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Opinion: The biggest dog in the Dow might soon break free

General Electric’s stock is down 18% this year. If the share price reverts to the mean, there could be big gains.

There is a classic investment strategy with a good track record: the so-called Dogs of the Dow.

Simply put, you buy the worst performers in the Dow Jones Industrial Average DJIA, -0.31% on expectations they’ll rebound and, possibly, outperform the other Dow components.

The Dogs of the Dow strategy is especially attractive at this time for investors who have seen “mean reversion” work time and again. In plain English, mean reversion is when out-of-favor stocks with strong balance sheets bounce back, “reverting to their mean” in price. Stocks above their mean, on the other hand, tend to fall.

The holy grail of very long-term investing is to accumulate on the dips, if appropriate. Is it appropriate to hold, buy or sell GE here? Let us explore the good, the bad and the ugly. However, the most important short-term information is coming from the chart.


Please click here for the annotated chart of GE, which shows that sellers have been very aggressive since the release of earnings. But on a net basis, there is more demand for the stock than there is supply. This is reverse of what was happening prior to the earnings release.

How do we know that? We rely on the VUD indicator, the most sensitive measure of net supply and demand in real time. Orange on the chart is net selling, and green is net buying.

This is very bullish behavior.

The chart shows when GE’s much anticipated earnings were released. The stock initially jumped on the headline numbers in the...