High RS Diffusion Index

May 25, 2016

The chart below measures the percentage of high relative strength stocks (top quartile of our ranks) that are trading above their 50-day moving average (universe of mid and large cap stocks.)  As of 5/24/16.

diffusion

The 10-day moving average of this indicator is 66% and the one-day reading is 69%.

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Investors cannot invest directly in an index.  Indexes have no fees.  Past performance is no guarantee of future returns.  Potential for profits is accompanied by possibility of loss.

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The Minority That Matter

May 23, 2016

Eric Crittenden has recently updated his research on the distribution of stock returns over time—research that underscores the rationale for trend following strategies.  His study now covers the period 1989-2015.  See below for further explanation:

Longboard’s original research proves that over the long term, a small minority of stocks drive returns for the overall market.

If you’ve heard of the Pareto Principle before, this might not surprise you.

What does this mean for investors? It may be more efficient to navigate this reality by getting defensive, and strategically avoiding the majority in this equation: the underperforming investments.

Be aware of disproportionate rewards

Here’s a closer look at our research on this competition gap in action in the U.S. stock market.

Under-Over-performers-1024x643

We analyzed 14,455 active stocks between 1989 and 2015, identifying the best performing stocks on both an annualized return and total return basis.

Looking at total returns of individual stocks, 1,120 stocks (7.7% of all active stocks) outperformed the S&P 500 Index by at least 500% during their lifetimes. Likewise, 976 stocks (6.8% of all active stocks) lagged the S&P 500 by at least 500%. The remaining 12,404 stocks performed above, at or below the same level as the S&P 500.

The principle of the competition gap remains true in practice: The minority accumulates a disproportionate amount of the total rewards, creating a “fat tail” distribution of extreme outperformers and underperformers with a large gap between the two.

Focus on the minority

What’s more, the left tail in the stock market’s competition gap (or distribution) is significant. 3,431 stocks (23.7% of all) dramatically underperformed the S&P 500 by 200% or more during their lifetimes.

AttributionCollectiveReturn-1024x613

So, let’s say an investor’s portfolio missed the 20% most profitable stocks between 1989 and 2015. Instead, he invested in only the other 80%. His total gain would have been 0%.

Once again, the principle holds true: Over the long term, the more efficient approach is to strategically avoid the many underperformers.

Seek alternative long-term returns
To get more benefits from alternative allocations, investors can seek long-term trend following strategies that proactively trim investments that don’t perform over time. These more defensive strategies are better positioned to avoid sustained downtrends — and a diversified portfolio with fewer strategies trapped in sustained downtrends can recover more quickly.

What’s more, some of the same strategies that can deliver this downside protection can add further diversification, potentially delivering results that are uncorrelated to the market and to other alternatives.

If ever there was a need to highlight the need for relative strength analysis, this is it!  It is no small thing to have a discipline for weeding out underperforming stocks from the portfolio and Dorsey Wright is uniquely positioned to help you with this task.  Subscribers of our research can use our technical attribute ratings and our matrix tools to weed out weak stocks.  Users of our investment products can access strategies that have defined sell disciplines in place.  The sell discipline will differ by strategy, but it is there for each of them.

Sitting on losing positions with the belief that they will eventually turn around is a fool’s errand.  But isn’t patience the key to long-term investment success?  Yes and no.  Patience in a well-designed investment strategy is one thing.  Patience in losing positions is another thing entirely.  Individual stocks are under no obligation to provide a profitable experience for their investors.  Stocks don’t know when or at what price you bought them.  As the research above demonstrates, many–in fact most–stocks are losers relative to a broad market benchmark.  It is up to you to successfully navigate the very fat-tailed distribution of stock returns.  Relative strength can help.

Click here for disclosures.  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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Weekly RS Recap

May 23, 2016

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 (5/16/16 – 5/20/16) is as follows:

ranks

This example is presented for illustrative purposes only and does not represent a past or present recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  The performance above is based on pure price returns, not inclusive of dividends, fees, or other expenses.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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Relative Strength Spread

May 17, 2016

The chart below is the spread between the relative strength leaders and relative strength laggards (top quartile of stocks in our ranks divided by the bottom quartile of stocks in our ranks; universe of U.S. mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.    As of 5/16/16:

ranks

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.

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The Role of Cash in Systematic RS Growth

May 16, 2016

A fully-invested equity strategy or an equity strategy that has the ability to raise cash—which is better?  Which is better will depend on the time frame and the risk tolerance of the individual client, but I would suggest that there may be a place for both in a client’s asset allocation.  A fully-invested equity strategy will likely be more volatile, have deeper drawdowns, but may also perform better in certain time periods than a strategy that has the ability to raise cash.  A strategy that has the ability to raise cash can offer clients greater staying power because of knowledge that risk management is a key objective of the strategy.  In our family of Systematic RS portfolios, we have some fully invested portfolios and some that raise cash.

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.

expected return_risk

Our Systematic RS Growth portfolio is a portfolio that has the ability to hold up to 50% cash if necessary.  See below for some frequently asked questions about how this ability to hold cash works:

Question: How do you determine when to raise cash in the portfolio?

Answer: We employ a trend following equity guideline that keeps the portfolio fully-invested when equity markets are trending higher.  However, when broad equity markets move into a declining trend, the guideline will start increasing the amount of cash to be held in the portfolio.  The further that the market moves from its highs, the more cash will be called for in the portfolio.  However, there is one twist to this process.  We raise cash in the portfolio if two things happen: 1) the model calls for increasing the cash position and 2) one or more of our current holdings has deteriorated sufficiently from a trend and relative strength perspective to be sold.  Basically, if a stock moves out of the top half of our ranks, moves below 3 technical attributes, or moves into a negative trend on a PnF chart, the stock will be sold.  See below for the historical cash allocation in the Growth portfolio:

cash_growth

Source: Dorsey Wright.  As of 4/30/16.  Estimate based on monthly cash values of a sample Growth portfolio.

Question: How do you determine when to reinvest the cash?

Answer: The trend following equity guideline will call for reinvesting the cash when the broad market moves off its lows.  The further it moves from its lows, the less cash will be called for in the portfolio until the point when the account is once again fully invested.

Question: How has this portfolio performed over time?

Answer: Since inception of 12/31/2006 through 4/30/2016, the Systematic RS portfolio has outperformed the S&P 500 Total Return Index 7.89% to 6.36% net of all fees.

mountain_growth

detailed perf_growth

As of 4/30/2016. Net performance shown is total return net of management fees, commissions, and expenses 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 2A of the adviser’s Form ADV.  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.  

Question: How can I access the Systematic RS Growth portfolio for my clients?

Answer: The Systematic RS Growth portfolio is available on the Envestnet UMA platform, Kovack UMA platform, Stifel Opportunity Platform, RBC MAP platform, UBS MAC platform, and for RIAs at Schwab, Fidelity, and TD Ameritrade.  If you would like to see it added to a SMA or UMA platform at your firm, please have your managed accounts department contact Andy Hyer at 626-535-0630 or andyh@dorseymm.com

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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Weekly RS Recap

May 16, 2016

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 (5/9/16 – 5/13/16) is as follows:

ranks

This example is presented for illustrative purposes only and does not represent a past or present recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  The performance above is based on pure price returns, not inclusive of dividends, fees, or other expenses.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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Letting Winners Run: Using ADRs to Deliver Your Active International Exposure

May 12, 2016

Check out John Lewis’ article in Iris.com today on our Systematic RS International portfolio (click here).

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High RS Diffusion Index

May 11, 2016

The chart below measures the percentage of high relative strength stocks (top quartile of our ranks) that are trading above their 50-day moving average (universe of mid and large cap stocks.)  As of 5/10/16.

diffusion

The 10-day moving average of this indicator is 73% and the one-day reading is 82%.

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Investors cannot invest directly in an index.  Indexes have no fees.  Past performance is no guarantee of future returns.  Potential for profits is accompanied by possibility of loss.

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Relative Strength Spread

May 10, 2016

The chart below is the spread between the relative strength leaders and relative strength laggards (top quartile of stocks in our ranks divided by the bottom quartile of stocks in our ranks; universe of U.S. mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.    As of 5/9/16:

spread

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.

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Curiosity Conversations

May 9, 2016

Brian Grazer is the producer of A Beautiful Mind, Apollo 13, Splash, Arrested Development, 24, 8 Mile Empire, and J. Edgar, among others.  His films and TV shows have been nominated for forty-three Academy Awards and 149 Emmys.  In 2007, he was named one of Time‘s 100 Most Influential People in the World.

He also has a habit of constantly seeking out “curiosity conversations” and has interviewed the likes of Andy Warhol, Barack Obama, Princess Diana, Michael Jackson, Norman Mailer and many more.  From his book, A Curious Mind:

I started having what I called curiosity conversations.  At first, they were just inside the business.  For a long time, I had a rule for myself:  I had to meet one new person in the entertainment business every day.  But pretty quickly I realized that I could actually reach out and talk to anyone, in any business that I was curious about.  It’s not just showbiz people who are willing to talk about themselves and their work–everyone is.

For thirty-five years, I’ve been tracking down people about whom I was curious and asking if I could sit down with them for an hour.  I’ve had as few as a dozen curiosity conversations in a year, but sometimes I’ve done them as often as once a week.  My goal was always at least one every two weeks.  Once I started doing the curiosity conversations as a practice, my only rule for myself was that the people had to be from outside the world of movies and TV…

…I have meetings and phone calls and conversations all day long.  For me, every one of those is in fact a curiosity conversation.  I don’t just use curiosity to get to meet famous people, or to find good scripts.  I use curiosity to make sure movies get made—on budget, on time, and with the most powerful storytelling possible.  I’ve discovered that even when you’re in charge, you are often much more effective asking questions than giving orders…

…I use curiosity as a management tool.  I use it to help me be outgoing.  I use curiosity to power my self-confidence.  I use it to avoid getting into a rut, and I use it to manage my own worries…

You’re born curious, and no matter how much battering your curiosity has taken, it’s standing by, ready to be awakened

…Curiosity itself is essential to survival.  But the power of human development comes from being able to share what we learn, and to accumulate it.  And that’s what stories are: shared knowledge

…I want the opportunity to be different.  Where do I get the confidence to be different?  A lot of it comes from curiosity….

…That’s what curiosity has done for me, and what I think it can do for almost anyone.  It can give you the courage to be adventurous and ambitious.

My emphasis added.  I could go on, but hopefully the excepts that I have shared give you a flavor of the role that curiosity conversations have played in defining and shaping Brian Grazer’s life.  I found his book to be fascinating.

And I couldn’t help but think of its implications to our business.  What is the difference between those who succeed in financial services and those who struggle along or fail?  Surely, connections, storytelling ability, confidence, persistence, and wisdom are among the defining characteristics of those who succeed.  And what better way to develop those attributes that to constantly seek out opportunities to learn from people of all walks of life.  Perhaps, you are saying to yourself, “Yea, but if I reach out to someone and ask for an hour of their time to learn from them, they will surely perceive a hidden agenda of simply trying to turn them into a client.”  There is no doubt that this will be a major obstacle.  Brian Grazer’s book was filled with all the opposition he received from people about sitting down with him for an interview.  But, he persisted.  Furthermore, as Grazer points out, people generally like talking about themselves and many people will be flattered by your request.

Financial services is nothing if not a people business.  A more organized and concerted effort to engage in these types of conversations could very well enrich our lives in many ways beyond the monetary.

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Weekly RS Recap

May 9, 2016

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 (5/2/16 – 5/6/16) is as follows:

ranks

This example is presented for illustrative purposes only and does not represent a past or present recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  The performance above is based on pure price returns, not inclusive of dividends, fees, or other expenses.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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Sector Performance

May 6, 2016

The table below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 5/5/2016.

sector

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

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High RS Diffusion Index

May 4, 2016

The chart below measures the percentage of high relative strength stocks (top quartile of our ranks) that are trading above their 50-day moving average (universe of mid and large cap stocks.)  As of 5/3/16.

diffusion

The 10-day moving average of this indicator is 69% and the one-day reading is 70%.

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Investors cannot invest directly in an index.  Indexes have no fees.  Past performance is no guarantee of future returns.  Potential for profits is accompanied by possibility of loss.

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Relative Strength Spread

May 4, 2016

The chart below is the spread between the relative strength leaders and relative strength laggards (top quartile of stocks in our ranks divided by the bottom quartile of stocks in our ranks; universe of U.S. mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.    As of 5/3/16:

spread

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.

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Combining Momentum & Low Volatility for Enhanced Alpha

May 2, 2016

Most market participants would agree that four of the most popular factor based investment methods used today are often considered to be momentum, value, growth, and low volatility.   At Dorsey Wright, we are often asked the best way to combine Dorsey Wright strategies (momentum/relative strength) with these other commonly used factor strategies.      Proponents of any smart beta strategy will often support all of these strategies, even admitting that there are pros and cons to each factor.  Momentum, for example, is the idea of investing in securities or asset classes using a previous time period that has performed well, most commonly a 12 month trailing return.  This type of strategy tends to do well during periods of sustained trends, but lags others such as value and low volatility during choppy markets.

During the 1st quarter of 2015, the majority of momentum/relative strength based strategies tended to fare better than the other factor based strategies mentioned above.  One of the largest contributing factors to this alpha generation during Q1 of 2015 was the dispersion which existed amongst US equities.   For example, the energy sector saw a sharp decline while sectors such as healthcare, biotech, and consumer discretionary fared much better.    Fast forward to the Q1 of 2016 and we have a different story on our hands.   Momentum strategies have struggled due to a lack of sustained sector leadership, while investment themes such as low volatility and value have performed much better.

Given the recent changes in sector leadership, we thought it would be interesting to go back and take a look how a few of these factor methods have compared to each other in terms of performance, volatility, etc.  The table below is a simple study complied over the last 18 years comparing PDP (Momentum), SPLV (low volatility), and SPY (benchmark).   Although momentum (PDP) outperforms both SPLV (low volatility) and SPY (benchmark), the added alpha generation came with a few drawbacks (mainly the potential for elevated volatility).   While periods such as these can be difficult, there are certainly ways to minimize the downside when they do come about in the market.   For example, using a systematic process can be a huge advantage, as it helps remove the human emotion which often times is magnified during periods of heightened market volatility.   Let’s take a look at the table below and see what type of results each of these portfolios (momentum, low volatility, and the equity index) generated over the allotted time period.

pdp

PDP inception date: March 1, 2007 – data prior to inception is based on a back-test of the underlying index.

SPLV inception date: May 5, 2011 – data prior to inception is based on a back-test of the underlying index.

When we take a closer look at the returns, we can see just how much the momentum and low volatility factors  differ in terms of performance at various cycles in the market (note 1999, 2003, and 2008 just to name a few).   The idea of implementing both momentum and low volatility into a portfolio would then sure seem logical to most money managers.   After all, any type of low volatility factor investing can typically be thought of as a reversion to the mean type of trade, which most would agree is the exact opposite goal of momentum investing (i.e.  looking for “fat tail” trades that deviate from the mean).    More simply stated, combining two different factor allocations in a portfolio which tend to do well during different market cycles would certainly seem to be an added benefit for any portfolio manager looking to reduce volatility and continue to generate alpha.

pdpsplv

The graphic above does a good job of displaying the differences returns year in and year out.  In fact, the correlation of excess returns between momentum and low volatility ends up at roughly-.70.    We plan to further visit this topic in our next blog post in order to give readers an a better idea on the type of results seen when combining these two factors in both a static and flexible allocations.   For now, the important thing to keep in mind is that in today’s investment world market participants should take full advantage of the full suite of products out there in order to help achieve alpha for their clients.    Using momentum and low volatility is just one way this can be done.   More detailed performance and risk analysis to follow in our next post on this topic.

Performance data for SPLV prior to 05/05/2011 and PDP prior to 3/01/2007 is the result of backtested underlying index data.  Investors cannot invest directly in an index.  Indexes have no fees.  The returns of the ETFs above do not include dividends, or all transaction costs.  Back-tested performance is hypothetical (it does not reflect trading in actual accounts) and is provided for informational purposes to illustrate the effects of the strategy during a specific period.  Back-tested performance results have certain limitations. Back-testing performance differs from actual performance because it is achieved through retroactive application of an investment methodology designed with the benefit of hindsight. Back-tested performance does not represent the impact of material economic and market factors might have on an investment advisor’s decision making process if the advisor were actually managing client money. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.

Neither the information within this post, nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities  This article does not purport to be complete description of the securities to which reference is made.

DWA provides the underlying index for the PDP, discussed above, and receives licensing fees from PowerShares.

           

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Weekly RS Recap

May 2, 2016

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 (4/25/16 – 4/29/16) is as follows:

ranks

This example is presented for illustrative purposes only and does not represent a past or present recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  The performance above is based on pure price returns, not inclusive of dividends, fees, or other expenses.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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Sector Performance

April 28, 2016

The table below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 4/27/16.

gics

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

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High RS Diffusion Index

April 27, 2016

The chart below measures the percentage of high relative strength stocks (top quartile of our ranks) that are trading above their 50-day moving average (universe of mid and large cap stocks.)  As of 4/26/16.

diffusion

The 10-day moving average of this indicator is 79% and the one-day reading is 66%.

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Investors cannot invest directly in an index.  Indexes have no fees.  Past performance is no guarantee of future returns.  Potential for profits is accompanied by possibility of loss.

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Relative Strength Spread

April 27, 2016

The chart below is the spread between the relative strength leaders and relative strength laggards (top quartile of stocks in our ranks divided by the bottom quartile of stocks in our ranks; universe of U.S. mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.    As of 4/26/16:

spread

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.

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Performance Within Context of Expectations

April 25, 2016

Just how baffling can the stock market be to investors?  So often the market just does not behave the way investors think it should.   Morgan Housel of The Motley Fool provides some data points that can make investor’s heads explode:

Coca-Cola is fighting 12 consecutive years of soda consumption decline. Its stock is at an all-time high.

Tesla is changing the world, and orders for its new car are off the charts. Its stock is lower than it was 18 months ago.

Cigarette consumption has dropped 44% since 1981. Altria stock is up 71,000% since 1981.

WalMart net income has tripled since 2000. Its stock has lost 1.5% since 2000.

Apple has earned almost a quarter trillion dollars of profit since 2012. Its stock has barely budged.

Amazon’s profits round to zero since 2012. Its stock has tripled.

2009 was one of the worst years for the economy in a century. The market rose 27%.

2015 was a good year for the economy. The market rose 1%.

Brazil’s economy is a disaster. Its stock market is flat over the last two years.

America is enjoying the longest streak of low unemployment claims in four decades. Its stock market is also flat over the last two years.

And so on.

Housel sums up the problem:

Outcomes are determined by performance within the context of expectations, with importance heavily weighted toward the latter. And if predicting future performance is hard, calibrating them against expectations is close to sorcery…

…In a world where analysts focus most of their time analyzing performance – what earnings will do, or what the economy will do – and it’s no wonder we struggle to predict outcomes.

This is where many investors simply throw up their hands and give up on finding a logical, organized way to analyze the market.  It is also where investors who are introduced to the Point and Figure method of technical analysis “see the light” in the sense that the market gets boiled down to understanding that price is the intersection between supply and demand.  The motivation for buying and selling activity may remain elusive, but the imbalance between supply and demand can be seen in the chart.  Momentum of the trend of the security can be identified and derived by looking at the relative strength of the security compared to all other securities in the investment universe.  With that information, investors can invest in the market as it really is and not as they wish it to be.

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Weekly RS Recap

April 25, 2016

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 (4/18/16 – 4/22/16) is as follows:

ranks

This example is presented for illustrative purposes only and does not represent a past or present recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  The performance above is based on pure price returns, not inclusive of dividends, fees, or other expenses.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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Relative Strength Spread

April 19, 2016

The chart below is the spread between the relative strength leaders and relative strength laggards (top quartile of stocks in our ranks divided by the bottom quartile of stocks in our ranks; universe of U.S. mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.    As of 4/18/16:

spread

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.

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Finding an Edge

April 18, 2016

For NBA fans, watching the Golden State Warriors this season has been nothing short of spectacular.  With a record of 73-9, the Warriors are now officially the greatest regular-season NBA basketball team in history.  It’s easy to watch Stephen Curry, Klay Thompson and crew in action and chalk it up to sheer talent.  Sure, there is plenty of talent to be found on this team (as there is on many of the other NBA teams).  However, as Ben Cohen of the WSJ reports, this team and this strategy have been years in the making.  Two excerpts shed some light on their strategy:

The data dive yielded many insights, but the Warriors eventually zeroed in on the 3-point line. NBA players made roughly the same percentage of shots from 23 feet as they did from 24. But because the 3-point line ran between them, the values of those two shots were radically different. Shot attempts from 23 feet had an average value of 0.76 points, while 24-footers were worth 1.09…

…The team realized that any possession that ended with a 3-point attempt by Mr. Curry was worthwhile—and that they would never discourage him from taking one. In this, the season of Mr. Curry’s unleashing, the Warriors are shooting 17% more threes than a season ago. Mr. Curry is attempting more than 11 a game. No NBA team had ever had a player attempt more than nine. Last season he hit 286 threes. This season he is on pace for about 400.

Shooting voluminous amounts of 3-point shots can seem impractical.  When a shooter goes through a shooting slump, continuing to shoot from long distance can seem foolish.  Yet, apparently, the Warriors “never discourage” Curry from shooting from 3-point land.

What is the lesson?  If you find a unique edge, relentlessly exploit it!

This is not dissimilar to the findings of John Lewis’ February 2016 white paper Point and Figure Relative Strength Signals.  What PnF relative strength configuration leads to the best results over time?  To answer this question, the paper ran a test from 1990-2015 in which a universe of 1,000 securities was evaluated based on PnF relative strength signal and categorized into one of four portfolios on a monthly basis.  As shown below, the portfolio made up of stocks that were on a Point and Figure buy signal and in a column of X’s generated far better returns than the other portfolios over time.  These are the stocks that had the best intermediate and longer term relative strength versus the broad market.

RS Group

annualized

Critics of relative strength  may say it is impractical or even foolish to buy stocks simply because they have stronger momentum than the market.  However, we have found an edge and we are seeking to relentlessly exploit it.

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.

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Weekly RS Recap

April 18, 2016

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 (4/11/16 – 4/15/16) is as follows:

ranks

This example is presented for illustrative purposes only and does not represent a past or present recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  The performance above is based on pure price returns, not inclusive of dividends, fees, or other expenses.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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Sector Performance

April 15, 2016

The table below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 4/14/16.

sector

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

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