Relative Strength Spread

August 19, 2014

The chart below is the spread between the relative strength leaders and relative strength laggards (universe of mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.    As of 8/18/14:

spread 08.19.14 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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Rebirth of Separately Managed Accounts

August 18, 2014

InvestmentNews on the strong growth of separately managed accounts:

A class of products that have been around for a long time are undergoing a rebirth: separately managed accounts, or SMAs.

The recent sales figures have been impressive. SMA market assets have bounced back to levels last seen before the financial crisis — more than $762 billion at year-end 2013, according to Cerulli Associates Inc., with one-year growth of 23.1%. Cerulli Associates projects growth rates in separate accounts of 11.3% to 12.2% in each of the next four years.

The success of SMAs lies in their advantages: customization, transparency, tax efficiency and professional management. They can also offer flexibility in fees and a high value perception for clients attracted by the cachet of owning a professionally managed strategy in a more exclusive wrapper.

The concept is easy to explain, one reason that SMAs are gaining traction with clients. They fill the needs of retail investors wealthy enough to invest $100,000, and in some cases as little as $50,000, who want to move beyond pooled vehicles like mutual funds into portfolios with individual security ownership that are actively managed by professional asset managers.

Customization is a key differentiator in the marketplace. SMAs can help financial advisers demonstrate they are listening to the individual needs of their clients. Each SMA can be tailored to meet specific needs and goals. When investing in SMAs, advisers and clients can express preferences or restrictions concerning strategies or individual stocks, which can give them a greater sense of control.

For this reason, they are particularly attractive to clients with specific investment guidelines, and those who require additional hand-holding from their adviser. Increased demand for environmental, social and governance portfolios is fueling momentum in SMA strategies that apply sustainability-focused ESG integration. A shift away from traditional style box investing to outcome-oriented solutions is also fueling the movement to SMAs, as investors express greater desire for products addressing income, longevity and volatility risk.

In the wake of the financial crisis, transparency has become even more important to clients. With SMAs, advisers and clients see their actual holdings. They also receive full details on fees. This level of transparency lets high-quality asset managers prove their worth.

SMAs also provide excellent vehicles to assess and balance tax liabilities. The run-up of the equity markets has created considerable tax implications for many investors. The fiscal condition of public budgets indicates that taxes are likely to increase, not decrease, and many investors are seeking tax advantages mutual funds do not offer. Within an SMA there are no unearned gains and often trades can be balanced to address tax loss and gain harvesting. That can be highly attractive to investors who have large taxable assets and want access to particular portfolio managers or investment strategies. SMAs can also help those who want to create benefits for charitable giving.

All of the points that are made in this article ring true to my experience as well.  Click here to see where our SMAs are currently available.

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Weekly RS Recap

August 18, 2014

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

Last week’s performance (8/11/14 – 8/15/14) is as follows:

perf ranks 08.18.14 Weekly RS Recap

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

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Buffett’s Drawdowns

August 15, 2014

Drawdowns of perhaps the world’s greatest investor, Warren Buffett:

Yesterday Warren Buffett’s Berkshire Hathaway stock price broke $200,000. Buffett’s performance over the years is an amazing feat.

Since 1980, when the price was in the $200-300 range, the stock has compounded at an annual rate of 21% per year. That’s good enough to double your money every three-and-a-half years.

But those returns didn’t always come easy to Buffett or his investors. There were times when his patient style of value investing was out of favor and the stock experienced large losses. Here are the biggest losses in Berkshire Hathaway stock since 1980:

buffett Buffetts Drawdowns

No way to earn the types of returns he has generated without taking some lumps along the way.

Source: Ben Carlson

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Top International Holdings

August 15, 2014

Among our SMA strategies that have been in highest demand this year has been our Systematic RS International portfolio.  Top holdings are shown below:

intl hldgs Top International Holdings

As of 7/31/14

Here is a quick overview of what these companies do (Source: Yahoo! Finance):

Bitauto Holdings (BITA): Bitauto Holdings Limited provides Internet content and marketing services for the automotive industry primarily in the People’s Republic of China.

Vipshop Holdings (VIPS): Vipshop Holdings Limited, through its subsidiaries, operates as an online discount retailer for various brands in the People’s Republic of China.

Gruma SAB de CV (GMK): Gruma, S.A.B. de C.V., through its subsidiaries, produces, and sells corn flour, wheat flour, tortillas, and other related products.

Empresa Distrib Comercializadora Norte (EDN): Empresa Distribuidora y Comercializadora Norte S.A., a public service company, is engaged in the distribution and sale of electricity in Argentina.

Seiko Epson (SEKEY): Seiko Epson Corporation, together with its subsidiaries, is engaged in the development, manufacture, and sale of information-related equipment, devices and precision products, sensing and industrial solutions, and others, as well as provision of related services.

Vestas Wind Systems (VWDRY): Vestas Wind Systems A/S engages in the manufacture and sale of wind turbines and wind power systems worldwide.

Pampa Energia SA (PAM): Pampa Energía S.A., together with its subsidiaries, generates, transmits, and distributes electricity in Argentina.

Telekom SA Soc LTD (TLKGY): Pampa Energía S.A., together with its subsidiaries, generates, transmits, and distributes electricity in Argentina.

YFP SA (YFP): YPF Sociedad Anónima, an energy company, is engaged in the exploration, development, and production of crude oil, natural gas, and liquefied petroleum gas (LPG) in Argentina.

Sysmex (SSMXY):  Sysmex Corporation, together with its subsidiaries, engages in the research and development, production, sale, service, and support of diagnostic instruments, reagents, and software worldwide.

To receive a fact sheet for the strategy, please e-mail andyh@dorseywright.com or call 626-535-0630.

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. A list of all holdings for the past 12 months is available upon request.

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Sector Performance

August 15, 2014

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 8/14/14.

sector 08.15.14 Sector Performance

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

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Fund Flows

August 14, 2014

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

ici 08.14.14 Fund Flows

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

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Quote of the Week

August 13, 2014

Pre-commitment to a rational investment plan is important, because the intuitive impulse to act otherwise is strong. —Shlomo Benartzi

Understated quote by Shlomo Benartzi, but essential for investment success.

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Can You See the Future?

August 13, 2014

A key excerpt from Andrew Ang’s book Asset Management: A Systematic Approach to Factor Investing:

Investors must use past data to estimate inputs for optimization problems.  But many investors simply take historical averages on short, rolling samples.  This is the worst thing you can do.

In drawing all of the mean-variance frontiers for the G5, or various subsets of countries, I used historical data.  I plead guilty.  I did, however, use a fairly long sample, from January 1970 to December 2011.  Nevertheless, even this approximately forty-year sample is relatively short.  You should view the figures in this chapter as what has transpired over the last forty years and not as pictures of what will happen in the future.  As the investment companies like to say in small print, past performance is no guarantee of future returns.  The inputs required for mean-variance investing—expected returns, volatilities, and correlations—are statements about what we think will happen in the future.

Using short data samples to produce estimates for mean-variance inputs is very dangerous.  It leads to pro-cyclicality.  When past returns have been high, current prices are high.  But current prices are high because future returns tend to be low.  Thus, using a past data sample to estimate a mean produces a high estimate right when future returns are likely to be low.  These problems are compounded when more recent data are weighted more heavily, which occurs in techniques like exponential smoothing.

Mean-variance optimization (a darling of financial theory) works just fine when you can accurately predict returns, volatilities, and correlations.  But, if you can’t (or should I say when you can’t), mean-variance optimization is useless.  As Ang points out, simply taking historical averages “is the worst thing you can do.”  Alas, coming up with the optimal asset allocation that will allow us to create wonderful returns with a small amount of volatility is comforting to wish for, but real life is much messier than the theory.

Trend following may, admittedly,  be somewhat simple (although as John can attest, the computer programming required isn’t for simpletons).  But, the only question that ultimately matters is does it work.  Click here and here for some material to help answer that question.

Past performance is no guarantee of future returns.  A 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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DWA ETFs

August 13, 2014

Shown below are Point & Figure charts of the 16 ETFs for which Dorsey Wright & Associates is the index provider (as of 8/13/14):

pdp1 DWA ETFs

dwas1 DWA ETFs

dwaq1 DWA ETFs

piz1 DWA ETFs

pie1 DWA ETFs

pez1 DWA ETFs

pfi1 DWA ETFs

prn chart DWA ETFs

psl1 DWA ETFs

ptf1 DWA ETFs

pth1 DWA ETFs

pui1 DWA ETFs

pxi1 DWA ETFs

pyz1 DWA ETFs

fv1 DWA ETFs

ifv1 DWA ETFs

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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When Ignorance May Not Be Bliss

August 12, 2014

In case there was any question about whether or not investors need advice (Forbes):

The stock market was up 30% in 2013, but if you’re like most investors, that’s news to you.

A new Gallup survey shows that nine out of ten people are unaware that the stock market climbed 30% last year. Most believe that stocks performed well, just not that well — 17% say stocks increased 20% and 37% say stocks increased 10%. Three out of ten people thought stocks stayed the same or decreased.

Investors Estimates of 2013 When Ignorance May Not Be Bliss

The bull market is well into its fifth year, but many Americans haven’t reaped the gains.

Just 52% of Americans were invested in the stock market last year, down from 62% in 2008, according to a previous Gallup survey.  Another study pegs equity allocations at their lowest levels over the last half century. This includes workers who own equities through money invested in a 401(k) or other retirement account.

“Every bull market, such as the one the country is now experiencing, has the bear’s shadow hanging over it. And that shadow tends to grow bigger and darker with every additional month of market gains,” notes Gallup.

What if investors were handed $10,000 to save or invest now?  Just 41% would put it in the stock market, while 36% would keep it in cash and 20% would buy a CD.

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Relative Strength Spread

August 12, 2014

The chart below is the spread between the relative strength leaders and relative strength laggards (universe of mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.    As of 8/11/14:

spread 08.12.14 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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Systematic RS Int’l: Risk-Adjusted Returns

August 11, 2014

Are you getting paid for the risk that you are taking?  There are a number of statistics that are designed to help an investor make that evaluation for any given strategy.  Sharpe ratio, which measures unit of return per unit of standard deviation can be helpful in this regard.   In the case of our Systematic RS International portfolio (available as a separately managed account), evaluating the Sharpe ratio, in addition to standard deviation and annualized returns can be helpful.  Looking at the statistics below one can see that the Systematic RS International (Net) has outperformed the MSCI EAFE Index by 5.58% annually since its inception date of March 31, 2006.  However, one would also note that the standard deviation (volatility) of the Systematic RS International portfolio has been 4.42% higher than the MSCI EAFE.  Do those excess returns justify the higher volatility?

intl stats1 Systematic RS Intl: Risk Adjusted Returns

Source: Dorsey Wright.  Click here for disclosures.

Add to those statistics the fact that the Sharpe ratio for the Systematic RS International portfolio has been nearly double that of the MSCI EAFE since March 31, 2006 and I would suggest that the answer is yes to the question of whether or not an investor is getting adequately compensated for the risk taken in this portfolio.

sharpe ratio1 Systematic RS Intl: Risk Adjusted Returns

The statistics above are based on total price returns, inclusive of dividends and transaction costs.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

Performance since inception is shown below:

perf intl Systematic RS Intl: Risk Adjusted Returns

E-mail andyh@dorseywright.com or call 626-535-0630 to receive a fact sheet for this portfolio.

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. Definition of statistical terms: Performance: Net annualized performance. Volatility: Annualized standard deviation. Standard deviation shows how much variation or dispersion exists from the average value. Beta: A measure of systematic or market-related risk. Alpha: A measure of non-market return associated with the portfolio. See Modern Portfolio Theory for more information. Correlation: Compresses covariance into a range of +/- 1. A negative correlation indicates an inverse relationship whereas a positive correlation is indicative of a direct relationship. Annual turnover: An annualized measure of the percentage of the portfolio that was traded. 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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Diversification by Style Box or by Risk Factor?

August 11, 2014

Andrew Ang, in his new book Asset Management: A Systematic Approach to Factor Investing, identifies a key obstacle for many wealthy investors–specifically business owners—who liquidate and then look to invest those assets in the financial markets:

It can be counterintuitive for rich individuals to realize that preserving wealth involves holding well-diversified portfolios that have exposure to different factor risk premiums.  They created their wealth by doing just the opposite: holding highly concentrated positions in a single business.

We’ve probably all heard someone make the case against diversification by saying something along the lines of, “My plan has been to put all my eggs in one basket and to watch that basket very closely!”  However, at some point most people have a desire to diversify their risks.

Two of the most rigorously tested risk factors are momentum and low volatility.  Compelling research suggests that both factors have demonstrated the ability to outperform over time and these two factors have the added benefit of having a relatively low correlation to one another.  For example, consider the correlation of the PowerShares DWA Momentum ETF (PDP) and the PowerShares S&P 500 Low Volatility ETF (SPLV) since 2011, the inception for SPLV.

correlations1 Diversification by Style Box or by Risk Factor?

Source: Yahoo! Finance and iShares.  The correlations above are based on monthly total returns, inclusive of dividends, but not inclusive of transaction costs.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  

While much of the industry is still focused on seeking diversification between style boxes, I believe investors would be better served to start focusing on diversification between risk factors, like momentum and low volatility.   As you can see, there has been much lower correlation between PDP and SPLV than there has been between Growth and Value over this time.

Dorsey Wright & Associates is the index provider for the PowerShares DWA Momentum ETF (PDP).

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Weekly RS Recap

August 11, 2014

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

Last week’s performance (8/4/14 – 8/8/14) is as follows:

avg 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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Sector Performance

August 8, 2014

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 8/7/2014.

sector 08.08.14 Sector Performance

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

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July Arrow DWA Funds Review

August 8, 2014

7/31/2014

The Arrow DWA Balanced Fund (DWAFX)

At the end of July, the fund had approximately 40% in U.S. equities, 27% in Fixed Income, 22% in International equities, and 11% in Alternatives.

We had one change in July—replaced a position in Netherlands with Taiwan.  The addition of Taiwan is the first signs of Emerging markets starting to come back into the fund.  Developed international markets have been stronger than Emerging markets for quite some time, but that is showing some signs potentially changing.  For the month, our best performing holdings were Technology, Real Estate, and Healthcare, while much of our exposure to Europe was a drag.  If we continue to see weakness in our International equity holdings, this could be an area where we see more changes in the coming weeks.

DWAFX lost 2.46% in July, and is up 0.27% YTD through 7/31/14.

We believe that a real strength of this strategy is its balance between remaining diversified, while also adapting to market leadership.  When an asset class is weak its exposure will tend to be towards the lower end of the exposure constraints, and when an asset class is strong its exposure in the fund will trend toward the upper end of its exposure constraints.  Relative strength provides an effective means of determining the appropriate weights of the strategy.

dwafx July Arrow DWA Funds Review

The Arrow DWA Tactical Fund (DWTFX)

At the end of July, the fund had approximately 89% in U.S. equities and 9% in Real Estate.

We had a couple of trades in July—sold two of our European equity positions and Agricultural Commodities and bought Large Cap Growth, a Dividend fund, and Real Estate.  The declining relative strength of U.S. Small Caps has been one of the key changes in the fund so far this year.  We came into 2014 with 30 percent exposure to U.S. Small Caps, but now have zero.  The purchases this month reflect the continued relative strength improvement of  U.S. Large Caps.  In July, our Healthcare position and a couple of our other Large Cap  positions held up relatively well, while some of our Mid Cap and European equity positions were a drag on the portfolio.

DWTFX lost 3.12% in July, and is down 0.68% YTD through 7/31/14.

This strategy is a go-anywhere strategy with very few constraints in terms of exposure to different asset classes.  The strategy can invest in domestic equities, international equities, inverse equities, currencies, commodities, real estate, and fixed income.  Market history clearly shows that asset classes go through secular bull and bear markets and we believe this strategy is ideally designed to capitalize on those trends.  Additionally, we believe that this strategy can provide important risk diversification for a client’s overall portfolio.

dwtfx July Arrow DWA Funds Review

A list of all holdings for the trailing 12 months is available upon request.  Past performance is no guarantee of future returns.  These relative strength strategies are NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  See www.arrowfunds.com for a prospectus.

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Bullish Sentiment Dissipates–Again

August 7, 2014

From Bespoke Investments Group comes a reminder of the continuing skittishness of investors:

One thing that investors have been able to count on during this bull market is that whenever equities run into trouble bulls scatter and bears come out of the woodwork.  Given the recent market weakness, that has once again been the case this week.  Following the worst week for equities in over two years, bullish sentiment on the part of individual investors dropped and bearish sentiment spiked.  According to the weekly survey of investor sentiment from the American Association of Individual Investors (AAII), bullish sentiment dropped from 31.12% down to 30.89%.  While that was just a marginal decline, as you can see in the chart, it is still down sharply from where it was in early July.

a Bullish Sentiment Dissipates  Again

Meanwhile, the magnitude of the move in bearish sentiment was much greater.  Compared to last week’s reading of 31.12%, bearish sentiment rose over 7 percentage points this week to 38.23%.  That is the highest level of bearish sentiment in nearly a year (8/22/13).  With bullish sentiment now exceeding bullish sentiment by 7.34 percentage points, this is only the second time this year that bears have outnumbered bulls.

b Bullish Sentiment Dissipates  Again

It seems that every time the market drops a few percent, bullish sentiment dissipates.  In a secular bull market, which we may very well be in, that type of knee-jerk reaction can be costly.

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Fund Flows

August 7, 2014

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

ici 08.07.14 Fund Flows

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

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Systematic RS Growth

August 6, 2014

“How do you manage risk?”    Not surprisingly, this continues to be one of the first questions out of investors mouths as they consider any strategy.  Even with the last five years providing one of the strongest bull markets in history, investors vividly remember the pain of the last two bear markets.

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:

cash Systematic RS Growth

Source: Dorsey Wright.  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 net Systematic RS Growth

growth annual Systematic RS Growth

growth perf Systematic RS Growth

As of 7/31/14

Click here for a fact sheet or contact Andy at 626-535-0630 or andyh@dorseywright.com with questions.  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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Quote of the Week

August 6, 2014

Via Michael Covel, an excerpt from James O’Shaughnessy’s book What Works on Wall Street:

Models beat the human forecasters because they reliably and consistently apply the same criteria time after time. In almost every instance, it is the total reliability of application of the model that accounts for its superior performance. Models never vary. They are always consistent. They are never moody, never fight with their spouse, are never hung over from a night on the town, and never get bored. They don’t favor vivid, interesting stories over reams of statistical data. They never take anything personally. They don’t have egos. They’re not out to prove anything. If they were people, they’d be the death of any party.

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High RS Diffusion Index

August 6, 2014

The chart below measures the percentage of high relative strength stocks that are trading above their 50-day moving average (universe of mid and large cap stocks.)  As of 8/5/14.

diffusion 08.06.14 High RS Diffusion Index

The 10-day moving average of this indicator is 55% and the one-day reading is 34%.  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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DWA ETFs

August 5, 2014

Shown below are Point & Figure charts of the 16 ETFs for which Dorsey Wright & Associates is the index provider (as of 8/5/14):

pdp DWA ETFs

dwas DWA ETFs

dwaq DWA ETFs

piz DWA ETFs

pie DWA ETFs

pez DWA ETFs

pfi DWA ETFs

prn chart DWA ETFs

psl DWA ETFs

ptf DWA ETFs

pth DWA ETFs

pui DWA ETFs

pxi DWA ETFs

pyz DWA ETFs

fv DWA ETFs

ifv DWA ETFs

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Relative Strength Spread

August 5, 2014

The chart below is the spread between the relative strength leaders and relative strength laggards (universe of mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.    As of 8/4/14:

spread 08.05.14 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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Risk Aversion in Squirrels (And Humans)

August 4, 2014

Who knew we had so much in common with squirrels!  Bob Seawright has a fun summary of a study of squirrels that tried to find out what causes a squirrel to flee.  After all, we’ve all had the experience of walking right by a squirrel and they don’ t seem to be the least bit bothered.  However, make eye contact with a squirrel and off they go.  Read his whole article for the methods of the study, but the key conclusion are as follows:

The key point is that it makes a big difference whether or not people are looking at the squirrels, although staying on the footpaths also keeps them calmer. In truly dreadful scientific prose that tries desperately to sound authoritative, the researchers conclude as follows:

“We have identified cues that are likely to be important for risk perception by an urban animal species monitoring its environment. Together with direction of attention of people, urban squirrels were more reactive to pedestrians that showed a divergence from ‘usual’ behaviour (e.g. pedestrians entering areas which are usually human-free), even when not associated with closer approach or changes in speed. In addition to being arboreal (which can include use of anthropogenic structures), which minimizes vulnerability to diurnal terrestrial ‘predators’ (see Herr, Schley & Roper, 2009), general trophic and social flexibility (Baumgartner, 1943; Don, 1983; Koprowski, 2005) may help explain why eastern grey squirrels are successful urban adapters.”

What they mean is that squirrels pay attention to unusual human behavior and eye contact. When they see them, they bolt.

Seawright then skilfully makes the connection to investor behavior:

These squirrels are a pretty good metaphor for us, but perhaps not in the way we might expect. Squirrels, like humans, are highly risk averse. We humans feel a loss two to two-and-a-half times more strongly than we feel a comparable gain. In the wild, that makes perfect sense. If the squirrels run away too readily, they may lose a nut or two, but little else. But if the varmint sticks around too long, it can get eaten by a predator. That’s a loss that is permanent and unrecoverable.

We are remarkably like squirrels. If markets are behaving as we expect, we’re fine. When they deviate from what we expect, we get concerned and pay special attention, ready to flee. And when we spend too much time looking head-on at what’s going on (as when the squirrels’ and the observers’ eyes meet in sweet communion)—perhaps checking our accounts online every day or, heaven forbid, watching one of the “business” channels, we tend to trade (read “bail”) far too often.

The research bears this tendency out. And, sadly, the professionals tend to flee as readily as their clients. The metaphor is a bit mixed, but if we have a good plan in place (a crucial “if”) and when the markets are wild, we’d be wise to “avert our eyes” and stay calm.

In the investment world, being too skittish—bailing out of the markets too readily—is generally much more dangerous to our success than holding on too long, especially when the applicable time horizon is a relatively long one. Staying the course through tough times requires that we deal with immediate pain for far-off gain, which is always very difficult for us. That makes this sort of situation that much tougher.

“Averting our eyes” only makes sense if we have a good plan in place.  That is the value of consulting with a competent financial advisor.  But, if that is in place, behaving like a squirrel is likely to end in disappointment.

squirrel Risk Aversion in Squirrels (And Humans)

Source: ThinkAdvisor.com

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