Dogs of the Dow Revisited

Back in August of last year I mentioned that the Dogs had fallen apart.  This was before the real "falling apart" had begun but it was clear at that point that the strategy wasn't holding up.  I speculated that picking the small dogs was simply a bet on volatility.  When bull markets are running high vol, low priced stocks of companies that are established will run further than the lower vol stocks.  Conversely, the lower vol stocks will sink less rapidly in lower markets.  Since the Dow mostly goes up, I'm not sure how much magic can be placed around the dog strategy.  You could just as easily bet on smaller cap, higher beta companies and get the desired effect.  My feeling on this seems to have an ounce of merit.  As we've been progressing through this bear market rally, the small dogs are outperforming the broader Dow index.  Not to sound like a broken record, but this makes sense.  Higher vol stocks tend to extend further faster in either direction.

This observation though might have some merit for new money.  If you've stumbled on some new found cash, it may make sense to consider the dogs after underperforming quarters or years and consume defensive, higher cap, lower vol stocks during less turbulent times.  This is counter to most advice where defense is recommended after the decline is well under way.

I consider the dogs strategy a crude but interesting trading system.  This is why I revisit it from time to time.  The more I observe it though, the more I believe there is really nothing new here, just a volatlity play under the guise of an edge.