Dow 30 Overview As March 20,2021

In my early posts I wrote about Dow 30 industrial average index and how it seems to me as overvalued compared to fair value of those stocks that included in it. Here I will list all the stocks inside the Dow 30 index and their fair values and the prices they are trading with in market. Based on the fair values of these stocks, a conclusion about if the Dow 30 is overvalued or undervalued or stable and has fair value can be made.

Company NameTicker Price of Stock Fair value of Stock
Apple IncAAPL119.9957.54
AMERICAN EXPRESS COAXP140.7111.9
BOEING COBA255.82-25.5
CATERPILLAR INCCAT225.2915.15
CISCO SYSTEMS INCCSCO48.9840.73
CHEVRON CORPORATIONCVX103.3826.33
WALT DISNEY COMPANYDIS191.1434.35
DOW INCDOW63.91114.74
GOLDMAN SACHS GROUP INCGS344.2-845
HOME DEPOT INCHD289.1313.26
INTERNATIONAL BUS MACH CORPIBM128.9375.03
INTEL CORPINTC63.766146
JOHNSON & JOHNSONJNJ160.04204.6
JPMD JPMORGAN CHASE & COJPM155.14-864
COCA-COLA COKO50.8170.6
MCDONALD’S CORPORATIONMCD222.44265.67
3M COMPANY3M188.71255.53
MERCK & CO INCMRK77.51162.31
MICROSOFT CORP.MSFT230.35141.09
NIKE INCNKE137.4923.17
PFIZER INCPFE35.5367.55
PROCTER & GAMBLE COPG128.01327.14
RAYTHEON TECHNOLOGIES CORPORATIONRTX78.3619.62
TRAVELERS COMPANIES INCTRV149.3725.6
UNITEDHEALTH GROUP INCUNH365.58576.15
VISA INCV206.982.67
VERIZON COMMUNICATIONSVZ56.24413.81
WALGREENS BOOTS ALLIANCE INCWBA52.54450
WALMART INCWMT131.74716.45
EXXON MOBIL CORPORATIONXOM56.490.25
Stocks Prices Compared to their fair values as of March 20, 2021

The above table listed all the 30 companies that are listed in Dow 30 with their prices and their fair values. There is some notes that should be clarified to make the above table reliable.

Notes:

  1. The above table is not a recommendation for any stock in any trade, if you want to buy or short any stock do your due diligence and make sure that your investing or trading systems align with the information listed above.
  2. The assumption used to estimated the fair values of all the stocks above is as if theses companies growths’ are similar to the USA GDP growth which is 2.2%.
  3. Some of the above fair values is in minus (-) which does not make sense, but it can provide a clue about how these stocks are completely overvalued.
  4. Number of overvalued companies are (14) which is have the companies in the Dow 30 index, that might be the reason why the DOW 30 still in uptrend or sideway, and traders should exercise caution if they want to short stocks in uptrend with high momentum.
  5. Traders can use their systems to look for short term deals that presented for them by market movement, investors on the other hand need to stick to stock fair value instead of its price, because even if there will be bear move the market at the end will appreciate the stock fair value and move toward it.

Stock fair value is something completely different than its price which is listed in the market that affected by the law of supply and demand. The wise investors need to distinguished between these two things and never buy stock that its price higher than its fair value and, never sell stock that its price is lower than its fair value.

Dow 30 index is overvalued as of Dec 7, 2020

The Dow 30 index is a general index that measure the sentiment of the US equity market as well as investor in long run since it consist of the main 30 companies that affect the market and the economy in general. This index shows if the market is going in uptrend, downtrend or sideways. Because of that I used this index as a base for my analysis and I used all companies inside this index in order to come up with my index which shows the real value of Dow 30 index. My index which I am going to call it Sam 30 index is based in Dow 30 index as benchmark to all investors and traders alike to see if the Dow 30 index is an overvalued or undervalued or has fair value.

I am not going to describe the process that I did to come up with Sam 30 index, instead of that I am going to discuses how does Sam 30 index can be used in conjunction with the Dow 30 index in order to allow investors and traders see if there is an opportunity to go long or short or even to step aside and do nothing.

Let us assume that the Dow 30 is 30,000 points and Sam 30 is 23,400 that means the Dow is greater than Sam 30 with more than 6600 points, which means the Dow 30 is overvalued and investors should not invest in the market , and traders on the other hand should apply their technical analysis to see an opportunity for shorting any overvalued stock in this market. The same is true if the Dow 30 was 23,400 points and Sam 30 was about 35,000 that means the market is undervalued and investors and traders should look for an opportunity to go long with any undervalued stocks.

Sam 30 is not day by day index, instead is an index where its value updated whenever new earning report released by the companies that built the Dow 30 index. Once the earning report released for any company of those 30 companies that listed in Dow 30, Sam 30 index will be updated to its new value in the next day.

As of December 7, 2020 the Sam 30 value is 22,495.92, that means, when we do our analysis that described above, the market is overvalued

Dow 30Sam 30
30,218.2622,495.92
Comparison between Dow 30 and Sam 30

As you can see above the Dow 30 is greater than Sam 30 with more than 7,700 points which means that the market is overvalued and I suggested that investors to step back and do nothing while traders can short any overvalued company based in their technical analysis.

Market Sentiment: How can be measured?

A lot of traders are using indexes or at least the major one to see if the market is going up or down or does not move in either way as sideways movement. This a very helpful technique that used by traders and investors to see if the market is willing to pay some profit in either way by going long or short, or if the market is not moving at all which can be better to stay out of it.

Many traders and investors alike using S&P 500 as a gauge for market sentiment to see if the market is about to have a new breakout move or continue its original one before they trade or invest in any stocks. This approach is more helpful for traders and investors because it will prevent them to invest or trade in phases where market is not going any way, or even worst when it move or start move in downtrend.

But the question to ask here, is measuring market sentiments by using S&P 500 is a good approach or there is another index that is better in measuring the market sentiment rather than S&P 500.

Before answering the above question let us understand what is S&P 500 and how can be calculated?

S&P 500 is simply an weighted average for 500 companies. These companies are the most largest companies in U.S economy. Some of those companies have higher weight than others based in their size and how big financially are such as Apple, Microsoft. As the name imply there are 500 companies in this average. Some of these companies are consider leaders of U.S Stock market, such as Apple, Microsoft, Google, Amazon, while there are so many companies that included in this index are considered a lager companies.

From statistic point of view, when the sample number is increased the average for that sample is almost coming to normal and anomaly will be disregard. To make this simple, when there is a bad companies in that average are mixed with good companies, the value of those bad companies will be disregard since their value will not affect the average specially if those companies are smaller in weight than those good one. That was the reason that S&P 500 index broke the top that made in Feb 2020 in beginning of this year, even if there were so many companies are reporting bad earning report.

S&P 500 Break Resistance

But what if the sample size is been minimized to 200 or 100 or 50 or may be 30 such as Dow 30 index. What will happen in this case?. The answer is obvious, the average will be more sensitive. That means when there is an anomaly appear, the average will effect immediately either if that anomaly was good or bad. And here comes the important to take Dow 30 index which is known as Dow jones industrial average as measurement of market sentiment.

Dow 30 consist of the biggest companies of all sectors of the stock market. It vary from technology companies to petroleum companies as well as banks and pharmaceutical companies. The variation of these biggest companies and the limitation of this average to consider only 30 biggest companies in U.S economy which make this average a unique market sentiment specially when investors or traders want to know if it is a bull or bear market.

For example, in 2020 where coronavirus pandemic started the market wiped all its profit since 2016 in just five weeks. All other indexes such as S&P 500, NASDAQ and other European indices have been recovered from that drop except the Dow 30 which still failed to reached the top that made in Feb 2020 as shown in the pictures below:

S&P 500 break the top reached in Feb 2020
NASDAQ 100 Break the top made in Feb 2020
Dow 30 failed to break the top made in Feb 2020

As we can see from the above charts there was an anomaly. These indices should be aligned with each other and broke the top made in Feb 2020 in order to prove the sell off that started in Feb 2020 has been recovered, but since Dow 30 still did not break that resistance made in Feb 2020, it will be hard to tell if the market has been recovered from coronavirus effect or not.

Alignment for all indices is important in order for traders and investors to tell if they are in bull/bear market, and Dow 30 index shows through years if the market is in uptrend, downtrend or sideways. That does not neglect the importance of S&P 500, or NASDAQ composite, they are both good tools to measure the market sentiment, but when it come to overall result, I believe Dow 30 has the final word to decide if the market is about to move either way.

Impulse Vs. Correction wave: How to spot Market’s Next Move

Stocks market default move as all know is going up unless there is a correction move where prices will go sideways because people collect their profits or down when there is a problem in the company. But that is not the case in Forex Market where the move can be either up when the main currency is stronger than the secondary one or down when the opposite is true. In this type of market, traders who bet in the price action and its movement will find it hard to spot which move is the correct wave and which is the correction wave. It will be hard to know which one the actual direction of the price and which one is the correction of the actual move. The following is some tips that can be helpful for traders to spot which move of price is the impulse and which is the correction. Once these two movement have been identified trading will become more easier, because traders can stick to the original direction of price whenever an opportunity has been rises.

The first approach to identify the impulse and the correction is to use long time-frame such as weekly or monthly, and try to identify if the price in these time frame has multi[pl tested trend line. Once this trend line has been identified then the impulse will be always with the direction of that trend line, and the correction will be always in the opposite diction of that trend line. Like the figure below:

Multi tested down-trend line

Another approach to identify the impulse wave and/or the correction wave is using MACD. MACD has two lines, one of which is called the MACD line and the other is Signal line. When MACD line is above the Signal line and all above zero its an uptrend, and when MACD line is below the signal line and all below zero this is a downtrend. But what if the MACD is above the signal line but both below zero line, or MACD is below the signal line and all above zero line. In these two cases the market is in correction phase and once you identify the original trend you can wait until the correction phase end and the price start move with the impulse direction again . Here where you can use the MACD to see if the price impulsing or correcting:

 Above Zero lineMACD above Signal lineUptrend, impulse
Above Zero lineMACD below Signal line Correction in uptrend
Below Zero lineMACD above Signal line Correction in downtrend
Below Zero lineMACD below Signal line Downtrend, impulse
MACD and impulse and correction waves

As you can see in the below chart:

Note: MACD should be used as secondary confirming tool not as major tool. Never use it by its own, the only major tool that you can rely on is the price action and its movement.

Sometimes the correction wave has an impulse and strong wave where the impulse will be in the opposite direction of the general market, and the correction wave for this impulse is in the direction of market. Here where many traders loss their money in market specially in Forex where there is lack of volume. The only way that will help traders to avoid this types or trades is to make sure that they get in trade with the direction of general market impulse wave after the momentum of the correction wave is faded and that happened when the MACD line is crossing signal line or retrace back from it and all lines are either below zero( for Sell) or above zeros (for buy) which means that the market will resume in the main direction like the figure below.

One of the great tool that can be used to tell if the trend line (either was up or down) about to be broken and the correction wave which suppose to hit the trend-line and resume with movement of main trend line direction is about to become an impulse, is using a momentum tools such as (RSI). Once the price reached a down-trend such as the one in the figure below with high RSI that either at 70 or above , then there is a high probability that the price will valid break the trend line and move up in new up-trend and new impulse wave.

Price Hit Down Trend with RSI hit 70 or above

Those are some tips that might help traders in how to indicated which move is the correct one (impulse) and which one is the correction move. Trader need to stick to the original move and avoid trading in correction move especially if she is not experts. Because as I said before all money that traders make in the original move can be wiped of and more once the price get in a correction wave.

Trading probabilities: Clear approach to Trade Forex

Forex’s Traders always heard that trading probabilities is one of the most effective strategy that will guarantee sustainable profits and the best way to minimize lost. But many of them don’t know how to do so. This article will explain trading probabilities from engineering background in order to sustain profit and minimize lost, and most of all to make traders accept any lost and never get greedy when won because it will make trader realize that FOREX market are just a simple random movement that no one can guarantee where is the market is heading.

First of all let us prove that the market is a random movement of price where traders try to predicate its next move in systematic way but 90% failed. Many traders use indicators such as moving average, MACD, RSI and stochastic in order to decided either to buy or sell. And many traders who buy or sell based in those indicators lost there trades. why is that?

The answer is very simple and straight forward, because the market is not moving in systematic way. Because if it was, then when you buy based in these indicators you should win as well as when you sell, but since the market is moving in random way you keep losing even when you used these indicators which suppose to help you to win not losing.

Since market moving randomly, the only way to understand it is by applying possibilities or outcomes for its next move and assigned probabilities for those outcomes and see which possibility is more likely to happen next.

When traders treat market as random experiment they will understand it clearly. Any random experiment has an outcome and each outcome has probability of occurrence. If you deal with Forex market as random experiment the outcomes lie in three possibility (up, down, or sideways). Each one of theses outcomes will be assigned probability as following:

Market’s next Moveprobabilities
Up33.3%
Down33.3%
Sideways33.3%
Error0.01%
Total100%
Market outcomes and probabilities

Once siting the outcomes and their probability, traders have to build a hypothesis for each outcome and either accept or reject that hypothesis ( hypothesis mean that assuming the market will move up and then test that assumption with evidence and see if this assumption is still valid or not).

The first hypothesis is market will go up. To test this hypothesis in order to accept or reject it you can ask the following question :

  1. Is the market making higher high and higher lows, if yes that mean the market is in uptrend, and this hypothesis is still accepted.
  2. Does the market pullback to a support and retrace to its original direction which is up with strong candlestick reversal pattern, if the answer is yes then this hypothesis is still valid.
  3. Keep going in asking questions to end up with either accepting this hypothesis or reject it.
  4. Then you divided the probability for this hypothesis which is (33.3%) by the number of the questions to get probability for each question.
  5. In the above example we had two questions and the probability for each question will be (33.3/2) = 16.65%.
  6. Then let us assume that the answer for question one is (yes) it is an uptrend, and the answer for question two is (no) the retrace was not strong.
  7. That means we had (+16.65%) and (-16.65%) because the second question’s answer was no.
  8. That mean the remaining probability for this hypothesis which is uptrend is (33.3%-16.65%)= 16.65%.
  9. Now we have a probability for our first hypothesis which is one of the outcome that market is heading up equal to = 16.65%. Sometimes when all answers are not satisfied that mean we reject this hypothesis and the probability for this outcome equal =0.
  10. Now we can be certain with a probability of 16.65% that market is moving up. But the remaining percent which was substructure earlier can be added to either the down move hypothesis or sideways in order to end up with higher outcome from three which are (up,down or sideways) and see which one has the higher probability and trade it.
  11. Now you can repeat the process form (1 to 10) to end up with the probabilities for down movement and sideways.
  12. Once you preform these processes and come up with all the probability for all three outcomes then you can trade in direction of the outcome that has higher probability using price actions or any other secondary indicators such as (Moving average,MACD,RSI).

Randoms experiment can be varied from tossing a coin to see the outcome if it was head or tail, to more sophisticated experiment such as predicting the Market movement. In my opinion Forex market is a random experiment where a lot of factors contribute to its movement that hidden from the ordinary trader. For traders to understand this market I urge her to go back and study the random experiment in details to come up with a strategy – or update the above explained one – that help her beat the market by making profit consistently and accept lost. I know that will never be hard for Forex traders because they were able to make profit with this giant market but were not able to keep it because they never think about the market as it is moving randomly.