RS Charts of The Week

August 28, 2015

SPYVSAGG zpslznymynz RS Charts of The Week

SPYVSIYR zpsm5wkuzdf RS Charts of The Week

SPYVSGCC zpsz13lt2jx RS Charts of The Week

SPYVSEEM zpsjbermarh RS Charts of The Week

SPYVSEFA zpsh9ykkwx6 RS Charts of The Week

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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How Do You Manage Risk?

August 27, 2015

That is the question that has been top of mind for many investors over the past several weeks as the markets have done their best imitation of the Twisted Colossus at 6-Flags.  As it relates to our family of separately managed accounts, the answer really differs by portfolio.  Here is the overview of the approach to risk management for our 7 Systematic Relative Strength portfolios:

Aggressive

  • Owns 20-25 U.S. mid and large cap stocks
  • Buys stocks out of the top decile of our ranks and sells them when they fall out of the top quartile of our ranks
  • Overweights sectors up to approximately 2x the weight of that sector in the broad universe; no minimum required sector exposure so if a sector is weak it is possible that we have zero exposure to that sector
  • Fully invested at all times

Core

  • Owns 20-25 U.S. mid and large cap stocks
  • Buys stocks out of the top quartile of our ranks and sells them whey they fall out of the top half of our ranks
  • Overweights sectors up to approximately 2x the weight of that sector in the broad universe; no minimum required sector exposure so if a sector is weak it is possible that we have zero exposure to that sector
  • Fully invested at all times

Growth

  • Owns up to 25 U.S. mid and large cap stocks
  • Buys highly ranked stocks and sells when they fall out of the top half of our ranks or have sufficient trend or technical attribute deterioration
  • Overweights sectors up to approximately 2x the weight of that sector in the broad universe; no minimum required sector exposure so if a sector is weak it is possible that we have zero exposure to that sector
  • Can raise up to 50% cash as dictated by market conditions

International

  • Owns 30-40 small, mid, and large cap ADRs from both developed and emerging markets.
  • Buys stocks out of the top quartile of our ranks and sells them when they fall out of the top half of our ranks
  • Overweights sectors up to approximately 2x the weight of that sector in the broad universe; no minimum required sector exposure so if a sector is weak it is possible that we have zero exposure to that sector
  • Fully invested at all times

Balanced

  • Owns 20-25 U.S. mid and large cap stocks and U.S. Treasurys in an approximately 60% equities / 40 % fixed income weight
  • Buys stocks out of the top quartile of our ranks and sells them whey they fall out of the top half of our ranks.  Fixed income exposure to intermediate U.S. Treasurys
  • Overweights sectors up to approximately 2x the weight of that sector in the broad universe; no minimum required sector exposure so if a sector is weak it is possible that we have zero exposure to that sector
  • Fully invested at all times

Global Macro

  • Owns 10 ETFs from a broad range of asset classes, including U.S. equities, International equities, Inverse equities, Currencies, Commodities, Real Estate, and Fixed Income
  • No minimum constraints in asset class exposure so that if an asset class is weak it is possible for us to have zero exposure to that asset class
  • Strict buy and sell discipline based on relative strength

Tactical Fixed Income

  • Owns 2-6 Fixed Income ETFs from a broad range of sectors of Fixed Income, including U.S. Treasurys, TIPs, Corporate Bonds, Emerging Market Bonds, High Yield, and Convertible Bonds
  • 40% of the portfolio will always remain invested in some form of U.S. Treasurys (Short-Term, Long-Term or TIPs)
  • Strict buy and sell discipline based on relative strength

The chart below is based on Dorsey Wright’s opinion of the likely relationship between volatility and return relationships between each of the different strategies over a long period of time.  Actual results may differ from these expectations.  Greater volatility may result in greater gains and greater losses.

return volatility How Do You Manage Risk?

Life is full of trade offs and the financial markets are no different.  Good results are likely to be achieved when a caring financial advisor takes the time to understand their client’s needs and risk tolerance and then to build the right allocation for that client.  For those advisors using our SMA’s as part of that allocation, they will find that these 7 portfolios have very different approaches to risk management.  All of them employ some form of risk management.  Even the fully invested portfolios are managing risk through individual position management (i.e. cutting them back when they become too large a percentage of the portfolio or completely selling them when dictated by relative strength rank) and through sector exposure.  Others, like Growth, can raise up to 50% cash to seek to mitigate some of the downside risk.  Balanced benefits from the time-tested benefits of combining equities and fixed income.  Global Macro is our “go any-where” portfolio that can completely shift away from weak asset classes if needed.

If you would like to receive the brochure for these portfolios, please e-mail andy@dorseywright.com or call 626-535-0630.

Past performance does not guarantee future results. In all securities trading, there is a potential for loss as well as profit. It should not be assumed that recommendations made in the future will be profitable or will equal the performance as shown. Investors should have long-term financial objectives when working with Dorsey, Wright & Associates.

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Relative Strength Spread

August 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 8/26/15:

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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High RS Diffusion Index

August 25, 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 8/24/15.

diffusion3 High RS Diffusion Index

The 10-day moving average of this indicator is 53% and the one-day reading is 11%.  Dips in this index have often provided good opportunities to add money to relative strength strategies.

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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The Cost of Emotional Investing

August 24, 2015

Food for thought from FiveThirtyEight’s Ben Casselman:

Financial markets around the world continued to melt down today. The Dow Jones Industrial Average was down 1,000 points at one point this morning (it has since rebounded). Asian and European shares are down even more. Oil has fallen below $40 a barrel.

Here’s what you need to know: Don’t sell.

Let me try that again, with greater emphasis: Do. Not. Sell.

Got it? Good. You can stop reading. The rest of this article is for people who aren’t convinced.

Let me be clear: I have no idea whether stocks are going to keep tumbling or if they’ll quickly rebound. I don’t know what’s causing today’s collapse. (“Fears that China’s economy is slowing dramatically,” as The Wall Street Journal wrote Monday? Sure, but those fears have existed for months.) I don’t think a few days of turmoil are a sign that the U.S. is headed for another recession, but economists are notoriously terrible at predicting recessions.

But the simple fact is that you don’t know any of those things either. Nor does anyone else.

What we do know is that market crashes, however you define them, happen. Since 1950, the S&P 500 has had one-day declines of 3 percent or more nearly 100 times. It’s had two dozen days where it fell by 5 percent or more. Slow-motion crashes, where big declines are spread out over several trading days, are even more common.

But every one of those declines has been followed by a rebound. Sometimes it comes right away. Sometimes it takes weeks or months. But when it comes, it comes quickly. If you wait until the rebound is clearly visible, you’ve already missed the biggest gains.

Imagine two people who each invested $1,000 in the S&P 500 at the beginning of 1980. The first one buys once and never sells. The second one is slightly more cautious: He sells any time the market loses 5 percent in a week, and buys back in once it rebounds 3 percent from wherever it bottoms out. At the end of last week, the first investor’s holdings would be worth $18,635. The second investor would have just $10,613. (For simplicity’s sake, I’m ignoring dividends, fees, taxes and other factors.)

casselman datalab markets1 The Cost of Emotional Investing

I would argue that most investors would benefit from some portion of their asset allocation being invested in a strategy that has the ability to get defensive, which would involve selling at some point.  However, as this article points out, any selling better be part of a well-researched and well-tested strategy because simply investing based on what feels right is likely to end poorly.

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RS Charts of The Week

August 21, 2015

SPYVSAGG zpshtkdrlli RS Charts of The Week

spyvsiyr2 zps1psh2i6o RS Charts of The Week

SPYVSGCC zpsthiao80z RS Charts of The Week

SPYVSEEM2 zps8n7lznbe RS Charts of The Week

SPYVSEFA zpsfpwl5b7w RS Charts of The Week

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

August 21, 2015

The table below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 8/20/15.

sector3 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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SRS International vs. Peer Group

August 19, 2015

How should investors navigate the International equity markets?  Different cultures, different languages, different accounting standards, different currencies, different geographies.  Should investors even bother?  The way we approach International equity markets is no different than how we approach U.S. markets.  We define our investment universe, we determine our model constraints and decision rules, and then we let relative strength do its thing.  Simple trend following.

How has this approach worked over time?  Make sure you are seated, and then see below:

psn SRS International vs. Peer Group

Source: PSN, as of 6/30/2015

Some quick facts about this portfolio:

  • Inception 3/31/2006
  • Invests in 30-40 ADRs from Developed and Emerging International Markets
  • Fully invested at all times
  • Buys stocks out of the top quartile of our ranks and sells stocks when they fall out of the top half of our ranks
  • Seeks to overweight strong sectors and underweight weak sectors
  • No country constraints

A fact sheet of the strategy can be found here.  E-mail andy@dorseywright.com if you have questions.

The performance represented in this brochure is based on monthly performance of the Systematic Relative Strength International Model. Net 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. The advisory fees are described in Part II of the adviser’s Form ADV. The starting values on 3/31/2006 are assigned an arbitrary value of 100 and statement portfolios are revalued on a trade date basis on the last day of each quarter. All returns since inception of actual Accounts are compared against the MSCI EAFE Total Return 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. A list of all holdings over the past 12 months is available upon request. The performance information is based on data supplied by the Manager or from statistical services, reports, or other sources which the Manager believes are reliable.

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.

Past performance does not guarantee future results. In all securities trading, there is a potential for loss as well as profit. It should not be assumed that recommendations made in the future will be profitable or will equal the performance as shown. Investors should have long-term financial objectives when working with Dorsey, Wright & Associates.

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Looking Under the Hood of Broad Indexes

August 19, 2015

With all the talk of 2015 being a flat year in the U.S. equity markets, it is worth remembering that while that may be true of many of the broad benchmarks, like the S&P 500, it is not true when you look at the dispersion in returns of a broader universe of individual stocks.

Consider the YTD performance of the 2,843 stocks in the NASDAQ US Benchmark Index:

dispersion Looking Under the Hood of Broad Indexes

Source: Nasdaq, Performance through 8/18/15, Price return only, not inclusive of dividends

The highest performer in this universe is up 341% YTD and the worst performer has lost 95% of its value so far this year.  However, the capitalization-weighted NASDAQ US Benchmark Index is up 2.09% for the year–close to flat.

Part of the reason that we are such fans of Momentum investing is that it allows us to seek to capitalize on this dispersion.  2015 has generally been a good year for Momentum strategies because leadership has been relatively stable for much of the year.  One ETF which Dorsey Wright provides the index for is the PowerShares DWA NASDAQ Momentum Index (DWAQ).  See below for the description of this index:

The PowerShares DWA NASDAQ Momentum Portfolio (Fund) is based on the Dorsey Wright® NASDAQ Technical Leaders Index (DWA NASDAQ Technical Leaders Index). The Fund will normally invest at least 90% of its total assets in common stocks that comprise the Index. The Index is chosen from a universe of approximately 1,000 common stocks having the largest market capitalizations from the NASDAQ US Benchmark Index. All securities in the universe are ranked using a proprietary relative strength (momentum) measure. Each security’s score is based on intermediate and long-term price movements relative to a representative market benchmark and the other eligible securities. The top 100 securities are selected for the Index. The Fund and the Index are rebalanced and reconstituted quarterly.

DWAQ’s YTD Performance is shown below:

dwaq1 Looking Under the Hood of Broad Indexes

Source: Dorsey Wright, as of 8/18/15, Price return only, not inclusive of dividends

If you look under the hood of broad market indexes, you are likely to find plenty of dispersion.  We think Momentum is an effective way to capitalize on that dispersion.

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 DWAQ and a suite of other Momentum ETFs at PowerShares.  See www.powershares.com for more information.

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Range-Bound

August 19, 2015

On the S&P 500’s trading range (via USA Today):

The daily trading range between the S&P 500’s closing high and low the past six months has been just 4.4%, “which is narrower than any other six-month range in the history of the index,” Bespoke says. What’s more, Bespoke adds, the S&P 500 still has not been up or down more than 3.5% on a year-to-date basis yet in 2015 (and) this is the first year in the index’s history where it was never up or down more than 4% at some point in the year.”

spx1 Range Bound

Source: Dorsey Wright, Price returns only, not inclusive of dividends, as of 8/18/15

However, it has been a different story from a sector perspective:

sector2 Range Bound

Source: iShares, Price returns only, not inclusive of dividends, as of 8/18/15

Past performance is no guarantee of future returns.

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Inefficient Markets

August 19, 2015

Seth Klarman the the topic of market efficiency:

The reason that capital markets are, have always been and will always be inefficient is not because of a shortage of timely information, the lack of analytical tools, or inadequate capital.  The Internet will not make the market efficient, even though it makes far more information available, faster than ever before, right at everyone’s fingertips.  Markets are inefficient because of human nature — innate, deep-rooted, permanent.  People don’t consciously choose to invest with emotion — they simply can’t help it.  (Source: Excess Returns, Vanhaverbeke)

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Favorite Warren Buffett Quotes

August 19, 2015

Some of my favorites:

It has been helpful to me to have tens of thousands (of students) turned out of business schools taught that it didn’t do any good to think.

(Warren Buffett, Grant, 1991)

To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets.  You may, in fact, be better off knowing nothing of these.

(Warren Buffett, 1996 Letter to the Shareholders of Berkshire Hathaway)

Success in investing doesn’t correlate wtih IQ once you’re above the level of 125.  Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.

(Warren Buffett, BusinessWeek 1999)

Buffett Favorite Warren Buffett Quotes

Photo credit: Biography.com

Source: Excess Returns, Vanhaverbeke

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High RS Diffusion Index

August 19, 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 8/18/2015.

diffusion2 High RS Diffusion Index

The 10-day moving average of this indicator is 63% and the one-day reading is 72%.

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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Relative Strength Spread

August 18, 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 8/17/15:

spread1 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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A Stock Picker’s Market

August 17, 2015

Ben Levisohn in the 8/15/15 Barron’s with an important stat for active managers:

It would be easy to look at the disconnect between the S&P 500 and its components and see it is a sign of trouble ahead. But there is another explanation as to why the market has been relatively stable: Stocks have become increasingly less likely to move in the same direction as the S&P 500. There’s a measure for this—implied correlation. Implied correlation measures how much options traders expect any given individual stock to trade in lock-step with the benchmark.

In bad times, implied correlation surges higher, approaching 100%, as it did during the financial crisis, when it didn’t matter what you owned, everything was falling. When implied correlation falls, it means that investors are more inclined to trade each stock according to its own merits. And wouldn’t you know? Last week, implied correlation fell below 43% for the first time since 2008.

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Weekly RS Recap

August 17, 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 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 (8/10/15 – 8/14/15) is as follows:

perf 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 Charts of The Week

August 14, 2015

SPYVSAGG zpsahgtfxem RS Charts of The Week

SPYVSIYR zpshy8ckicg RS Charts of The Week

SPYVSGCC zpscsorfum1 RS Charts of The Week

SPYVSEEM zpsb8nnztjo RS Charts of The Week

SPYVSEFA2 zpsvyfcrcma RS Charts of The Week

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

August 14, 2015

The table below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 8/13/15.

sector1 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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Bullish Sentiment Remains Sub Par

August 13, 2015

From Bespoke:

This week’s sentiment survey from the American Association of Individual Investors (AAII) showed that bullish sentiment increased from 24.32% up to 30.45%.  So even as volatility increased, bullish sentiment saw its largest weekly increase since late June.  At current levels, however, bullish sentiment has now been below its bull market average of 38.1% for 20 straight weeks, which is the longest streak of below average readings in the current bull market.  On top of that, bullish sentiment has also been below 40% for 24 straight weeks.  The last time that happened was all the way back in 1994.

AAII Bullish 081315 Bullish Sentiment Remains Sub Par

Bearish sentiment, meanwhile, remains elevated.  In this week’s survey, bearish sentiment also increased up to 36.15% from last week’s level of 31.66%.  While bearish sentiment remains below its recent high of 40.7% two weeks ago, the trend has clearly been higher since the start of 2015.

AAII Bearish 081315 Bullish Sentiment Remains Sub Par

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High RS Diffusion Index

August 12, 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 8/11/15.

diffusion1 High RS Diffusion Index

The 10-day moving average of this indicator is 64% and the one-day reading is 60%.

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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Best & Worst of Smart Beta in 2015

August 12, 2015

ETF.com takes a look at how Smart Beta ETFs have fared so far this year:

Smart-beta ETFs have been all the rage recently, attracting billions of dollars in inflows. These funds, which often share little in common other than the fact that they aim to outperform traditional, market-cap-weighted index funds, are extremely varied in their strategies. Unsurprisingly, just as varied as their strategies is their performance.

Since the start of 2015, there have been both big winners and big losers in the smart-beta space. That said, the top-performing smart-beta ETFs so far in 2015 do share some commonalities. Nine of the 10 funds on the list are related to either health care, Japan or Europe.

Our own PowerShares DWA Healthcare Momentum ETF (PTH) and PowerShares DWA NASDAQ Momentum ETF (DWAQ) receive some nice coverage in this article.

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 PDP and a suite of other Momentum ETFs at PowerShares.  See www.powershares.com for more information.

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Transcending the Style Box

August 11, 2015

Traditionally, Growth indexes give you exposure to “U.S. companies whose earnings are expected to grow at an above-average rate relative to the market” and Value indexes give you exposure to “U.S. companies that are thought to be undervalued by the market relative to comparable companies.”  So which is better?  Depends on the time frame.  Markets can go through long stretches of favoring one over the other.  Here is how the last 15 years have looked:

growth value Transcending the Style Box

Source: Dorsey Wright, Price returns only, not inclusive of dividends or all transaction costs, IWF used for Russell 1000 Growth and IWD used for Russell 1000 Value

Part of the appeal of a momentum strategy is that it sidesteps the unnecessary restrictions of the style box.  Take the PowerShares DWA Momentum ETF (PDP).  This ETF is based on a momentum index constructed by taking a universe of about 1,000 U.S. Mid and Large Cap stocks and identifying the 100 with the best momentum characteristics (according to our rankings).  PDP is rebalanced on a quarterly basis.

The relative strength ranking process used to construct the index used for PDP pays no attention to whether or not a stock is a “Growth” stock or a “Value” stock.  Rather, a stock simply has to be relatively strong.  As shown in the chart below, the correlation of Momentum (PDP) to Growth (IWF) and Value (IWD) over time changes.

correlation Transcending the Style Box

Source: Yahoo! Finance.  Returns used for this were total returns, inclusive of dividends, but not all transaction costs.

Notice how in recent years the correlation of Momentum to Value has been lower than it was in the first couple years of PDP’s history.  Why is that?  Because Growth stocks have generally been performing better than Value stocks in recent years so our relative strength ranking process leads us to those stocks.

What does this mean for an investor?  I think it could mean that an investment in a Momentum Index is likely to be more adaptive than an investment in a style-specific index.  Ultimately, I think the ability to adapt to different market environments is key for investment success over time.

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 PDP and a suite of other Momentum ETFs at PowerShares.  See www.powershares.com for more information.

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The Exception to the Rule

August 11, 2015

Most professional athletes seem to blow through millions in the blink of an eye.  Not Ryan Broyles:

 Ryan Broyles grabs his cell phone every morning over breakfast and pores over the latest transactions. What the Detroit Lions wide receiver is looking at, though, has nothing to do with football.

Over the past three-plus years, Broyles has become immersed in the financial world. His financial planning throughout his career allowed him to make a lot of investments. So when he laments the S&P 500 has “been sideways” most of the year, he has good reason.

It all started after a meeting with a financial adviser soon after being drafted in 2012. The adviser gave Broyles some advice he used to shape his life: Spend as you would like over the next few months. Figure out your means. Then set a budget, live within it and invest the rest.

Broyles signed a contract worth more than $3.6 million after being taken in the second round. More than $1.422 million was guaranteed. But Broyles knew the other statistics — ones reinforced when he went to the rookie symposium.

He knew NFL players, and athletes in general, go bankrupt. He saw athletes blow through millions. He was determined not to have that happen to him.

He came up with a budget. Broyles said he and his wife, Mary Beth, have lived on $60,000 a year, “give or take”, throughout his career. Everything else has gone to investments, retirement savings and securing Broyles’ post-football monetary future.

Broyles wanted to make sure his NFL career, however long it lasts, really did set him up for life.

“Then you know how much you can invest, how risky you can be,” Broyles said, as he enters the last year of his rookie contract with no guarantee he’ll make the Lions’ roster. “Then, when I was hitting the same budget over three, four, five months, it was all right, this is what your budget is and I had some spending money.

“I didn’t hold myself back at all on those terms. That’s what I tell people when they want to start to invest, I tell them to live your life and see where you stand and then pull back. Don’t pull back without even knowing.”

He has no problem driving a red Ford Focus rental car during training camp this year. It’s why he and his wife drive Mazdas — he recently bought a new one — and he still has his 2005 Chevrolet Trailblazer from college.

Broyles wouldn’t go into specifics about his investments — just smiling wide when asked. Despite some big changes in his life this offseason — the couple bought their first home in Texas and had their first child, Sebastian — he doesn’t feel any more pressure to succeed on the field because he has an extra mouth to feed.

“The pressure I put on myself is just being the best player I am,” Broyles said. “I would never play [just] for money, you know what I mean, that’s not my intentions whatsoever.

“Whatever comes, it’s just a blessing. But I got the mindset of a businessman off the field, I’ll tell you that.”

Broyles immersed himself in the financial world. In March, he went to Washington, D.C., with New Orleans running back Mark Ingram to speak to students about financial planning. Broyles worked with VISA and the NFL on promoting a Financial Football video game in classrooms to help teach financial security and planning in both D.C. and his home state of Oklahoma.

“I studied as much as I could,” Broyles said. “Talked to people wealthier than me, smarter than me. So that definitely helps.”

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Weekly RS Recap

August 10, 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 (8/3/15 – 8/7/15) is as follows:

ranks 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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How Much Does A Cow Weigh?

August 8, 2015

NPR’s Planet Money confirms the conclusions found in James Surowiecki’s findings from The Wisdom of Crowds.  Click here for the podcast.

Should give you a much clearer understanding of how the stock market works.

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