Saturday, March 03, 2007

IBD and this correction

I'm pretty disappointed by the market timing methods of IBD during these last few months. Neither the S&P 500 or Nasdaq distribution day count methods predicted last Tuesday's selloff. IBD tracks these days and recommends going into cash when there are 4 or 5 distribution days within four weeks. Luckily for me, I have been cautious mainly because of the guidance of Tom O'Brien. It was with this caution that I was able to act quickly when the market gaped down.

It was a matter of luck that the "Ask Bill" segment on the Tom O'Brien show aired this last Wednesday, where people get to ask Bill O'Neil about his investing strategy. During the interview someone asked if we were in a correction now even though the S&P and Nasdaq only had two distribution days. In a smug tone, O'Neil replied that the Dow Jones Industrial Average had shown 4 days of distribution prior to the selloff. I'm sorry, but your paper doesn't track the Dow industrials Bill, so a lot of good that does us. It is this kind of after-the-fact analysis that gives technical analysis a bad name. It also really irritates me a scientist.

So here is the chart of the DOW. An average that I have consistently heard people disregard due to its small size (only 30 companies). The take home message here is that IBD's market timing method isn't perfect.

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