Technically Speaking, a 10,000 Dow Is Imminent

Though the Dow Jones industrial average narrowly missed reaching 10,000 on Monday, Wall Street “technical” analysts expect the blue-chip index to slice through that level soon.

The chart patterns of key stocks--the trends in prices and in trading volume--appear strong enough to carry the index to that historic mark, those analysts say.

Many of the Dow’s blue chips--including General Electric (ticker symbol GE), American Express (AXP), McDonald’s (MCD) and Johnson & Johnson (JNJ)--are at or near new highs and appear to have at least short-term momentum working in their favor, analysts say.

“Of the 30 stocks [in the Dow], you have two-thirds that should carry it past 10,000,” said Adolfo Rueda, a technical analyst at New York investment firm Shields & Co. “Some look exceptionally good technically.”

Technical analysts don’t focus on so-called fundamentals such as companies’ revenue and earnings. Instead, they look at what’s happening with the stocks themselves in their day-to-day and intra-day price action and in the number of shares changing hands.

The logic of watching technical patterns is that the market action, on some level, reflects the fundamentals and investors’ expectations for the companies.

That is, a stock reaching a new high on heavy volume may signal that a company’s profit outlook is good--and that the rising number of investors fighting to own the stock recognize that.

By contrast, stocks advancing meekly, or on light volume, may signal that investors believe the company’s prospects aren’t that hot.

Along with GE, American Express, McDonald’s and J&J;, AlliedSignal (ALD), Procter & Gamble (PG), IBM (IBM), Wal-Mart (WMT) and J.P. Morgan (JPM) all look solid technically, Rueda said.

On the flip side, Boeing (BA), Caterpillar (CAT), Sears Roebuck (S), Philip Morris (MO) and Goodyear Tire & Rubber (GT) are acting poorly from a technical analyst’s viewpoint.

In a positive sign, several Dow stocks have broken out of lengthy “bases.” A base is a consolidation period during which a stock often (though not always) moves sideways. During this span, the stock is said to be “digesting” past gains or losses.

In other words, in the technician’s way of generalizing, everyone who wants to own the stock has bought it, while everyone who wanted to sell it already has.

If a stock is in a basing period, any new buyers who swoop in are often met with a limited number of willing sellers. As a result, the stock “breaks out” as the price surges.

Breakouts begin on a specific day during which a stock pokes notably above its base, or recent price trend. Breakouts normally are accompanied by heavy volume, which is a sign of rising investor interest in the stock. Often, a breakout will mean the stock moves to a record high.

GE is a good example of a Dow stock that has broken out recently. Its breakout began March 8, when the stock closed at a new high of $104.81 on above-average trading volume. On Monday, the price rose further, gaining $2.75 to a record $110.13.

However, investors looking to establish new positions in leading Dow stocks with a short-term profit objective should be careful. Just because stocks are technically strong, investors must guard against jumping too late into what turns out to be a short-lived rally.

In some cases, stocks become “extended.” That means they’ve risen so far from their breakout levels that they’re susceptible to a short-term pullback.

For example, retailer Wal-Mart has been a good performer recently, but that stock is extended now, some technical analysts argue.

To guard against being a late-comer, some technicians recommend that once you have identified a stock in a breakout, you should avoid chasing it into extended territory. One rule of thumb: If you can’t get the stock within 5% or so of the breakout-day price, better to look around for another stock that appears on the verge of breaking out or has just begun to do so.

For investors looking to get into blue chips today, it may be better to keep an eye on stocks that are still in bases.

At the moment, AlliedSignal and Procter & Gamble are in lengthy bases, some technicians say. General Motors (GM) and IBM are forming new bases after consolidating past advances.

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Dogs of the Dow: Woof!

The Dow Jones industrial average has been on a roll these days, but what about the once-ballyhooed “Dogs of the Dow” investing theory? This value-oriented strategy calls for investors to buy equal shares of the 10 Dow stocks with the highest dividend yields (annual dividend divided by share price) as of Dec. 31, to hold one year. The idea is that high dividend yields mean beaten-down share prices that should bounce back. But the theory has lost much of its luster in the last couple of years as the Dow dogs--like most “value” portfolios--have underperformed the market overall. So far, the 1999 pack looks like the same laggard dogs with new fleas. Even including dividend yields, the Dow dog stocks of Dec. 31 are on track to substantially underperform the Dow index itself. A look at the 10 Dow dogs for 1999:

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Ticker Mon. Y-T-D Current Company symbol close chng. yield General Motors GM $89.56 +25.2% 2.2% J.P. Morgan JPM 125.38 +19.3 3.2 3M MMM 79.69 +12.0 2.8 DuPont DD 56.25 +6.0 2.5 Goodyear GT 51.50 +2.1 2.3 Chevron CHV 84.38 +1.7 2.9 Caterpillar CAT 45.44 -1.2 2.6 Intl. Paper IP 43.31 -3.4 2.3 Eastman Kodak EK 66.75 -7.3 2.6 Philip Morris MO 38.63 -27.8 4.6 Dow dogs avg. +2.7% 2.8% Dow 30 avg. 9,958.77 +8.5% 1.6%

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Source: Bloomberg News