The Daily Dow
Friday, May 16, 1997
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (May 16, 1997) -- When the market is at record highs and volatile, as it has been of late, visions of 1929 and 1987 project through investors' minds. Inevitably, this raises the issue of safety nets like sell stops. Should one use sell-stop orders with the Dow Approach?

A sell-stop order instructs your broker to sell the stock automatically if it sinks to a price you specify. In theory it's a way of protecting yourself against a long decline if you've chosen a poor investment.

With the Dow Approach, though, sell stops may well work against you. The approach is designed to help you identify out-of-favor or beaten-down stocks, ones no one else really wants. The idea is to pick them up at a bargain, knowing full well that these Dow giants are pretty hard to hold under water for long. Eventually, they recover and when the rest of the market jumps in, you are rewarded for having bought them when no one else wanted to.

But it's not a perfect timing system. You may well buy a stock that's still on its way down and then watch it languish for a while before it begins to recover. If you set a sell stop at 10%, 15%, 20% below your purchase price, you may well get stopped out of the position at precisely the wrong time -- as it bottoms out.

A lot of investors believe they can use the stop to get out of the position and then buy it back when it starts to recover, but I've yet to see a reliable way to do that. Sometimes the stock will drop down rapidly and recover that gap and then some, equally rapidly. Not too many investors can turn around and repurchase quickly a stock they've just been stopped out on. So it's likely you'd end up a reverse cliche, selling low and buying [back] high.

I don't know of anyone who's done a systematic, day-by-day study of stop losses at different levels with the Dow Approach, but as stable as it is without stops, it's not the kind of tinkering I believe will prove profitable. The approach is not very volatile and these stocks are resilient. The key to them is not the perfect timing you might try to achieve with sell stops, but the patience and discipline to stay the course and let the percentages work in your favor. Have a very unWise weekend!

(c) Copyright 1997, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool. ________________________________

Stock  Change   Last
--------------------
T    +   1/4   33.38
GM   -   5/8   55.50
CHV  -   3/4   70.13
MMM  -3        91.50

               Day   Month    Year
        FOOL-4   -0.78%   1.01%  -3.52%
        DJIA     -1.89%   2.65%  11.58%
        S&P 500  -1.44%   3.55%  12.02%
        NASDAQ   -0.95%   6.34%   3.85%

    Rec'd   #  Security     In At       Now    Change
   1/2/97  120 3M            83.00     91.50    10.24%
   1/2/97  153 Chevron       65.00     70.13     7.88%
   1/2/97  179 Gen. Motor    55.75     55.50    -0.45%
   1/2/97  479 AT&T          41.75     33.38   -20.06%


    Rec'd   #  Security     In At     Value    Change
   1/2/97  120 3M          9960.00  10980.00  $1020.00
   1/2/97  153 Chevron     9945.00  10729.13   $784.13
   1/2/97  179 Gen. Motor  9979.25   9934.50   -$44.75
   1/2/97  479 AT&T       19998.25  15986.63 -$4011.63


                             CASH    $609.53
                            TOTAL  $48239.78