The Dow Jones (DJX) Index Option put/call ratios
Below is a chart of the DJIA that tallies the number of higher highs and lower lows made by each of the 30 component stocks in the index each trading day. Each daily net value is added to the previous day's net value to create a running cumulative total.
Below is a chart of the DJIA's monthly close. This chart also displays
the 3 period simple moving average along with the displaced moving average. The
displaced moving average is simple the green line shifted to the right. In this
chart, the 3 X 3 DMA is shown in blue.
Below is a monthly chart of the DJIA's changes from month to month along with a 3 period simple moving average. The y-scale represents the ratio of the DJIA monthly close as compared to the previous month. Another way to interpret this is to equate the y-scale's value of one to 0%. The y-scale's value of 1.10 is the same as +10% wihle 0.90 equals -10%. So this chart shows us that the DJIA generally hasn't fluctuated more than +/-10% of the last 29 years. And when it did exceed these levels, the DJIA went to the other side of the envelope.
Below is a chart of the DJIA's quarterly close with the Fibonacci retracement lines. The fibonacci range was taken from the low of 1994 to the high of 1999. The fibonacci retracement lines are the smaller orange lines. These represent the 61.8%, 50%, and the 32.8% retracement zones or resistance areas. This chart also displays the 3 period simple moving average along with the displaced moving average. The displaced moving average is simple the magenta line shifted to the right. In this chart, the 3 X 3 DMA is shown in yellow.
Below is a chart of the DJIA's monthly average rate of returns. The light blue line represents the five year average annual percentage rate (APR) of the DJIA The average rate of return is calculated in the following manner. At the end of every month, the ratio of the monthly price was divided by the monthly price of the DJIA of 5 years earlier. Dividends were not included, so the total return was not calculated. This capital appreciation ratio was then converted into an APR. This APR is similar to a bank's 5 year interest rate on a 60 month Certificate of Deposit (CD).
The dark blue line is the 10 year moving average rate of return which could be compared to the 10 year US treasury note.
Please note that the light blue line nor the dark blue line represent the 60-month CD rate nor the 10 yr T-note, but rather this rate is the result of converting the DJIA's price gain or loss into an interest rate equivalent. Also note that this average rate of return only represents the price fluctations of the DJIA and not the total return which would include all dividends paid to stockholders of these companies.
The magenta and yellow lines represent the maximum and the minimum for the 10 year period.
The y-scale of this chart represents the ratio's values. A value of 1.00 is equivalent to 0% while a value of 1.10 can be converted to +10%. Also a value of 0.90 can be converted to -10%. Currently, the 5 year ratio is around 0.98 or -2%. This means that DJIA has losted 2% percent from the same month 5 years ago. This figure can also be used to compare how a bond investor rate of return compares to a stock investor in the DJIA. In this case, the bond investor did better because the bond certainly gave the investor a positive return. And if you look up the interest rate of 5 years ago, you'll find that that a 5 year treasury note yielded 5.49% (2/1998). So bonds were a better investment than stocks from February 1998 to March 1, 2003. Investors in bonds earned 5.49% per year on their money while stock investors lost an average of 2% per year of their money. For example, a $10,000 invesment in bonds back in Feb. 1998 became worth $12,745 on Mar. 1,2003 while $10,000 in the DJIA became worth only $8,837 (not including dividends). The bond investor gained 27% in 5 years while the DJIA investor lost 11.6% in 5 years.
However on a ten year basis, investors in the DJIA made more money than bond investors. The dark blue line shows us that the DJIA yielded an annual 13.5% return over the last ten years while the 10 year Treasury Note yielded only 6.26% (2/1993) per year for the same period. Remember that the 6.26% was the prevailing interest rate 10 years ago not today's interest rate.
This hopefully gives you a little insight as to how professionals value investments because they are constantly comparing one investment class to another. The goal is to identify extreme valuations and make decisions based upon how sustainable those extremes are. If you want to see what the interest rates were in the past go to FRED - Federal Reserve Economic Database.
Below is a chart of the DJIA's rate of return on a captial appreciation basis along with the 10 year Treasury Notes interest rates of the past. As the graph of the 10 year T-Note depicts, interest rates peaked around 1982 and have been falling ever since. The DJIA's performance was better than bond holders since 1985 on a 10 year basis. What that means is that if an individual purchased 10 year T-Notes (10 year US bonds) in 1985, they earned approximately 12% risk free because the US government has never defaulted (or failed to pay) on its loans, or bonds. Now if an individual purchased the DJIA in 1985 they too earned approximately 12% per year for the next ten years, but they had the increased risk of stock prices rising or falling. Investors in the DJIA also received dividends which would have increased their total return over bond holders but this chart doesn't show the total return for simplicity's sake. What's interesting to note is that if you had bought the DJIA stocks just prior to the 1987 Crash, you would have still earned more than bond holders. But again stock holders had the added risk of not knowing that stock prices would continue higher. So in 1987, you could have bought 10 year bonds earning 10% per year risk-free or stocks which earned 10.6% per year on average for the next 10 years. However, those investors that bought stocks after the crash of 1987 saw there returns jump to 15% per year while bond holders only earned 9% per year.
Now, if anyone bought the DJIA during the early 1990s, they are still ahead of bond holders but as the chart is showing, the DJIA's rate of return is falling. Note that the chart stops at 1993. This is current because the rate of return for 10 years can only be calculated based on data from 10 years ago. If today is 3/31/2003 then the DJIA's rate of return can be calculated from 3/31/1993 to 3/31/2003. Bonds on the other hand, when we buy them tell us in advance what the rate of return is going forward. A bond purchased today will provide the current yield for the entire period of the bond. But with stocks, we don't know the future value of stocks purchased today.
Nobody knows if the DJIA's rate of return will drop to a point that is equal to bond holders or even fall below the rates of return of bond holders. As the charts shows, during the last 40 years the DJIA went from a period of underperforming relative to the 10 year T-Note (1962-1977) to a period where the DJIA equaled the performance of the10 year T-Note (1977-1985) to a period where the DJIA outperformed the 10 year T-Note (1985-2003). If history repeats itself, then as an investor, you would have to ask yourself which investment would be better: bonds or stocks. The problem however in asking this age old question is will the US Gov't still be solvent in the future. Could there be anything catastrphic event that will the break the cycles of the past? Will the current debt levels finally become problematic? Will the DJIA 10 year rate of return drop to match that of bond holders from 1993 at 6%?
If we assume that the DJIA will again reach parity with 10 year bond holders, then what is the price that the DJIA would need to reach to match the 10 year bond rates of 6% from 10 year ago? The answer depends on what price we use. If the DJIA's price range in 1993 was 3232 to 3800 and closed at 3754, 6% compounded for 10 years would give us prices in today's terms that range from 6512 to 5564. The DJIA is currently at 8000 (3/31/03, 1PM), so the DJIA would need to lose another 2000 points and if it did, investors from 10 years ago would have earned 6%. New investors of course lost money. Remember, that if prices drop to these levels, 10 year bond holders and DJIA stock holders will have earned the same rate of return on their money from 1993 (excluding dividends). But if dividends were included and the total rate of return of the DJIA were compared, then the DJIA would need to fall lower than 5564 to match the returns of bond holders.
The problem now facing investors with maturing 10 year bonds and DJIA stockholders is in deciding where to put their money for the next 10 years. As the flow of money has been indicating, money has been flowing into bonds despite the fact that interest rates are dropping. Remember, as of today, the US Government is the only seeming guaranteed investment on the planet (this may not be true in the future if the Government can't pay its bills or hyperinflation becomes a reality) so investors around the globe are parking their cash into US Treasuries or bonds. This demand for safety is in direct response to collapsing stock prices around the globe which has pushed down interest rates (there are more investors buying bonds than stocks right now). So if you were lucky enough to avoid buying stocks during the last 4 years and had money to invest the question is where are you going to invest your money so that it at least earns more than the inflation rate. Well, up until the Spring of 2002, US bonds were providing higher returns than the inflation rate. Now demand for safety is so high that bond rates dropped and are now providing investors with yields equal to the inflation rate. This shows precisely how scared most investors are since they are now more concerned with preserving capital rather than earning any real rate of return. They'd rather park their money in a bond that is bearly keeping up with inflation than loosing it investing in stocks. What do you think, will the DJIA rise by more than 4% per year in 10 years because that's the current 10 year bond rate of return? Will the DJIA be higher than 11,842 on 3/31/2013? That's the decision right now.
Please note that in the past there was a long period in which bond holders and stockholders were equals. One group of investors didn't earn more money than the other for 8 years. So if we enter such a period it will be quite some time before either bonds or stocks become the better investment choice. The decision today as to which is a better invesment 10 years from now, stocks or bonds, is the critical question. Hopefully this chart gives you a better understanding and a little insight as to how the financial markets ebb and flow.
One final thought. As investors consider future prospects, they must consider the current financial, political, global, and economic climate. If you were a long term investor and purchase 30 year bonds in the 1980s, you would still be earning 10% or more while current purchasers of bonds are only looking at rates of 1% to 4%. At some point, speculators will begin buying stocks again on the calculated risk that stocks will earn more than 2%. They will look at their options and conclude that bond rates are too low, real estate is over priced, commodities are responding to political events rather than to economic forces of supply and demand (or market forces), so by the process of elimination, some aggressive investors and big risk takers will buy stocks because the other choices at the moment don't provide enough return. Remember that investing is emotional and that investors tend to over-react. So speculators try to identify these emotional over-reactions and invest earlier than the average investors so that they can get better returns. This means being armed with historical information and understanding how money flows. Why did investors lose money in the mid-1960s through the 1970s? Why didn't people want to invest in stocks during this time? What changed the perception to make buying stocks so widely accepted today? What are the attitudes of today's investor versus the investor of 40 years ago? All things change besides stock prices.
Below is a chart of the DJIA's weekly closing price along with the bullish/bearish sentiment reading. The weekly DJIA closing price is overlaid with the sentiment figures. The sentiment figures presented are the Bullish minus the Bearish net value expressed as a percent along with the number of investors that are neutral which is also expressed as a percentage. In addition, there is a 5 period moving average of the Bull-Bear sentiment values.
When investor's confidence is high or the number of "Bulls" is high the DJIA tends to near a peak. But as you can see, there are some notable exceptions. Conversely, when the number of "Bears" or investor's confidence is low, the DJIA tends to be near a low.
Below is a chart of the daily closing price of the DJIA along with the number of stocks in the Dow Jones 30 that made higher highs and lower lows. Since there are 30 component stocks to the DJIA, the maximum value of stocks making higher highs is 30. This is also true for the number of stocks making lower lows. Notice that when the number of stocks goes to an extreme, the DJIA tends to reverse direction if only for a few days.
Below is a chart of the daily closing price of the DJIA along with the number of stocks within the DJIA that are making Higher Highs with increasing volume and Lower Lows with increasing volume. This chart is different from the chart above in that this chart uses the DJIA's component daily stock volume as an additional factor. In this chart, extremely high values (>15) tend to favor a continuation of the trend. This is the opposite interpretation of the previous chart.
