Weekly RS Recap

February 8, 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 (2/1/16 – 2/5/16) is as follows:

ranks

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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Sector Performance

February 5, 2016

The table below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 2/4/16.

sector

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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Systematic RS Growth

February 5, 2016

“How do you manage risk?”    Not surprisingly, the recent stock market correction has once again brought this question to the forefront of investor’s minds.

How we manage risk depends on the strategy.  For some of our portfolios, rotating out of equities and into fixed income, currencies, or even inverse equities is an option.  However, for our Systematic RS Growth portfolio, risk management is handled, in part, by employing an exposure overlay that, when activated, causes sales to go to cash and not be reinvested until indicated.  This portfolio invests in up to 25 U.S. Mid and Large Cap equities demonstrating, what we believe to be, favorable relative strength characteristics.  The strategy will hold up to 50% cash if necessary.  Our exposure to cash in this portfolio is shown below:

growth_cash

Source: Dorsey Wright.  As of 1/31/16.  Estimate based on monthly cash values of a sample Growth portfolio.

Using cash as a way to seek to mitigate market losses has real appeal to investors who want to invest in equities, but also want to know that that there is a plan for risk management.  Over time, the results have been very good as shown below.  While the portfolio has still had periods where it has lost money, the cash overlay has indeed helped to buffer some of the downside risk.

growth 1

growth 2

growth 3

As of 1/31/16

Since 12/31/2006, this portfolio has been able to outperform the S&P 500 by 2.03% annually on a net basis.

Contact Andy at 626-535-0630 or andyh@dorseywright.com to request a fact sheet.  Click here for a list of platforms where our separately managed accounts are available.

Historical Performance Of the Dorsey, Wright Systematic Relative Strength Growth Strategy: The performance represented in this brochure is based on monthly performance of the Systematic Relative Strength Growth 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 12/31/2006 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 S&P 500 Index. The S&P 500 is a stock market index based on the market capitalizations of 500 leading companies publicly traded in the U.S. stock market, as defined by Standard & Poor’s. 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.  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.  The inception for this strategy was 12/31/1994. However, the strategy underwent a material change that was complete on 12/31/2006. The material changes included adding an exposure overlay and a systematic stock selection process.

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Systematic RS International

February 5, 2016

There may be some truth to the idea that there are greater opportunities for outperformance in less efficient markets.  That has certainly been the case in our line-up of separately managed accounts.  The strategy where we have been able to generate the largest margin of outperformance over time has been our Systematic RS International portfolio.

As shown below, this portfolio has outperformed its benchmark by 6.56 percent annually (net) since its inception of 3/31/2006.

int'l 1

As of 1/31/16

Characteristics of our Systematic RS International portfolio:

  • Invests in 30-40 international stocks out of an investment universe of several hundred American Depository Receipts (ADR’s).
  • Invests in Small, Mid, and Large-Cap stocks
  • Relative Strength determines which securities are bought and when they are sold
  • Minimum investment is $100,000
  • Available as a separately managed account on many different platforms.

Top holdings as of 1/31/16 are shown below:

int'l 2

To learn more about this portfolio, please call 626-535-0630 or e-mail andyh@dorseywright.com.

Historical Performance of the Dorsey, Wright Systematic Relative Strength International Strategy

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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Instability At The Top

February 3, 2016

It requires a huge run of success to make it into the list of the top 5 stocks based on market capitalization, but how durable is the performance of those mega caps after they make it to the top?  Justin Fox at Bloomberg took a look at this question.  Consider the following two charts.  The first chart shows today’s top 5 market-cap stocks (Alphabet/Google, Apple, Microsoft, Facebook, and Berkshire Hathaway) and the trajectory they took to get there.

today's top 5

The second chart looks at the top 5 market cap stocks from a decade ago (Exxon Mobil, General Electric, Microsoft, BP, and Citigroup), and how they have fared since.

top 5 from a decade ago

Only Microsoft remains in both lists.  In fact, Microsoft was the only one of those stocks that beat the S&P 500 over the past decade.  Two of the stocks are still well underwater from where they were a decade ago.

return

Source: Yahoo! Finance.  Returns are inclusive of dividends, but do not include any transaction costs.  2/2/06 – 2/2/16

Admittedly, this is not a comprehensive study.  Rather, it simply illustrates the fact that success is not guaranteed.  Just because a company has been successful in the past does not guarantee that it will be successful in the future.  As we commonly point out, there is no shortage of data showing the rationale for buying high momentum stocks.  Sometimes those high momentum stocks are also mega-cap stocks.  However, having a good sell discipline is essential!

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.

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High RS Diffusion Index

February 3, 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 2/2/16.

diffusion

The 10-day moving average of this indicator is 33% and the one-day reading is 44%.  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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Relative Strength Spread

February 2, 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 2/1/16:

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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Dorsey Wright Separately Managed Accounts

February 1, 2016

Picture1

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

  • Wells Fargo Advisors (Global Macro available on the Masters/DMA Platforms)
  • Morgan Stanley (IMS Platform)
  • TD Ameritrade Institutional
  • UBS Financial Services (Aggressive and Core are available on the MAC Platform)
  • RBC Wealth Management (MAP Platform)
  • Raymond James (Outside Manager Platform)
  • Stifel Nicolaus
  • Kovack Securities (Growth and Global Macro approved)
  • Charles Schwab Institutional (Marketplace Platform)
  • Envestnet UMA (Growth, Aggressive, Core, Balanced, and Global Macro approved)
  • Fidelity Institutional

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

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

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

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

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

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

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

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

Picture2

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

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The Great Surge

February 1, 2016

Finished The Great Surge, The Ascent of the Developing World by Steven Radelet over the weekend.  Here’s one excerpt that I found particularly insightful:

I believe that during the next twenty years, the great surge of development progress can continue.  If it does, 700 million more people will be lifted out of extreme poverty, incomes in developing countries will more than double again, childhood death will continue to decline, hundreds of millions of children will get the educations they deserve, and basic rights and democratic freedoms will spread further around the world.  China’s growth rate will slow gradually rather than abruptly, and it will move–with some disruptions–closer to a more open and democratic society rather than the other way around.  India will continue its uneven ascendancy, and the majority of developing countries will continue to achieve moderate or rapid growth.  New technologies will help fight diseases, increase agricultural production, and expand cleaner sources of energy.  Global governance systems and international organizations will evolve to include developing countries and be more effective in meeting the world’s challenges.  The world will be a safer, healthier, and more prosperous place…

…It’s easy to be pessimistic about the future.  It’s also easy to forget that people have despaired about the future of the planet since the earliest civilizations.  It may be true that some of the challenges the world faces today are greater than those of the past, but so are the world’s capacities to meet these challenges.

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Weekly RS Recap

February 1, 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 then compared to the universe return.  Those at the top of the ranks are those stocks which have the best intermediate-term relative strength.  Relative strength strategies buy securities that have strong intermediate-term relative strength and hold them as long as they remain strong.

Last week’s performance (1/25/16 – 1/29/16) is as follows:

perf ranks

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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Weekly RS Recap

January 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 (1/19/16 – 1/22/16) is as follows:

ranks

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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The Forest and the Trees

January 22, 2016

One of our favorite indicators for gauging the performance of relative strength strategies is the Relative Strength Spread.  The way that we calculate the RS Spread is to divide the RS leaders by the RS 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.

See below for both the long-term RS Spread as well as the RS Spread broken down into approximately 5-year chunks:

lt spread

90_94

95-99

00_04

05_09

10_16

Some observations:

  • The long-term chart of the RS Spread (1990-2016*) reflects the vastly superior performance of the RS leaders compared to the RS laggards over time.  The ratio started at 1.00 on March 14, 1990 and had risen to 4.59 by January 21, 2016.
  •  Three of those approximately 5-year periods were very favorable to RS strategies: 1990-1994, 1995-1999, and 2010-2016*
  • The RS Spread made no real net gains in two of the periods: 2000-2004 and 2005-2009
  • The RS Spread tended to do the worst following major bear markets—periods of sharp laggard rallies
  • The RS Spread tended to do the best during periods of stable leadership
  • The RS Spread was flat from late 2009-late 2014, but has broken to the upside in a major way in recent years

There is always a desire on the part of investors to try to time exposure to different strategies like relative strength and value.  Maybe some can pull the timing off well, but I think most investors would benefit most from relative strength strategies by simply doing sufficient homework to understand its long-term performance characteristics and then to allocate a portion of their money to disciplined RS strategies.  Investors may then want to seek out uncorrelated strategies (like value) to round out their overall asset allocation.  Sometimes relative strength investors have to be patient while RS comes back in favor, but I am not aware of any other strategy that compares as favorably over time.

*Data range: March 14, 1990 – January 21, 2016.  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.  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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Interpreting Oversold Conditions

January 21, 2016

How oversold is the U.S. equity market at this point?  One way to answer that is by looking at the Sector Bell Curve that plots the sector bullish percent charts for the 40 Dorsey Wright sectors.  A broad universe of U.S. equities is categorized into these 40 sectors.  The bullish percent for each sector measures the percentage of stocks in each of those sectors on a point and figure buy signal (short-term indication of positive trend).  The average of those 40 bullish percent readings (BPAVG) was 21.20% as of 1/20/16.  Visually, this oversold condition can be observed by the chart below which shows this sector bell curve skewed to the left hand side of the chart.

sector bell curve

We have data on BPAVG going back to 6/13/1997.  Over that period of time, only 1.5% of all measurements have been lower than today’s reading.  So, short answer is that the market is pretty oversold at this point!  The chart below of the S&P 500 highlights other times over this period where the BPAVG has been as oversold (or more oversold).

spx

Those months and years where the BPAVG has been this oversold (or more) since 1997 are highlighted in yellow: August-October 1998, January 2008, October-December 2008, February-March 2009, October 2011, and now January 2016.

A couple observations:

  • Some of those times when the Sector Bell Curve (BPAVG) was this oversold preceded tremendous moves higher in the broad market (1998, 2009, 2011)
  • Some of those oversold conditions preceded even greater losses in the broad market (2008)

The search goes on for the perfect indicator of a market bottom!  Actually, I’m not holding my breath.  Markets just aren’t that predictable.  With that in mind, I have a couple thoughts on how to proceed:

  1. Diversify.  A mix that appeals to me is 1/3 fully-invested momentum and value strategies, 1/3 Tactical Allocation, 1/3 Fixed Income.
  2. Add money to your investments when you get oversold conditions.  There is no guarantee that this type of oversold condition won’t get more oversold, but these types of conditions have often created great buying opportunities.
  3. Add other money to your investments on a regular basis no matter what the market is doing.  Is this at odds with suggestion #2?  No.  One of the biggest mistakes investors can make is to not save enough and waiting for “the perfect” opportunity to get in at the bottom can cost an investor a substantial amount of money over time.  Sure, for those inclined, use oversold opportunities to take advantage of what may be a great opportunity, but saving on a regular basis is essential to building wealth over time.

NOTHING CONTAINED WITHIN THE SITE 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 COMPANY, INDUSTRY OR SECURITY MENTIONED HEREIN. THIS POST IS FOR GENERAL INFORMATION AND EDUCATIONAL PURPOSES. 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

January 21, 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 1/20/16.

diffusion

The 10-day moving average of this indicator is 26% and the one-day reading is 19%.  Dips in this index have often provided good opportunities to add 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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Sector Performance

January 20, 2016

The table below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 1/19/16.

sector

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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Markets

January 19, 2016

Via Morgan Housel:

housel

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Weekly RS Recap

January 19, 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 (1/11/16 – 1/15/16) is as follows:

ranks

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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What To Do With A Correction

January 14, 2016

Wise words from Jim O’Shaughnessy (from an article written August 28, 2014):

In the past, the United States has endured far more perilous times than those we currently face, and I believe that you will never make money betting against the United States over the long-term. We have come through far greater challenges to emerge stronger, more vibrant and ready to face the future. And today, we find ourselves at inflation-adjusted highs for the S&P 500. Does this mean that stocks will continue to rise? Absolutely not. I’m sure that at some point we will get a 10 to 20 percent correction in the market. But when we do, remind yourself of this simple fact—the U.S. stock market has come back from every setback and gone on to make new highs. Hundreds of years of data back this up. When the next correction comes—and it will come—remind yourself of this simple fact, and BUY.

Past performance is no guarantee of future returns.

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High RS Diffusion Index

January 14, 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 1/13/16.

diffusion

The 10-day moving average of this indicator is 37% and the one-day reading is 21%.  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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Probable vs. Possible

January 13, 2016

Good advice from Jim O’Shaughnessy:

Investors should make decisions using the long-term base rates a strategy exhibits—in other words, they should concentrate on what is probable rather than what is possible. If you organized your life around things that might possibly happen to you, you’d probably never leave your house, and when you did, it would only be to buy a lottery ticket. Consider, on a drive to the supermarket, it is highly probable that you will get there, buy your groceries and get back home to unpack them without incident. But what’s possible? Almost anything—it’s possible a plane flying overhead could lose an engine falling directly on your car and instantly killing you. It’s possible another car runs a red light and kills you on impact. It’s possible that It’s possible that you get carjacked and your assailant kills you in the process. You get the point—anything is possible buy highly improbable. It’s only when you think in terms of probability that you will get in your car and go, yet few investors do so when making investment decisions. Our brains create cause and effect narratives after something has occurred that seem to make sense, however improbable the event. Witness anyone who invested in the stocks with the highest sales gains after a great short-term run.

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Relative Strength Spread

January 12, 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 1/11/16:

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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Weekly RS Recap

January 11, 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 (1/4/16 – 1/8/16) is as follows:

ranks

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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Q4 Manager Insights

January 7, 2016

Despite a decent fourth quarter, global equity markets had a volatile year in 2015.  U.S. and global equities both finished the quarter with solid gains.  After the summer correction in the S&P 500, U.S. stocks snapped back quickly.  This was a surprise to many investors who were looking for the end of one of the longest bull markets on record.  After the snapback, equities treaded water and moved in a very tight trading range to close out the year.  Fixed Income (measured by the Barclay’s Aggregate Index) finished the fourth quarter down slightly, but held on to scrape a 0.55% gain for the year.  Commodities, led by oil, continued their sell off and were the worst performing class of the year.  The trouble in commodities also affected emerging markets, which finished the year down over -14%.

If you were left scratching your head and wondering why it was so difficult to make money in 2015 you are not alone!  According to data from Societe Generale, 2015 was the hardest year to make money in 78 years.  U.S. equities (measured by the S&P 500 Total Return Index) were the best performing major asset class, but only managed to squeak out a gain of 1.38% for the year.  That paltry gain was more than bonds, international equities, and short-term T-bills.  Way back in 1937 (despite what my kids say I was not around to witness that market!) short term treasuries were the best performing major asset class with a gain of only 0.3%.  Even in 2008, bonds were up over 20% so there was somewhere to make money.  This year’s environment was very difficult for hedge funds and for strategies that try to capitalize on major global trends.

Momentum and Relative Strength was a bright spot for the year.  We noticed that more focused (i.e., focused on one specific market) and concentrated (i.e., fewer holdings) strategies performed better.  For example, a concentrated U.S. equity momentum strategy did much better than a strategy with a large number of holdings or a strategy that was invested in multiple asset classes.  It was also advantageous to have a momentum overlay combined with other factors.  Value strategies didn’t fare well in 2015, but value stocks that also had good momentum did very well.  A lot of the momentum outperformance this year came from what momentum strategies avoided rather than what they held.  When we looked at the performance of the S&P 500 industry groups and broke them into quintiles (based on a monthly rebalance), the top four quintiles all had similar performance for the year.  The performance of the bottom quintile, however, was dreadful.  That quintile was made up mainly of Energy and Basic Materials groups.  It is rare to see one group underperform the other four groups by such a large margin (over -13%) for the year.

The Federal Reserve finally took action and raised interest rates by 0.25% during the fourth quarter.  The move was long anticipated, but had been put off due to market volatility and concerns about the health of the global economy.  It is important to keep in mind that even with the hike, rates are still historically low.  We have seen some studies recently that show equities are not as affected as you might think until rates get up around 5%, and we are a long way from that now.  This may be more of a problem for the fixed income markets than equities, but only time will tell.

As the current bull market continues to age we expect a few things to happen we believe will be positive for our strategies.  First, you will begin to hear more cries that the market is “expensive.”  That usually affects valuation based strategies more than relative strength based processes.  Second, the market will continue to narrow.  That is natural and totally expected as the bull market matures.  A narrow market is very positive for our strategies because we can overweight the small pockets of strength that are performing well and avoid the areas that are weak.  As a result, we are encouraging people to take a look at their portfolios and overweight momentum relative to value.  If you have any questions about your allocations or the best way to get exposure to momentum strategies please call us at any time.

Information is from sources believed to be reliable, but no guarantee is made to its accuracy.  This should not be considered a solicitation to buy or sell any security.  Past performance should not be considered indicative of future results. Potential for profits is accompanied by possibility of loss.

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High RS Diffusion Index

January 6, 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 1/5/16.

diffusion

The 10-day moving average of this indicator is 59% and the one-day reading is 45%.

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

January 5, 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 1/4/16:

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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