RS Chart of The Day

January 30, 2015

SPYVSEEM zpsbtaxigi1 RS Chart of The Day

Point and Figure RS Charts are calculated by dividing one security by another and plotting the ratio on a PnF chart.  When the ratio is rising, it is plotted in a column of X’s and reflects the numerator outperforming the denominator.  Likewise, when the relative strength ratio is declining, it is plotted in a column of O’s and reflects the outperformance of the denominator.

Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  This example is presented for illustrative purposes only and does not represent a past recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security.  This post does not attempt to examine all the facts and circumstances which may be relevant to any product or security mentioned herein.  We are not soliciting any action based on this document.  It is for the general information of clients of Dorsey, Wright & Associates, LLC (“Dorsey, Wright & Associates”).  This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients.  Before acting on any analysis, advice or recommendation in this document, clients should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice.

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Sector Performance

January 30, 2015

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 1/29/15.

sector 01.13.15 Sector Performance

The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.    Source: iShares

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RS Chart of The Day

January 29, 2015

SPYVSGCC zpswpxxzxqn RS Chart of The Day

Point and Figure RS Charts are calculated by dividing one security by another and plotting the ratio on a PnF chart.  When the ratio is rising, it is plotted in a column of X’s and reflects the numerator outperforming the denominator.  Likewise, when the relative strength ratio is declining, it is plotted in a column of O’s and reflects the outperformance of the denominator.

Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  This example is presented for illustrative purposes only and does not represent a past recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security.  This post does not attempt to examine all the facts and circumstances which may be relevant to any product or security mentioned herein.  We are not soliciting any action based on this document.  It is for the general information of clients of Dorsey, Wright & Associates, LLC (“Dorsey, Wright & Associates”).  This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients.  Before acting on any analysis, advice or recommendation in this document, clients should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice.

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High RS Diffusion Index

January 28, 2015

The chart below measures the percentage of high relative strength stocks that are trading above their 50-day moving average (universe of mid and large cap stocks.)  As of 1/27/15.

diffusion 01.28.15 High RS Diffusion Index

The 10-day moving average of this indicator is 74% and the one-day reading is 75%.

This example is presented for illustrative purposes only and does not represent a past recommendation.  The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.   Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. 

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What’s Hot…And Not

January 27, 2015

How different investments have done over the past 12 months, 6 months, and month.  As of 1/26/15:

asset class Whats Hot...And Not

Source: Yahoo! Finance.  Performance listed is total returns. 

1PowerShares DB Gold, 2MSCI Emerging Markets Index, 3DJ U.S. Real Estate Index,4S&P Europe 350 Index,5Green Haven Continuous Commodity Index, 6iBoxx High Yield Corporate Bond Fund, 7JP Morgan Emerging Markets Bond Fund, 8PowerShares DB US Dollar Index, 9iBoxx  Investment Grade Corporate Bond Fund,10PowerShares DB Oil, 11Barclays 20+ Year Treasury Bond,12 S&P 500 Index,13 PowerShares QQQ,14 Dow Jones Industrial Average

This example is presented for illustrative purposes only and does not represent a past recommendation.  Past performance is not indicative of future results.

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Global Macro: Relative Strength-Driven Asset Allocation

January 27, 2015

In an ideal world, retirement planning could be simplified into the old saying “It’s not timing the market that makes all the difference, it’s time in the market.”  That seems like such a prudent statement, doesn’t it?  After all, timing the market conjures up images of undisciplined and emotion-driven allocation shifts in and out of the market, hopelessly trying to capture all of the up, but none of the down.  Since nobody can time the market, why not just build a nicely diversified portfolio, rebalance once a year, and be done with it?  Won’t that lead to fairly steady results and ultimately reaching your retirement goals?  That is a nice theory, but I don’t believe that it holds up to reality.  The problem with the static allocation approach, I believe, is as follow:  It is not clear what the appropriate asset mix should be for a static allocation.  One might look at 50 years worth of data and conclude that the static allocation should be 40% U.S. Equity, 20% International Equity, 30% Fixed Income, and 10% Commodity exposure.  However, looking at 50 years worth of data is one thing.  Having an appreciation for just how much variability there can be, decade to decade, in asset class returns, volatilities, and correlations can be an entirely different thing.  If asset classes go through bull and bear markets, and they do, will investors have enough patience and tolerance for losses to stay the course?  Some will, and over the course of 30 to 50 years, I suspect that some percentage of extremely patient clients will do just fine.  However, most investors will make emotion-driven changes to their allocations.  They will swear off Fixed Income in 1982.  They will get bullish on Commodities in June 2008.  They will give up on U.S. equities in March 2009.  They will give up on European equities in 2011….and on and on.  The Dalbar numbers are what they are for this very reason.

Less quantitatively, the problem with the static allocation approach can be seen in the following picture.  One would like to believe that an investor could adhere to a static allocation / annual rebalance approach (“Your plan”) and steadily make progress towards your financial goals–kind of like a bank making monthly interest payments to your savings account.  However, actual markets (“Reality”) are very different.  Asset classes go out of favor for years, and even decades, at a time.  There can be spectacular stretches of capital gains and there can be  excruciatingly painful periods of market losses.

plan thinkingip1 Global Macro: Relative Strength Driven Asset Allocation

Source: @ThinkingIP

Thus, the need for a tactical approach to asset allocation.  Let me be clear, I in no way advocate an undisciplined approach to asset allocation—what many think of when they think of market timing.  Such an approach is very likely to perform substantially worse that the static approach to asset allocation over time.  However, our research shows that relative strength can be an effective method of building an adaptive approach to asset allocation.

See: Tactical Asset Allocation Using Relative Strength, by John Lewis, CMT

A relative strength-driven approach to asset allocation basically allows the investor the possibility of investing in multiple asset classes, but allows for great flexibility.  When asset classes are relatively strong, they will receive exposure in the strategy.  When they are relatively weak, they will receive little or no exposure.  The exposure ranges for our Global Macro portfolio, for example, are as follows.

exposure ranges Global Macro: Relative Strength Driven Asset Allocation

Global Macro is one of our most widely used approaches to asset allocation and it is available as a separately managed account, as a mutual fund, and an ETF:

  • Separately Managed Account and UMA: Available on the Masters and DMA platforms at Wells Fargo Advisors and some 20 other firms.  E-mail andy@dorseywright.com for a fact sheet.
  • Mutual Fund: Arrow DWA Tactical Fund (DWTFX).  See www.arrowfunds.com
  • ETF: Arrow DWA Tactical ETF (DWAT).  See www. arrowshares.com

This strategy was first launched as a separately managed account on March 31, 2009.  It was later adopted in the Arrow DWA Tactical Fund (DWTFX) in August 2009.  Through 1/26/15, the Arrow DWA Tactical Fund (DWTFX) is stacking up quite well against its peers in the Morningstar Tactical Allocation category:

dwtfx1 Global Macro: Relative Strength Driven Asset Allocation

Source: Morningstar

Over the past 5 years, it has outperformed 92% of its peers; 97% of its peers over the past 3 years, 91% of its peers over the last year, and 74% of its peers so far in 2015.

Asset allocation can be flexible without being erratic and undisciplined and we believe that relative strength is the right tool for the task.

Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Dorsey Wright is the signal provider for the Arrow DWA Tactical Fund (DWTFX) and the Arrow DWA Tactical ETF (DWAT).  See www.arrowfunds.com for a prospectus.

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RS Chart of The Day

January 27, 2015

SPYVSIYR zpsdahsaf66 RS Chart of The Day

 

Point and Figure RS Charts are calculated by dividing one security by another and plotting the ratio on a PnF chart.  When the ratio is rising, it is plotted in a column of X’s and reflects the numerator outperforming the denominator.  Likewise, when the relative strength ratio is declining, it is plotted in a column of O’s and reflects the outperformance of the denominator.

Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  This example is presented for illustrative purposes only and does not represent a past recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security.  This post does not attempt to examine all the facts and circumstances which may be relevant to any product or security mentioned herein.  We are not soliciting any action based on this document.  It is for the general information of clients of Dorsey, Wright & Associates, LLC (“Dorsey, Wright & Associates”).  This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients.  Before acting on any analysis, advice or recommendation in this document, clients should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice.

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DWTFX vs. Tactical Allocation Peers

January 27, 2015

Through 1/26/15, the Arrow DWA Tactical Fund (DWTFX) is stacking up quite well against its peers in the Morningstar Tactical Allocation category:

dwtfx1 DWTFX vs. Tactical Allocation Peers

Source: Morningstar

Over the past 5 years, it has outperformed 92% of its peers; 97% of its peers over the past 3 years, 91% of its peers over the last year, and 74% of its peers so far in 2015.

Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Dorsey Wright is the signal provider for the Arrow DWA Tactical Fund (DWTFX) and the Arrow DWA Tactical ETF (DWAT).  See www.arrowfunds.com for a prospectus.

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Relative Strength Spread

January 27, 2015

The chart below is the spread between the relative strength leaders and relative strength laggards (universe of mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.    As of 1/26/2014:

spread 01.27.15 Relative Strength Spread

This example is presented for illustrative purposes only and does not represent a past recommendation.  The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.   Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. 

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DWA Momentum ETFs added to Schwab OneSource

January 26, 2015

ETF Trends reports that 4 of our ETFs (PDP, PIE, PIZ, and DWAS) will be added to the Schwab OneSource (commission-free) platform on February 1st:

Charles Schwab (NYSE: SCHW), the largest discount broker, said today it will expand its Schwab ETF OneSource lineup of commission-free exchange traded funds to nearly 200 offerings starting on Feb. 1.

On that date, Schwab clients will be able to access 198 ETFs across 64 Morningstar categories on a commission-free basis. Schwab does not have any enrollment requirements or charge early redemption fees for the ETFs in the program – two key differentiators for investors comparing similar commission-free ETF programs,according to a statement issued by California-based Schwab earlier Monday.

OneSource, the largest commission-free ETF platform on the market today, has been a significant driver of ETF asset growth for Schwab. Last year, ETF assets custodied at Schwab surged 18% to $231 billion, according to the firm’s fourth-quarter and 2014 snapshot released. [ETF Assets Continue Flowing to Schwab]

“Schwab ETF OneSource has $38 billion in assets under management as of December 31, 2014. Flows into ETFs in the program were over $10 billion in 2014, representing 43 percent of the total ETF flows at Schwab,” the company said in the statement.

In September, Schwab unveiled a massive expansion of its Schwab ETF OneSource commission-free ETF platform by adding 65 new ETFs and seven new issuers.

New providers joining OneSource are ALPS, Direxion Investments, Global X Funds, IndexIQ, PIMCO, ProShares and WisdomTree (NasdaqGS: WETF). Those firms join OneSource’s original members State Street (NYSE: STT), Guggenheim, Invesco’s (NYSE: IVZ) PowerShares, ETF Securities, U.S. Commodity Funds and Schwab’s own lineup of ETFs. [Schwab Bolsters Commission-Free ETF Lineup]

The new additions to OneSource come courtesy of five of the platforms current providers, Direxion, PowerShares, ProShares, State Street and WisdomTree.

OneSource’s newest ETFs include the Direxion iBillionaire Index ETF (NYSEArca:IBLN)PowerShares DWA Emerging Markets Momentum Portfolio (NYSEArca:PIE)PowerShares DWA SmallCap Momentum Portfolio (NYSEArca: DWAS),ProShares Morningstar Alternatives Solution ETF (NYSEArca: ALTS)SPDR MSCI ACWI Low Carbon Target ETF (NYSEArca: LOWC) and theWisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSEArca: USDU).

one source DWA Momentum ETFs added to Schwab OneSource

Table Courtesy: Charles Schwab

ETF Trends editorial team contributed to this post.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

Dorsey Wright is the index provider for PDP, PIE, PIZ, DWAS and a suite of other momentum ETFs with PowerShares.  See www.powershares.com for more information.

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Dorsey Wright Separately Managed Accounts

January 26, 2015

Picture1 Dorsey Wright Separately Managed Accounts

Our Systematic Relative Strength portfolios are available as separately managed accounts at a large and growing number of firms.

  • Wells Fargo Advisors (Global Macro available on the Masters/DMA Platforms)
  • Morgan Stanley (IMS Platform)
  • TD Ameritrade Institutional
  • UBS Financial Services (Aggressive and Core are available on the MAC Platform)
  • RBC Wealth Management (MAP Platform)
  • Raymond James (Outside Manager Platform)
  • Stifel Nicolaus
  • Kovack Securities
  • Deutsche Bank
  • Charles Schwab Institutional (Marketplace Platform)
  • Sterne Agee
  • Scott & Stringfellow
  • Envestnet UMA
  • Placemark
  • Scottrade Institutional
  • Janney Montgomery Scott
  • Robert W. Baird
  • Prospera
  • Oppenheimer (Star Platform)
  • SunTrust

Different Portfolios for Different Objectives: Descriptions of our seven managed accounts strategies are shown below.  All managed accounts use relative strength as the primary investment selection factor.

Aggressive:  This Mid and Large Cap U.S. equity strategy seeks to achieve long-term capital appreciation.  It invests in securities that demonstrate powerful relative strength characteristics and requires that the securities maintain strong relative strength in order to remain in the portfolio.

Core:  This Mid and Large Cap U.S. equity strategy seeks to achieve long-term capital appreciation.  This portfolio invests in securities that demonstrate powerful relative strength characteristics and requires that the securities maintain strong relative strength in order to remain in the portfolio.  This strategy tends to have lower turnover and higher tax efficiency than our Aggressive strategy.

Growth:  This Mid and Large Cap U.S. equity strategy seeks to achieve long-term capital appreciation with some degree of risk mitigation.  This portfolio invests in securities that demonstrate powerful relative strength characteristics and requires that the securities maintain strong relative strength in order to remain in the portfolio.  This portfolio also has an equity exposure overlay that, when activated, allows the account to hold up to 50% cash if necessary.

International: This All-Cap International equity strategy seeks to achieve long-term capital appreciation through a portfolio of international companies in both developed and emerging markets.  This portfolio invests in those securities with powerful relative strength characteristics and requires that the securities maintain strong relative strength in order to remain in the portfolio.  Exposure to international markets is achieved through American Depository Receipts (ADRs).

Global Macro: This global tactical asset allocation strategy seeks to achieve meaningful risk diversification and investment returns.  The strategy invests across multiple asset classes: Domestic Equities (long & inverse), International Equities (long & inverse), Fixed Income, Real Estate, Currencies, and Commodities.  Exposure to each of these areas is achieved through exchange-traded funds (ETFs).

Balanced: This strategy includes equities from our Core strategy (see above) and high-quality U.S. fixed income in approximately a 60% equity / 40% fixed income mix.  This strategy seeks to provide long-term capital appreciation and income with moderate volatility.

Tactical Fixed Income: This strategy seeks to provide current income and strong risk-adjusted fixed income returns.   The strategy invests across multiple sectors of the fixed income market:  U.S. government bonds, investment grade corporate bonds, high yield bonds, Treasury inflation protected securities (TIPS), convertible bonds, and international bonds.  Exposure to each of these areas is achieved through exchange-traded funds (ETFs).

Picture2 Dorsey Wright Separately Managed Accounts

To receive fact sheets for any of the strategies above, please e-mail Andy Hyer at andy@dorseywright.com or call 626-535-0630.  Past performance is no guarantee of future returns.  An investor should carefully review our brochure and consult with their financial advisor before making any investments.

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RS Chart of The Day

January 26, 2015

 

SPYVSAGG zpsu7qygfde RS Chart of The Day

Point and Figure RS Charts are calculated by dividing one security by another and plotting the ratio on a PnF chart.  When the ratio is rising, it is plotted in a column of X’s and reflects the numerator outperforming the denominator.  Likewise, when the relative strength ratio is declining, it is plotted in a column of O’s and reflects the outperformance of the denominator.

Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  This example is presented for illustrative purposes only and does not represent a past recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security.  This post does not attempt to examine all the facts and circumstances which may be relevant to any product or security mentioned herein.  We are not soliciting any action based on this document.  It is for the general information of clients of Dorsey, Wright & Associates, LLC (“Dorsey, Wright & Associates”).  This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients.  Before acting on any analysis, advice or recommendation in this document, clients should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice.

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Weekly RS Recap

January 26, 2015

The table below shows the performance of a universe of mid and large cap U.S. equities, broken down by relative strength decile and quartile and then compared to the universe return.  Those at the top of the ranks are those stocks which have the best intermediate-term relative strength.  Relative strength strategies buy securities that have strong intermediate-term relative strength and hold them as long as they remain strong.

Last week’s performance (1/19/15 – 1/23/15) is as follows:

ranks 01.26.15 Weekly RS Recap

This example is presented for illustrative purposes only and does not represent a past recommendation.  The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.  Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. 

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First Trust DWA UITs

January 23, 2015

Among the ways to leverage the work of Dorsey Wright is through the Unit Investment Trusts that we construct for First Trust.  We have been managing these UITs since early 2011 and have been happy with their results over time.  For clients who are looking for a disciplined way to get exposure to a systematic relative strength strategy, we believe that these UITs may be a good solution.  A brief introduction to both series of UITs is given below:

The Dorsey Wright Relative Strength Top 50 Series is a unit investment trust which invests in stocks selected by Dorsey Wright and is designed to be held over the fixed 15-month term of the trust.

Portfolio Selection Process

Through the selection process, we seeks to identify those companies that we believe are technical leaders within the marketplace. We begin with the companies listed in the S&P 900 Index. All of the securities in the universe are scored on several measures of relative strength. The next step in the process is to determine the portfolio’s sector exposure. The sector weightings are determined by a combination of current market weights and the relative strength ranking of the securities within each sector. The goal is to acheive a portfolio of high relative strength securities with an overall sector weighting close to current market weights. The final step is to select the top 50 companies for the portfolio based on relative strength. The stocks are equally-weighted within the portfolio.


1 First Trust DWA UITs

Portfolio holdings of the most recent trust are shown below:


Top 503 First Trust DWA UITs

The Dorsey Wright Relative Strength Dividend Portfolio is a unit investment trust which invests in stocks selected by Dorsey Wright and is designed to be held over the fixed 15-month term of the trust.

Portfolio Selection Process

Through the selection process, we seeks to identify those companies that we believe will meet the dividend objective of the portfolio. We begin with the companies listed in the S&P 900 Index. All of the securities in the universe are scored on several measures of relative strength. The next step in the process is to determine the portfolio’s sector exposure. The sector weightings are determined by a combination of current market weights, the relative strength ranking and those with the highest dividend yield of the securities within each sector. The goal is to acheive a portfolio of high relative strength securities with an overall sector weighting close to current market weights. The final step is to select the top 50 companies for the portfolio based on relative strength and dividend yield. The stocks are equally-weighted within the portfolio.


2 First Trust DWA UITs

Portfolio holdings of the most recent trust are shown below:


Top 50 Dividend1 First Trust DWA UITs

To receive fact sheets, see www.ftportfolios.com.

An investment in this unmanaged unit investment trust should be made with an understanding of the risks involved with owning common stocks, such as an economic recession and the possible deterioration of either the financial condition of the issuers of the equity securities or the general condition of the stock market. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. A relative strength strategy is NOT a guaranteee. There may be times where all investments and strategies are unfavorable and depreciate in value.  A list of all holdings over the past 12 months is available upon request.

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Q1 2015 PowerShares DWA Momentum ETFs

January 1, 2015

The PowerShares DWA Momentum Indexes are reconstituted on a quarterly basis.  These indexes are designed to evaluate their respective investment universes and build an index of stocks with superior relative strength characteristics.   This quarter’s allocations are shown below.

PDP: PowerShares DWA Momentum ETF

pdp4 Q1 2015 PowerShares DWA Momentum ETFs

DWAS: PowerShares DWA Small Cap Momentum ETF

dwas3 Q1 2015 PowerShares DWA Momentum ETFs

DWAQ: PowerShares DWA NASDAQ Momentum ETF

dwaq3 Q1 2015 PowerShares DWA Momentum ETFs

PIZ: PowerShares DWA Developed Markets Momentum ETF

piz3 Q1 2015 PowerShares DWA Momentum ETFs

PIE: PowerShares DWA Emerging Markets Momentum ETF

pie3 Q1 2015 PowerShares DWA Momentum ETFs

Source: Dorsey Wright, MSCI, Standard & Poor’s, and NASDAQ, Allocations subject to change

We also apply this momentum-indexing methodology on a sector level:

sector1 Q1 2015 PowerShares DWA Momentum ETFs

See www.powershares.com for more information.  

The Dorsey Wright SmallCap Momentum Index is calculated by Dow Jones, the marketing name and a licensed trademark of CME Group Index Services LLC (“CME Indexes”). “Dow Jones Indexes” is a service mark of Dow Jones Trademark Holdings LLC (“Dow Jones”).  Products based on the Dorsey Wright SmallCap Momentum IndexSM, are not sponsored, endorsed, sold or promoted by CME Indexes, Dow Jones and their respective affiliates make no representation regarding the advisability of investing in such product(s).   A list of all holding for the trailing 12 months is available upon request.  This example is presented for illustrative purposes only and does not represent a past recommendation.  Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. Dorsey Wright is the index provider for the suite of momentum ETFs with PowerShares.

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10 Fun Facts about the PowerShares DWA ETF Rebalances

December 26, 2014

Each quarter, we reconstitute the 14 PowerShares Momentum Indexes for which we are the index provider. With the next rebalance upon us, we wanted to provide some insight into these indexes.

ps 10 Fun Facts about the PowerShares DWA ETF Rebalances

Click here for fact sheets

  1. The number of stocks in each index is 100 for PDP, PIE, PIZ, and DWAQ; 200 for DWAS, and 30-75 for each of the sector ETFs
  2. Point & Figure relative strength rankings are used to determine which stocks quality for the index each quarter
  3. Rather than equal-weight the index, those stocks with the best relative strength, according to our rankings, receive the most weight in the index
  4. The first of these ETFs, PDP, was introduced on March 1, 2007; PIE and PIZ were introduced on December 28, 2007; DWAS was introduced on July 7, 2012, and DWA was hired to be the index provider for the other 10 on February 18, 2014
  5. None of these ETFs have paid any capital gains distributions since inception (although this is no guarantee that they won’t in the future)
  6. For the international ETFs (PIE and PIZ), the investment universe consists of both ordinaries and ADRs.  When we do our rankings for international stocks we do the analysis on a USD price (not local price).  As a result, any currency fluctuations are taken into account when we convert the local daily prices to dollars.
  7. The investment universe for DWAQ is essentially the top 1000 market cap names that trade on the NASDAQ
  8. There are no sector constraints in PDP, DWAQ, or DWAS.  There are no country or sector constraints in PIE or PIZ.
  9. The investment universe for the sector indexes includes small, mid, and large cap stocks
  10. Once stocks are selected to be in the index, they will only stay as long as they retain sufficiently strong momentum.  We have had stocks stay in the index for anywhere from 1 quarter to more than 15 quarters.

Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Dorsey Wright is the index provider for these 14 momentum ETFs.

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Global Macro: In Case Your Time Horizon Is Not 45 Years

December 12, 2014

Cliff Asness recently posted an excellent review of Modern Portfolio Theory (MPT) that included some very interesting charts of the return and volatility of stocks, bond, and commodities from 1970-November 2014.  Over this 45-year period of time the efficient frontier of those three asset classes was as follows:

11 Global Macro: In Case Your Time Horizon Is Not 45 Years

Probably, what most would expect.  Stocks had higher returns than bonds and commodities, with more volatility than bonds, but less volatility than commodities.  Nothing too shocking in that picture.  However, the fun really starts when you look at the efficient frontier in 5-year increments:

2 Global Macro: In Case Your Time Horizon Is Not 45 Years

3 Global Macro: In Case Your Time Horizon Is Not 45 Years

4 Global Macro: In Case Your Time Horizon Is Not 45 Years

5 Global Macro: In Case Your Time Horizon Is Not 45 Years

6 Global Macro: In Case Your Time Horizon Is Not 45 Years

7 Global Macro: In Case Your Time Horizon Is Not 45 Years

8 Global Macro: In Case Your Time Horizon Is Not 45 Years

9 Global Macro: In Case Your Time Horizon Is Not 45 Years

10 Global Macro: In Case Your Time Horizon Is Not 45 Years

Pretty shocking, huh!  The long-term (45-year in this case) average returns and volatility of stocks, bonds, and commodities tell you very little about their return and volatility characteristics in any 5-year period.  Stay the course, focus on the long term, don’t sweat the small stuff, don’t make knee-jerk reactions…all those maxims aren’t going to work with your clients.  Those aren’t calming to a client, they are offensive!  Imagine saying that to a 65-year old investor who has just retired.  This investor sits down with you, their trusted financial advisor, and takes a look at their entire portfolio.  This is all they have.  This client is not planning on going back to work.  They have worked hard to amass this money and they need it to work for them for the next few decades of their life.  If their portfolio has a devastating 5 or 10 years this is not just an inconvenience for them, this will degrade their standard of living in a major way.

This is why we are big advocates of global tactical asset allocation.  Expand the investment universe to include not just U.S. Stocks, U.S. Bonds, and Commodities, but also Real Estate, International Equities, Currencies, and even Inverse Equities.  The table below shows just how flexible our Global Macro portfolio can be.  We believe that this type of flexibility is prudent given the significant variability on display in the above efficient frontiers.

exposure ranges Global Macro: In Case Your Time Horizon Is Not 45 Years

To learn more about this relative strength-driven approach to global asset allocation, click here for a fact sheet.  This portfolio is available on the Masters and DMA platforms at Wells Fargo Advisors and on SMA platforms at many other firms.  The strategy is also available as The Arrow DWA Tactical Fund (DWTFX and DWAT).

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  See www.arrowfunds.com for more information.  Click here for disclosures.

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SMA Performance

September 3, 2014

August was a strong month for relative strength as six of our seven Systematic RS portfolios outperformed their benchmarks.  Detailed performance is shown below:

perf 09.03.14 SMA Performance

To receive the brochure for these portfolios, please e-mail andy@dorseywright.com or call 626-535-0630.  Click here to see the list of platforms where these separately managed accounts are currently available.

Total account performance shown is total return net of management fees for all Dorsey, Wright & Associates managed accounts, managed for each complete quarter for each objective, regardless of levels of fixed income and cash in each account.  Information is from sources believed to be reliable, but no guarantee is made to its accuracy.  This should not be considered a solicitation to buy or sell any security.  Past performance should not be considered indicative of future results. 

The S&P 500 is a stock market index based on the market capitalizations of 500 leading companies publicly traded in the U.S. stock market, as defined by Standard & Poor’s.  The Barclays Aggregate Bond Index is a broad base index, maintained by Barclays Capital, and is used to represent investment grade bonds being traded in the United States.  The 60/40 benchmark is 60% S&P 500 Total Return Index and 40% Barclays Aggregate Bond Index.  The MSCI EAFE Total Return Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the United States and Canada and is maintained by MSCI Barra.  The Dow Jones Moderate Portfolio Index is a global asset allocation benchmark.  60% of the benchmark is represented equally with nine Dow Jones equity indexes.  40% of the benchmark is represented with five Barclays Capital fixed income indexes.

Each investor should carefully consider the investment objectives, risks and expenses of any Exchange-Traded Fund (“ETF”) prior to investing. Before investing in an ETF investors should obtain and carefully read the relevant prospectus and documents the issuer has filed with the SEC.  ETFs may result in the layering of fees as ETFs impose their own advisory and other fees.  To obtain more complete information about the product the documents are publicly available for free via EDGAR on the SEC website (http://www.sec.gov)

There are risks inherent in international investments, which may make such investments unsuitable for certain clients. These include, for example, economic, political, currency exchange, rate fluctuations, and limited availability of information on international securities. 

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Swedroe on Momentum

September 3, 2014

Larry Swedroe on Momentum:

Momentum is a well-established, empirical fact. Its premium is evident in more than 87 years of domestic market data, in more than 20 years of out-of-sample evidence beginning from the time of its original discovery, in statistics from 40 other countries, and in the performance of more than a dozen different asset classes.

In fact, the momentum premium has been both larger and more persistent in the U.S. since 1927 than the other three stock premiums—equity, size and value. Over the last 87 calendar years (1927-2013), the annual momentum premium was 8.4 percent. It was positive in 78 percent of the years during that period.

By comparison, the figures for the equity, size and value premiums are not quite as strong or persistent. Over the same time frame, the equity premium was 8.2 percent, and it was positive in 68 percent of those years; the size premium was 3.1 percent, and it was positive in 56 percent of those years; and the value premium was 4.9 percent, while showing a positive return in 62 percent of those years.

Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  A momentum strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value. 

HT: Abnormal Returns

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DWA ETFs

September 3, 2014

Shown below are Point & Figure charts of the 16 ETFs for which Dorsey Wright & Associates is the index provider (as of 9/3/14):

pdp DWA ETFs

dwas DWA ETFs

 

dwaq DWA ETFs

 

piz DWA ETFs

 

pie DWA ETFs

 

pez DWA ETFs

 

pfi DWA ETFs

 

prn chart DWA ETFs

 

psl DWA ETFs

 

ptf DWA ETFs

 

pth DWA ETFs

 

pui DWA ETFs

 

pxi DWA ETFs

 

pyz DWA ETFs

 

fv DWA ETFs

 

ifv DWA ETFs

The information found on Dorsey, Wright & Associates’ Web Pages has been prepared without regard to any particular investor’s investment objectives, financial situation, and needs. Accordingly, investors should not act on any recommendation (express or implied) or information in this report without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions. Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources, believed to be reliable. However, such information has not been verified by Dorsey, Wright and Associates, LLC (DWA) or the information provider and DWA and the information providers make no representations or warranties or take any responsibility as to the accuracy or completeness of any recommendation or information contained herein.

Neither the information nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities or commodities mentioned herein. This report or chart does not purport to be a complete description of the securities or commodities, market or developments to which reference is made. There may be instances when fundamental, technical, and quantitative opinions may not be in concert.

Each investor should carefully consider the investment objectives, risks and expenses of any Exchange-Traded Fund (“ETF”) prior to investing. Before investing in an ETF investors should obtain and carefully read the relevant prospectus and documents the issuer has filed with the SEC.  To obtain more complete information about the product the documents are publicly available for free via EDGAR on the SEC website (http://www.sec.gov).

PDP: Prior to the fund inception date (3/1/07), chart is created using extrapolated index data.

DWAS: Prior to the fund inception date (7/19/2012), the chart is created from extrapolated index data.

DWAQ:  Prior to fund inception date (4/30/03), chart is created using extrapolated index data (DYO), and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA NASDAQ Technical Leaders Index (TLNASDAQ)

PIZ: Prior to the fund inception date (12/28/2007), chart is created using extrapolated index data.Prior to the fund inception date (12/28/2007), chart is created using extrapolated index data.

PEZ: Prior to fund inception date (10/12/06), chart is created using extrapolated index data (EZZK), and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA Consumer Cyclicals Technical Leaders Index (TLCONCYC)

PFI: Prior to fund inception date (10/12/06), chart is created using extrapolated index data (EZFK), and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA Financial Technical Leaders Index (TLFINANCE)

PRN: Prior to fund inception date (10/12/06), chart is created using extrapolated index data (EZLK), and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA Industrials Technical Leaders Index (TLINDUST)

PSL: Prior to fund inception date (10/12/06), chart is created using extrapolated index data (EZSK), and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA Consumer Staples Technical Leaders Index (TLCONSTA)

PTF: Prior to the fund inception date (10/12/2006), chart is created using extrapolated index data. and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA Technology Technical Leaders Index (TLTECH)

PTH: Prior to fund inception date (10/12/06), chart is created using extrapolated index data (EZXK), and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA Healthcare Technical Leaders Index (TLHEALTH)

PUI: Prior to fund inception date (10/25/05), chart is created using extrapolated index data (DWU), and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA Utilities Technical Leaders Index (TLUTIL)

PXI: Prior to fund inception date (10/12/06), chart is created using extrapolated index data (EZKK), and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA Energy Technical Leaders Index (TLENERGY)

PYZ: Prior to fund inception date (10/12/06), chart is created using extrapolated index data (EZBK), and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA Basic Materials Technical Leaders Index (TLBASMAT)

FV: Prior to the fund inception date (3/6/2014), chart is created using extrapolated index data (FTRUST5)

IFV: Prior to the fund inception date (7/23/2014), chart is created using extrapolated index data.

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Point and Figure RS Signal Implementation

September 2, 2014

Over the course of the summer we published three different whitepapers looking at point and figure relative strength signals on a universe of domestic equities.  In the first two papers, we demonstrated the power of using PnF RS signals and columns to find high momentum stocks, and then we looked at the optimal box size for calculating relative strength.  If you were on vacation and happened to miss one of the first two papers they can be found here and here.

The third paper examines the performance profiles you can reasonably expect by following a process designed around point and figure relative strength.  You can download a pdf version of the paper here.  Most momentum research focuses on performance based on purchasing large baskets of stocks, which is impractical for non-institutional investors.  Once we know that the entire basket of securities outperforms over time the next logical question is, “What happens if I just invest in a subset of the most highly ranked momentum securities?”  To answer this question, we created portfolios of randomly drawn securities and ran the process through time.  Each portfolio held 50 stocks at all times, which we believe is a realistic number for retail investors.  Each month we sold any security in the portfolio that was not one of the top relative strength ranks.  For every security that was sold, we purchased a new security at random from the high relative strength group that wasn’t already held in the portfolio.  We ran this process 100 times to create 100 different portfolio return streams that were all different.  The one thing all 100 portfolios had in common was they were always 100% invested in 50 stocks from the high relative strength group.  But the exact 50 stocks could be totally different from portfolio to portfolio.

The graph below taken from the paper shows the range of outcomes from our trials.  From year to year you never know if your portfolio is going to outperform, but over the length of the entire test period all 100 trials outperformed the broad market benchmark.

Random zps69d808c9 Point and Figure RS Signal Implementation

 (Click To Enlarge)

We believe this speaks to the robust nature of the momentum factor, and also demonstrates the breadth of the returns available in the highest ranked names.  It wasn’t just a small handful of names that drove the returns.  As long as you stick to the process of selling the underperforming securities and replacing them with stocks having better momentum ranks there is a high probability of outperformance over time.  Over short time horizons the outperformance can appear random, and two people following the same process can wind up with very different returns.  But over long time horizons the process works very well.

Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  A momentum strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value. 

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Weekly RS Recap

September 2, 2014

The table below shows the performance of a universe of mid and large cap U.S. equities, broken down by relative strength decile and then compared to the universe return.  Those at the top of the ranks are those stocks which have the best intermediate-term relative strength.  Relative strength strategies buy securities that have strong intermediate-term relative strength and hold them as long as they remain strong.

Last week’s performance (8/25/14 – 8/29/14) is as follows:

perf 09.02.14 Weekly RS Recap

This example is presented for illustrative purposes only and does not represent a past recommendation.  The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.  Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. 

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Power 4 Model Holdings

September 2, 2014

Current holdings of the DWA PowerShares Sector 4 Model are shown below:

power 42 Power 4 Model Holdings

Click here for model details.

The information contained herein has been prepared without regard to any particular investor’s investment objectives, financial situation, and needs.  Accordingly, investors should not act on any recommendation (express or implied) or information in this material without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions. Any statements nonfactual in nature constitute only current opinions, which are subject to change without notice. Neither the information nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities, commodities or exchange traded products. This document does not purport to be complete description of the securities or commodities, markets or developments to which reference is made. 

The PowerShares DWA Sector Portfolios are calculated by NYSE Euronext or its affiliates (NYSE Euronext). The PowerShares DWA Sector Momentum ETFs, which are based on Dorsey Wright indexes, are not issued, endorsed, sold, or promoted by NYSE Euronext, and NYSE Euronext makes no representation regarding the advisability of investing in such product.

NYSE EURONEXT MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE DORSEY WRIGHT INDEXES OR ANY DATA INCLUDED THEREIN. IN NO EVENT SHALL NYSE EURONEXT HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.

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Sector Performance

August 29, 2014

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 8/28/2014.

sector 08.29.14 Sector Performance

The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.    Source: iShares

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Fund Flows

August 28, 2014

Mutual fund flow estimates are derived from data collected by The Investment Company Institute covering more than 95 percent of industry assets and are adjusted to represent industry totals.

ici 08.28.14 Fund Flows

This data is presented for illustrative purposes only and does not represent a past recommendation.

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