Every so often a guy named Tom Dorsey will show up on one of the stock market channels giving opinions. I find most of what he says to be quite useful. If you're not sure who he is, he's kind of a big guy and uses a lot of football analogies.
One of the things he said a long time ago that stuck with me was that almost every time a stock gets to $90 it then goes to $100. I don't know the exact numbers from his work, but it seems to me that he is right about this, and since I am not making a decision based on this little nugget, I don't need to know the exact numbers but Tom, if you read this site, you are welcome to post some details.
Does this rule of thumb work for ETFs? Since ETFs are derivatives, of sorts, the trading of the components in the ETF would seem to be the driver but perhaps I am wrong. The ETF in question is the Nasdaq BLDRs Emerging Markets 50 (ADRE). I own it personally and a few of my clients own it as well. It is been quite a while since I bought any shares of this and I don't know if I would buy it at this price or not. Today it broke above $90 for what I believe is the first time. The fund has had a very good run, consistent with most emerging market investments, and shows no sign of slowing down, based on the chart.
This is not the type of thing that would influence my trading but this may create a little knowledge about how things work, we'll see.
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5 comments:
Roger, interesting about the $90 to $100 theory from Dorsey. This is a hard idea to test because to get an accurate picture you would need a time series that is not split-adjusted. I only have split-adjusted data. But, still had to test your idea. I tested it against the Amex and there were 13 times a stock traded at $90 or higher for the first time within 250 weeks and 12 of those times the stock hit $100 or higher. So, a 92.31% win ratio. Going to bed...but I'll test the Nasdaq & NYSE tonight and post results tomorrow.
Michael Taylor
taylortree.com
One more thing...I gave the stock 52 weeks to hit the $100 target. And the average number of weeks it took to hit $100 was 15. The high of the stock was used in determining price. Note: these results shouldn't be considered valid due to:
1) not enough data points in test.
2) the split-adjusted data issue.
The test on the NYSE stocks proved sobering. There were 78 stocks traded and 44 hit the $100 mark, thus giving a win ratio of 56.41%. An average hold of 17 weeks.
The Nasdaq test proved a little better with 36 winning trades out of a total 53. A win ratio of 67.92% with an average hold of 19 weeks.
Overall, I would say Dorsey needs a new saying. Unless the non split-adjusted data proves much better.
Okay, now I'm going to sleep. :)
Tom Dorsey (of Dorsewy Wright Associates) has said that stocks which go to 90 will run to 100 in anticipation of a split . .
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