Investing 
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Technical Indicator: Cup & Handle

Don’t know much about history, don’t know much biology, don’t know much about these crazy technical indicators people talk about so I decided to look some of them up. Just as I did (albeit briefly) before with an investing strategy (there are more on the way I hope), I’ll do the same with some popular technical indicators. This time, I take a look at the always popular Cup & Handle technical indicator – which is a bullish indicator.

Cup and Handle Technical Indicator Image
Image from Investopedia

Why do its proponents claim it works? Well, what you have is a case of an investment that has turned a little sour and is on its way back up – but there’s a catch. The handle occurs when people who bought in at the start of the cup decide they want out, so the price will drift sideways or even lower and thus creating that little handle. Once that selling pressure is gone, the stock will take off. The only hitch in that idea is that you have no idea how long that handle is going to drift, it can be as short as a couple days or as long as a couple months.

So, the next step is understanding the various dimensions of the cup itself. If the cup itself is wider and has a long U, that’s a solid cup signal. If it’s more like a V or if it’s too deep (again, subjective), yuck stay away. Now, as for the volume of the security, the volume should be smaller as you get lower and lower into the cup and be lower than average at the bottom of the cup. As the price increases again, finishing the cup, the volume should increase.

This indicator is a little tough because it is so subjective, how deep is too deep, how much volume is too much, and because you have to see it after the fact. You have to identify the cup after it’s almost been formed (otherwise it could just be a decline) and then be able to jump in at the right moment. Unfortunately I don’t know of any historical data where folks have looked at cups and handles to see how things ended up but this is definitely one of those classic technical indicators most investors have heard before.


 Investing 
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Stock Picking Strategy: Dogs of the Dow

Now that I have a little more in terms of savings to put towards investments, I’ll begin investigating the various stock picking strategies out there and the first one I’ll take a look at is called Dogs of the Dow. I chose this one as the first one I took a look at because it’s really really easy.

Origins: The origins are hazy but it was definitely made popular by “Beating the Dow” written by Michael O’ Higgins.

Strategy: Pick the ten companies, of the thirty in the Dow Jones Industrial Average, with the highest dividend yields and invest evenly in all ten. At the end of the year, re-balance your portfolio so that you once again hold the ten companies with the highest dividend yields. There are a few variations on that strategy using the same basic concept of the ten Dogs and then just filtering those down. It’s also worth mentioning that this is a Contrarian Strategy, that is you’re picking stocks that are down and out, going contrary to the market.

Part of the reason why this theory works is because the stocks that have the highest yield usually have been seeing some tough times and depressed share prices due for a correction, so you buy when they’re down and out (and still have the benefit of the dividend). Then, at the end of the year, if they appreciated quite a bit, such that they fell out of the list of the top ten dividend yield stocks, you’d sell high and buy the low priced stocks again.

Track Record: From 1957 to 2003, the Dogs of the Dow averaged an annual rate of return of 14.3%. During that same period, the Dow as a whole averaged only 11%, a difference of 3.3%. From 1973 through 1996, the Dogs of the Dow averaged an annual rate of return of a whopping 20.3% compared to the Dow’s run of “only” 15.8%. While on a year by year basis the Dogs could potentially lag the Dow, this is a long term strategy so it relies on time to even out the returns.


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