062.67. There is no rule that says the Dow Industrials must stop at the prior turning point. However, our cautious nature instinctively pushes us to wonders if the run from the 2009 low is about to come to an end.
It is worth mentioning that from 1900 to 1987, the Dow Industrials would peak at or near an Altimeter level of 30 and trough around 15. An investor could almost count on these levels as general points to accumulate and sell stocks without fail. Note the various dates when a “sell” or “buy” indication was given. All points until after 1987 were useful indications for market timing.
What has changed that makes the Altimeter vary so much from the normal levels? We think it has to do with the selection of companies that are included in the Dow Jones Industrial Average with less of an emphasis on dividend payments, lower dividend yields and lower relative payout ratios. In addition, inclusion of companies like Hewlett-Packard, Microsoft, Intel and Cisco Systems has shifted the course of the index which might appropriately reflect the changing nature of the U.S. economy.
The idea of the Dow Jones Industrial Average is going through a dynamic shift on how to value the index is nothing new. According to Geraldine Weiss, former editor of Investment Quality Trends (www.iqtrends.com) :
“For more than 100 years, the benchmarks of value for the Dow Jones Industrial Average have been 3.0% at Overvalue and 6.0% at Undervalue. Now, the venerable D.J.I.A. has climbed so extremely high, it’s dividend yield has dropped to 1.5%…the lowest in history. The situation intrigues us and causes us to wonder if the Dow is establishing a new profile of value between dividend yield extremes of 1.5% at Overvalued (where stocks should be sold) and 3.0% at the former Overvalued level (where stocks can be bought). Throughout history, there has been a 100% differential between the high and low dividend yields at historical extremes. The D.J.I.A. now is 100% above its historic benchmark of Overvalue.
“If in fact the profile of value has changed fro the Dow Jones Industrial Average (time will tell), then it is reasonable to assume that some blue chip stocks which also have climbed far beyond their historic levels of Overvalue, may be experiencing a similar fundamental change in their profiles of value. We saw the other side of the coin in 1982, when interest rates rose to unprecedented levels and some interest rate sensitive stocks established extremes of high yield at Undervalue.”
Weiss, Geraldine. “Should Some Overvalued Stocks Be Re-Evaluated?” Investment Quality Trends. Mid-July 1999. page 12.
The altimeter above has mirrored the action of the historical dividend yield for the Dow Jones Industrial Average as described by Weiss. If this is correct, the possibility exists that the Industrials could vacillate between the Altimeter ranges of 30 and 60, or thereabouts.
When we run the Altimeter numbers, with the high of 68.22 and the low of 13.96, we can determine the expected Dow Theory support and resistance levels.
As can be seen above, the Dow Altimeter is retesting the 32.05 resistance level for the seventh time since the low of 1980. Since the low of 2009, this is the second time that the Dow is testing the 32.05 level and the first significant breach to the upside. If the current level is sustainable then the next resistance level is 41.09 and would theoretically put the Dow at 21,600. However, failure to retain the current level would result in a retest of the 23.00 level or 10,800 (and then 8,280) on the index. It is worth pointing that if the Dow were to decline to the ascending 23.00 level, the actual level of the Dow Altimeter would be at 30.