DWTFX vs. Tactical Allocation Peers

December 19, 2014

The Arrow DWA Tactical Fund (DWTFX) is stacking up nicely against its peers in the Morningstar Tactical Allocation category.  As shown below, it is outperforming 88% of its peers YTD, 91% of its peers over the last year, 96% of its peers over the last 3 years, and 89% of its peers over the past 5 years.

dwtfx DWTFX vs. Tactical Allocation Peers

Source: Morningstar

See www.arrowfunds.com for a prospectus.

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

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Sector Performance

December 19, 2014

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 12/18/14.

ranks 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

December 19, 2014

 

spyvsefa zpsa4784740 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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From the Archives: The Not-So-Normal Bell Curve

December 18, 2014

Matt Koppenheffer nicely makes the case for holding on to your winners and cutting out your losers (exactly what relative strength is designed to do):

When it comes to investing, there’s no shortage of bad advice floating around out there. Among the worst, though, is the old saw, “You can’t go broke by taking a profit.”

The saying refers to the belief that if you have a stock that’s gone up in value, it’s hard to go wrong selling that stock and “locking in” the gains. But while the saying is technically true — it’s hard to picture a scenario where an investor is suddenly bankrupt after selling a stock at a profit — it’s a dangerous platitude for investors to follow.

There’s a name for that
The practice of selling winning stocks and hanging on to losing ones is a practice that’s familiar to behavioral-finance experts. It’s a behavioral bias known as the disposition effect and has been revealed to be quite harmful for investors. A number of academic papers have shed light on the subject, including Berkeley professor Terrance Odean’s 1998 study that concluded that individual investors’ “preference for selling winners and holding losers … leads, in fact, to lower returns.”

A possible explanation
If the long-term returns from stocks were distributed normally — that is, they formed the familiar bell-shaped curve and most stocks’ returns clustered around the average — selling winners and holding losers might actually work. If the returns from most individual stocks were likely to be right around the average for all stocks, then a big winner would be more likely to stall out after its winning streak than continue climbing. At the other end, it wouldn’t be unreasonable to expect a stock that’s been a big loser to climb back closer to the average.

But that’s not how it works.

I was reminded of this by a recent report by Shankar Vedantam for NPR, called “Put Away the Bell Curve: Most of Us Aren’t Average.  Vedantam reviewed the research and work of Ernest O’Boyle Jr. and Herman Aguinis, who studied the performance of 633,263 people involved in academia, sports, politics, and entertainment.

In short, the pair’s finding was that the performance distribution in these groups wasn’t bell-shaped. Instead, many participants clustered below the mathematical average, while a group of superstars produced results far above the average and pulled the overall average up.

Stock returns have a similar distaste for fitting to a bell curve. Over the past 10 years, 63% of the S&P 500 companies underperformed the average. Meanwhile, a large group of significant outperformers delivered returns that were well above the average.

DontSellWinners From the Archives: The Not So Normal Bell Curve

As compared with the bell curve in the background, the data plotted here is a mess. And it should be. Stock returns are not normally distributed — which is what produces that nice bell-shaped curve. And though stats-stars who are much smarter than me often try to describe stock returns as “lognormal” — a mathematical transformation of the returns that gets them to more closely fit a bell curve — they’re not that, either. Stocks are typified by “fat tails” on either end — that is, more seriously outperforming and underperforming stocks than is easily captured by streamlined mathematical models.

So no matter how you look at stock returns, a surprising number of stocks end up returning far more and far less than the average. Practically, this means that the practice of “locking in gains” and hanging on to losers is a good way to miss out on the market’s huge outperformers, stay stuck with poor performers, and earn lackluster overall returns.

HT: iShares

This first appeared on our blog in May of 2012.  Recent trends in Energy (down) and Healthcare (up) brought this to mind.  Fat tails are a market reality–invest accordingly.

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High RS Diffusion Index

December 18, 2014

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 12/17/14.

diffusion 12.18.14 High RS Diffusion Index

The 10-day moving average of this indicator is 87% and the one-day reading is 85%.

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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RS Chart of The Day

December 18, 2014

spyvseem zpse3a9d0de 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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RS Chart of The Day

December 17, 2014

 

spyvsgcc zps9adc24d8 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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4 Attributes of Those Advisors Who Employ Relative Strength

December 16, 2014

I am of the belief that there are certain shared attributes of those advisors who gravitate to relative strength investing.  My first experiences in this industry, as an intern at a brokerage firm in Denver, CO in the summer of 2001 made this clear and it has been repeatedly confirmed since that time.  Just in the first couple weeks as an intern, I became aware that some advisors are pre-occupied with the hunt for the bragging rights that come with buying some obscure stock that rises from the ashes like the phoenix.  They will invest in stocks that have very weak relative strength, losing money and time, waiting almost without condition for the chance of being proven right.  Other advisors concerned themselves almost solely with raising assets and managing relationships.  They farmed all the money out to their firm’s recommended money managers.  When times were good for these advisors, they were great.  And when they were bad, they were awful.  Not having much depth when it comes to how to construct a well-thought-out asset allocation has its downside—specifically, losing the confidence of their clients over time.  Other advisors, bought into the strategic asset allocation models constructed by their firm.  They would say, ‘Let’s face it, who am I to think I can compete with the brightest money managers in this industry?’  Those strategic asset allocation models certainly weren’t disasters.  They were ok, but they didn’t do much to leave their clients with the feeling that there was anything special about their financial advisor.

However, that summer and in the years since I have had many experiences that have allowed me to get to know advisors who are drawn to relative strength investing.  In some ways, these advisors have very little in common—they come from every geographic location, many different educational backgrounds, many different firms, etc.  However, they do tend to have the following attributes:

Pragmatic: While some are greatly impressed with the pundit who told everyone to get out of the market in October 2007 because there was a massive bear market coming, this advisor looks further and realizes that the pundit also told everyone to get out of the market in 2003, 2005, 2009, 2011…  While some are greatly impressed with Modern Portfolio because it is so elegantly taught in textbooks in Business schools around the country, this advisor asks about MPT’s track record.   When this advisor reviews the body of knowledge of relative strength investing, he sees results.  He sees it isn’t perfect and that it has periods of underperformance, but he is impressed with the weight of the evidence in its favor.

Process-Oriented:  Focus on process and the results will take care of themselves.  This is a philosophy that appeals to this advisor.  This advisor is looking to stack the odds in their favor.  They have seen the studies that make it clear that there is momentum in the market and that the best probability of finding a future winner is to buy a current winner and stay with it as long as it remains strong.  They look at stock selection in the context of portfolio management rather than as isolated trades.

At Peace with What They Can’t Control:  Relative strength is a trend following methodology.  By definition, you will never buy a security at the exact bottom or get out at the exact top.  This advisor has come to terms with this and they don’t bother themselves with finding the elusive crystal ball.  That crystal ball doesn’t exist.  Nobody knows what the future holds.  Pretending that you do, or that you can find someone who can, is madness.  However, what this advisor knows is that having a crystal ball is not necessary to succeed in this industry.  This advisor has also come to terms with the reality that certain environments are not favorable for relative strength strategies—namely, choppy trendless markets and markets with major reversals in leadership.  So what if it doesn’t work all the time.  Does it work most of the time?  Do you expect it to work over time?  Those are the right questions.

Competitive:  This advisor want to do right by their client.  They want to make a great living.  They want to generate favorable investment results over time.  And they conclude that relative strength is framework within which they will operate in order to achieve those goals.

If you are already using relative strength, chances are that those attributes do a good job of describing you.  If you don’t currently use relative strength, but are attracted to those attributes, then I recommend that you give it a closer look.

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.

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RS Chart of The Day

December 16, 2014

spyiyr zpsc080c2a2 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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RS Chart of The Day

December 15, 2014

spyvsagg zpsce980ef3 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

December 15, 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 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 (12/8/14 – 12/12/14) is as follows:

ranks 12.15.14 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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RS Chart of The Day

December 12, 2014

spyvsefa zps6665e550 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

December 12, 2014

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 12/11/14.

sector 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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Momentum Investing

December 11, 2014

“Perhaps the best known investment paradigm is buy low, sell high.

I believe that more money can be made buying high and selling at

even higher prices. I try to buy stocks that have already had good

price moves, that are often making new highs and that have positive

relative strength. These are stocks that are in demand by other

investors. What is the risk? Obviously, the risk is that I’m buying

near the top. But, I would much rather be invested in a stock that is

increasing in price and take the risk that it may begin to decline

than invest in a stock that is already in a decline and try to guess

when it will turn around.”

Richard Driehaus – Driehaus Capital Management

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

December 11, 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:

1970 2014 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:

1970 1974 Global Macro: In Case Your Time Horizon Is Not 45 Years

1975 1979 Global Macro: In Case Your Time Horizon Is Not 45 Years

1980 1984 Global Macro: In Case Your Time Horizon Is Not 45 Years

1985 1989 Global Macro: In Case Your Time Horizon Is Not 45 Years

1990 1994 Global Macro: In Case Your Time Horizon Is Not 45 Years

1995 1999 Global Macro: In Case Your Time Horizon Is Not 45 Years

2000 2004 Global Macro: In Case Your Time Horizon Is Not 45 Years

2005 2009 Global Macro: In Case Your Time Horizon Is Not 45 Years

2010 2014 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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RS Chart of The Day

December 11, 2014

spyvseem zps87ab9c9c 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

December 11, 2014

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 12/10/14.

diffusion 12.11.14 High RS Diffusion Index

The 10-day moving average of this indicator is 94% and the one-day reading is 86%.

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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Quote of the Week

December 10, 2014

George Soros, Soros Capital Management

“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.

HT: Business Insider

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RS Chart of The Day

December 10, 2014

spyvsgcc zpsbe16b276 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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The Presidential Cycle

December 10, 2014

Piper Jaffray’s Informed Investor report summarizes the historical returns in the 3rd year of a U.S. president’s term:

Historically, the third year of a U.S. president’s term has been the strongest year. Therefore, we believe history supports our belief that 2015 will be another positive year for equities.

a The Presidential Cycle

As shown above, the 3rd year of the presidential cycle has historically posted market returns that more than doubled the prior year.  Something to consider as we move into 2015.

Past performance is no guarantee of future results.

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Falling Correlations, Rising Fortunes of Active Managers?

December 9, 2014

Some important developments for active stock pickers, from the WSJ’s Paul Vigna:

The Fed’s grip on the equities market is loosening, and that’s a good thing for stock pickers.

There’s a concept in trading called correlations, the tendency for companies that may not be alike, say, energy drillers and sneaker makers, to trade in lockstep, the stocks driven by forces beyond their control. For the past five years, with the Federal Reserve pumping trillions of fresh dollars into asset markets, correlations have been high. It was the proverbial “risk on, risk off” trade.

But with the Fed having closed down its most recent stimulus program, the bond-buying spree known as QE3, correlations among stocks have been falling away. This means that individual stocks have been trading more in line with their own fundamentals and less with the big macro trends. This offers traders, investors, and portfolio managers a chance to once again put their skills and intuitions to work, with a chance to beat the market.

“U.S. stocks are finally untethering their fortunes from the ballast supplied by the Federal Reserve over the last five years,” Nicholas Colas, the chief market strategist at New York brokerage firm Convergex, wrote in a research note Monday. The firm has been following this trend closely since the recession’s end, and found correlations hit a post-recession low in November. “The average correlation for each of the 10 industry sectors in the S&P 500 is down to 58.4% over the last month,” Nicholas Colas,  ”This is by far the lowest observation we’ve seen in the last five-plus years.”

convergex2 Falling Correlations, Rising Fortunes of Active Managers?

Source: Convergex

Falling correlations is music to the ears of managers employing relative strength.  Lower correlations lead to greater dispersion among a given universe of stocks and potentially increases the opportunities for outperformance.

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.

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Relative Strength Spread

December 9, 2014

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 12/8/2014:

spread2 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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RS Chart of The Day

December 9, 2014

spyvsiyr zpsf261e6c0 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

December 8, 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 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 (12/1/14 – 12/5/14) is as follows:

ranks 12.08.14 Weekly RS Recap

 

Energy and Telecom were the big losers for the week, while Healthcare continued its leadership:

ranks2 12.08.14 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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RS Chart of The Day

December 5, 2014

spyvseem zps934754d0 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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