In today’s writeup, we cover the important fundamental topic of Dow theory. In this, we will cover the formation of the new DOW top and its impact on our portfolio decision-making thought process.

Let us, first of all, revise our current scenario. We have the latest DOW bottom of 16245.35. Our DOW Top is at 17784.55.

Source: Trading View

Our current P/E ratio for the nifty 50 indexes is at 22.01.

Source: NSE India

Our 10-year government of India bond rate is at 7.14%, so our P/E ratio for fixed income instruments is around 14.

Source: Investing

So we are now well equipped with our data points, let us revise some of the concepts of Dow theory before the actual update.

Just a quick recap of the points required in forming the TOP are:

Point A:- Recent significant bottom, which was on 28th February 2022 at 16245.35 level,

Point B:- Highest point after A, which is on 4th April 2002 at 17784.35,

Point C:- Lowest point after B, point C is 17102.55 today(29^th April 2022).

So our new TOP is at 17784.35 Level.

Now, if we look at our P/E ratio for fixed income asset class which is at 14(approximate) on the yield of 7.14% for 10 year GOI bonds. We can have a look at the ranges for P/E ratio of fixed income asset class:

Low range: PE<19

Mid-range: PE 19-26

High range: PE>26.

Now if you are out of the Market, only two rules to buy

a.) Check PE and EGR, if both of them are low.

b.) If DOW tells you to buy*

(*)If the price goes above the recent Top, check PE and take a decision accordingly. Now if in case in future the DOW top gets breached then we will buy in accordance to the following ranges and ratios in our wealth portfolio:-

Low range: PE<19 —> buy 100%

Mid-range: PE 19-26 —> buy 50%

High range: PE>26 —>Don’t Buy.

If one looks closely at the above trading view chart that nifty has formed a lower-high(Dow Top). So it is very clear that we are structurally shifted to a primary downtrend as per the dow theory as we also discussed this in our last write-up as well. Now to change this Primary downtrend to a Primary uptrend, we will have to wait for the price to close above the recent significant Dow top to say that yes we are now again resumed our journey in the Primary uptrend.

Now, let us also talk about for the investor who are already in the market and what should they do?

Practically speaking, if you have been following DOW theory rigorously we have warned on 25^th February 2022 that according to DOW theory we have broken our bottom and in short we should come out 50% from our portfolio, if you are following the advice then good for you. And now if you are 50% invested then we would wait for the opportunity to arise and invest our rest 50% of our folio in future. We will update as and when opportunities arises.

NOTE: What about the Investor who are doing their Regular SIPs in the Index Funds?

If you are doing you SIP in index funds continue it without look at these concepts. You will be taking advantage of rupee-cost averaging.

Geopolitics will matter a lot in the coming weeks to months, I mean Russia-Ukraine war. Inflation targeting by central banks have to been on close observation as well. Inflation in supply induced so supply management will have to improve a lot to bring a cooling affect in the inflation. But these are very broad topics but as an Investor, once has to be diligently aware of what is happening around the corners of the world, because we live in a world where action of one will have a significant impact on the actions of others.