|  AUG 1996

Beat the Market with Cyclicals by Paul and Carole Huebotter

""The new Dow strategy"" outlined here is a method to pick a 10-stock portfolio to outperform both the Dow 30 and the well-known Dow dividend strategy. Take a look. by Paul and Carole Huebotter Economists maintain that the markets are too efficient for any trading system to regularly outperform, say, the 30 stocks that make up the Dow Jones Industrial Average (DJIA) or the Standard & Poor's 500 index. We disagree. Here's one that not only theoretically should, but does. The system, to which we refer as the new Dow strategy , is akin to the well-known Dow dividend strategy, which used to work well but has faltered considerably in the past decade. When the DJIA was mainly a collection of large cyclical-company stocks paying similar yields when averaged over the entire business cycle, investing in the top 10 yielders made sense. But the stock substitutions - 10 in the last 17 years - have transformed the DJIA into a hybrid group often dominated by growth companies. For example, the three energy giants - Chevron [CHV], Exxon [XON] and Texaco [TX] - are always in the Dow dividend portfolio, but their performance doesn't usually merit such loyalty. On the other hand, the low-yielding newcomers, such as McDonald's [MCD], Coca-Cola [KO] and Disney [DIS], never make the top 10. The symmetry of the DJIA has gradually eroded. As a result, the Dow dividend strategy has had an average annual return only 1% better than the DJIA since 1985, a far cry from the system's glory days of the 1970s and early 1980s.

by Paul and Carole Huebotter