Five Likely Prospects for Global Macro

October 31, 2014

With the recent launch of the Arrow DWA Tactical ETF (DWAT), which tracks our Global Macro strategy, we wanted to provide some ideas for some types of clients that are likely to be good prospects for the strategy.  (Global Macro is now available as an ETF (DWAT), a mutual fund (DWTFX), as a SMA, and as a UMA (Wells Fargo Masters and DMA platforms).

“I love my Pie…Until I don’t” Guy

Strategic asset allocation seemed like such a prudent way to invest for this client.  That is, until he noticed that his allocations to the different asset classes didn’t change much.  Yes, he had exposure to U.S. Large, Mid, and Small equities, Developed and Emerging Market Equities, Fixed Income, and a sliver of Commodities.  Yet, the exposure remained approximately the same in 1999, 2000, 2001, 2002….  And, yes, it remained approximately the same during the financial crisis of 2008-2009.  This client has become increasingly aware of the fact that asset classes go through bull and bear markets and has asked you about what options there may be to be more flexible.

“Small Account with Big Expectations” Guy

You took the client on, even though he only had $100,000.  Normally, your target client has $1 million or more in investable assets, but this client was a friend of one of your best clients.  No way to turn this one down.  However, this smaller client is well aware of the level of service that you provide your clients.  He is aware of your commitment to being a craftsman in the Dorsey Wright methodology and he expects the same level of service that he has heard so much about.  It is also in your DNA to do the very best job that you can for every one of your clients.  While this small account might not be big enough to justify the time that you provide your bigger clients, DWAT will allow you to employ a methodology that you are comfortable with and that resembles the methodology that you use with all of your clients.  Furthermore, when you speak to this smaller client it will be natural for you to explain the current exposure in the ETF and what types of asset class leadership you are currently seeing in the market.

“I love hedge funds, but not 2/20” Guy

This guy loves the concept of flexibility.  He loves the idea of active management.  He loves the idea of risk diversification.  However, he doesn’t like lock-up periods, high minimums, high fees, and no transparency.  Global Macro, aka the Arrow DWA Tactical ETF (DWAT), provides a welcomed alternative.  DWAT offers transparency, intra-day liquidity, and much lower fees.

“Shell-Shocked” Guy

This guy makes the Dalbar numbers what they are.  He buys high and he sells low.  After the financial crisis he moved the bulk of his assets into bonds.  He hasn’t lost money, but he has sure missed out on the spectacular gains in the equity markets.  However, he is afraid he is about to repeat his old mistakes.  He looks at the current holdings of DWAT and sees the heavy overweight to U.S. equities.  He has been expecting “the other shoe to drop” for years now and is afraid of another major bear market.  However, this client is thrilled when he learns of the adaptive nature of relative strength.  Frankly, he is tired of trying to forecast the markets.  He finds comfort that in learning that DWAT is a trend following strategy that has the ability to get very defensive in major bear markets.  He is also now aware that part of risk management is participating in good equity markets and he likes the idea that this strategy will force him into asset classes that may not feel good to him, but that are favored from a relative strength perspective.

“Value Investor” Guy

This client is all about value.  His favorite store is Wal-Mart and he only buys his suits on clearance.   And he loves his value managers.  In fact, the bulk of his portfolio is invested in strategies where the managers scour the globe for opportunities “where the market price is below intrinsic value.”  However, he is not fond of the extended periods of time when value can be out of favor.  He gets a rush off the first leg of new bull markets when his value managers tend to rocket off the bottom, but during the trend continuation phase of the market he gets antsy.  When you explain to him that there is something called relative strength that tends to have a low correlation to value, he shows interest.  With the addition of DWAT to his portfolio, he feels a much greater sense of diversification…even if he is still a value guy.

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

Posted by:


Commodities Corner: Cocoa Prices Displaying Signs of Weakness

October 28, 2014

In a recent blog post we discussed the agricultural markets (corn, soybeans, & wheat) were beginning to exhibit improving relative strength characteristics when compared to their peers within the commodities sector.  In this post, we will visit the exact opposite scenario and take at one of the soft commodities which is beginning to display signs of weakening relative strength.

Although not the most commonly discussed market, Cocoa futures have actually outperformed the majority of its peers (exceptions being Feeder Cattle, Live Cattle, & Zinc) over the last 9 months.   In fact, the year to date performance (as of 10/27) is up 8.42%.   However, as we mentioned above, recent technical developments are starting to show signs that this out performance may be coming to an end.  We will keep consistent with our theme of looking at traditional point & figure charts to determine if any of the recent developments may give us an idea what the current supply & demand characteristics are saying.

Point & Figure:  Cocoa (Dec 14 – CC/Z4)

The point and figure chart below displays a spread triple bottom break which was confirmed when Dec ’14 Cocoa futures were unable to find a bid at the previous area of demand near the 3080 level.  Once price traded below the 3060 level, a new box was formed and confirmed the pattern which currently has a measured move target down at the 2740 level.  Let’s think about that in terms of supply & demand.   On the two previous attempts the market found a firm bid near the 3080-3060 level and held firm.  On the most recent attempt, those same market participants did not show up as they have before and the supply (sellers) of the cocoa market overwhelmed the demand (buyers).  Thus far the sell signal has been working quite well, with Cocoa futures trading sharply lower over the past 2 sessions and briefly touching levels not seen since May 2014.   This is an example of a market which had been outperforming the majority of its peers and is now beginning to display signs of losing relative strength within the commodities asset class.

ccz4 300x218 Commodities Corner:   Cocoa Prices Displaying Signs of Weakness

Conclusion:

The above blog post provides some insight on using traditional point and figure charts to help identify markets which were once outperforming the majority of their peers but is now showing signs of weakness.   In the case of Cocoa futures, the spread triple bottom break which was confirmed on the move through 3060 as thus far ushered a sharp move lower.    Time will tell if the measured move target of 2740 is met or not, but one thing we can confirm is that the supply & demand picture for cocoa prices has recent shifted in favor of the bears.

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

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

Posted by:


Relative Strength Spread

October 28, 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 10/27/14:

spread 10.28.14 Relative Strength Spread

There has been a lot of volatility in this index over the last month, but it has snapped back and is above its 50 day moving average.

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. 

Posted by:


From Gut Instinct to Repeatable Processes

October 27, 2014

As the saying goes, “the only constant is change.”  That very much applies to investors as a group who are largely taking a different approach to selecting investments than in the past and it goes a long ways towards explaining the growth of Smart Beta ETFs.  Specifically, today’s investors are placing much less emphasis on gut instinct and much more on science and mathematics.  From Josh Brown (Fortune):

Individual investors have also helped foster the idea of “smart beta”, which in previous eras we’ve referred to as factor investing—the isolation and selection of stocks with specific characteristics, like high dividends or superior earnings quality. While you haven’t shown much interest in stock picking, you’ve clearly demonstrated a desire to own stocks that have the ability to outperform the market. The difference is that you prefer to go about this pursuit systematically rather than follow the calls of gurus or Wall Street’s analysts. This shift is a fitting analog for what’s happening in the outside world, a growing belief in processes that are repeatable, an emphasis on science and mathematics over art and gut instinct. In the last few years, retail investors pushed an astounding $382 billion toward smart beta index ETFs from such purveyors as WisdomTree, Invesco Powershares, and the AlphaDex series from First Trust.

Furthermore, it has been well documented that investor greed has been slow in returning after the financial crisis of 2008-2009.   I have spoken with very few advisors in recent years who have noted that they are seeing much excitement about the stocks market from their clients–even though the stock market has produced rather spectacular gains over the past five years.  Again, I think Brown’s observations are on point:

The data is incontestable; you’re back in the market, even if you are reluctant about the decision.

You’re investing by rote these days, adding to index products while tuning out anything with even a whiff of the old stock market fever from the bull markets of the past. And you’re willing to entertain the possibility of market-beating returns, so long as the discussion is couched in the terminology of passive investing. Where possible, you’re opting for low-cost and low-conflict over pricey and high-minded.

There’s a lack of enthusiasm for investing in the modern era, but no lack of dollars coming into investment accounts. This reticence, I should add, comes despite one of the longest bull markets for stocks and corporate bonds in history—five years, seven months and counting.

There are no stock market heroes, no mutual fund kings, and zero new investing celebrities. The closest we come to anything like that would be Carl Icahn and Warren Buffett, who, at 78 and 84 years old respectively, are hardly what you’d call Tiger Beat material. Financial television ratings are at two-decade lows even as the percentage of your financial assets invested in the stock market are at 15-year highs.

As for our place in this move toward Smart Beta ETFs, we partnered with PowerShares over seven years ago to bring to market the first Momentum ETF (PowerShares DWA Momentum ETF, PDP).  Some data points that speak to the success and growing acceptance of Momentum ETFs:

  • PDP now has $1.3 billion in AUM
  • PDP has outperformed the S&P 500 in 6 of the last 7 years
  • Dorsey Wright has been hired to be the index provider for an additional 16 ETFs
  • The body of knowledge of Momentum continues to expand, including this recent white paper by our own John Lewis

For those of you who are users of PDP or any of our other Momentum strategies—thank you!  For those who may be considering adding it to your portfolios, the technical picture for PDP is shown below.  It remains in a positive trend and is currently just a few percentage points from breaking out to a new buy signal:

pdp1 From Gut Instinct to Repeatable Processes

Source: Dorsey Wright, 10/27/14

Fascination with the “star manager” seems to be fading and in its place there is growing demand for repeatable processes.  The move to more systematic investment strategies plays right into the hands of an advisor who is well-versed in different Smart Beta strategies, and we believe that Momentum is one of the best in this category.

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

Posted by:


Tweet of the Week

October 27, 2014

wesbury Tweet of the Week

Sometimes (all the time in our case) it is best to not to overthink things and to just systematically follow the trends.

Posted by:


Weekly RS Recap

October 27, 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 (10/20/14 – 10/24/14) is as follows:

ranks 10.27.14 Weekly RS Recap

More like that, please.

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. 

Posted by:


Sector Performance

October 24, 2014

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 10/23/14.

sector 10.24.14 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

Posted by:


Stock vs. Company

October 23, 2014

Former Microsoft CEO, Steve Ballmer: During time that our market cap went from $500 billion to $200 billion our profit tripled from $9 billion to $28 billion.  Start watching at the 33:18 mark.

Good reminder that there can be a difference (sometimes very large!) between the stock and the company.

msft Stock vs. Company

Source: Yahoo! Finance

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

Posted by:


Commodities Corner: Agricultural Markets Finding Demand

October 23, 2014

It’s no secret the majority of commodities markets have had a very tough year.   Some of the hardest hit sectors have been the energies, grains, and metals markets.     Over the last 9 months,  some of these markets are down as much as 16%.   Let’s think about that for a second and compare this to the performance of the S&P 500 which is up 6%.   We can get a fairly good idea of where the relative strength has been among asset classes just by stating those figures!

At Dorsey Wright, we use a systematic based investing process focused on relative strength to help minimize our exposure to the under-performing asset classes around the world.  This has allowed us to limit our exposure towards commodities,  while maintaining exposure towards the stronger performing asset classes around the globe such as US Equities.    However, this isn’t to say that down the road the commodities sector won’t come back into favor and having the ability to rotate back into this area should the tide turn is an added benefit of being a tactical investor.

Although the relative strength readings for the majority of commodities remain very weak, it’s worth noting some recent technical developments in the grain markets may be a sign the supply & demand relationship in the agriculture sector may be changing in favor of the bulls for the short term.  We will discuss this in further detail below.

Corn Futures (Dec ’14):  Point & Figure

In taking a look at the below point & figure chart chart, we can see there have been some positive developments which recently occurred on the Dec ’14 Corn chart.  The triple top spread break out which was confirmed with the move above $3.60 currently has a measured move target of $3.96.  Time will tell whether or not this target is achieved, but the ability of the market to take out overhead supply which had been rejected on two previous attempts is worth monitoring.

corn dec1 300x150 Commodities Corner:   Agricultural Markets Finding Demand

Soybean Futures (Jan ’15):  Point & Figure

A similar technical development also recently occurred  on the  Jan’15 Soybeans chart.  The double top break out which was confirmed with the move above $9.84 and currently has a measured move target of $10.60.   Again, this re-enforces the idea that the supply of the market which had previous rejected prices has been overcome by demand in the short term.

SF5 300x167 Commodities Corner:   Agricultural Markets Finding Demand

Wheat Futures (CBOT – Dec ’14):  Point & Figure

To round things out, lets take a look at the point & figure chart of CBOT Wheat to see if a similar situation has developed like it did in both corn and soybeans.   Sure enough, a double top break out was recently confirmed with a move above $5.15.   The measured move price target is currently $5.80.

wheat 300x173 Commodities Corner:   Agricultural Markets Finding Demand

Conclusion:

Above we have discussed some of the recent positive development on the traditional point and figure charts for a few of the commodities within the agricultural sector.   In a beaten down asset class such as commodities, this may be a sign that pockets of relative strength are beginning to show up in corn, soybeans, & wheat when compared to other peers within the commodities asset class.  The ability to gain exposure towards these sectors should their relative strength readings continue to improve is just another example in the benefits of following a tactical investment methodology.

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

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

Posted by:


DWA ETFs

October 23, 2014

Shown below are Point & Figure charts of the 17 ETFs for which Dorsey Wright & Associates is the index provider (as of 10/23/14):

PowerShares

pdp DWA ETFs

dwas DWA ETFs

dwaq DWA ETFs

piz DWA ETFs

pie DWA ETFs

pez DWA ETFs

pfi DWA ETFs

industrials DWA ETFs

psl DWA ETFs

ptf DWA ETFs

pth DWA ETFs

pui DWA ETFs

pxi DWA ETFs

pyz DWA ETFs

First Trust

fv DWA ETFs

ifv DWA ETFs

Arrow Shares

dwat 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.

Posted by:


What scares you the most financially?

October 22, 2014

With Halloween right around the corner, we’re going to get financially spooky.  What scares you the most financially?  From the conversations I have  had with both financial advisors and individual investors, here are the top concerns that I hear:

  1. How would my portfolio handle another 2008?
  2. How long can this bull market go?  Is it time to reduce my equity exposure?
  3. Will I have enough money in retirement?

While the imaginary ghosts and goblins of Halloween are all in good fun and contribute to the celebration, the very real fears of the financial markets are based on experience.  This generation of investors is never going to forget the pain (financial and emotional) that they suffered in the last two major bear markets.  Those experiences will inform their investment decisions for the rest of their lives.  Does that mean that they will always choose the most conservative (and potentially the lowest-returning) investments?  No, but I do think that risk management will be top on their priority list for a very long time.

That creates an enormous opportunity for the financial advisor who is capable of building a well-designed asset allocation that places a priority on risk management.  Advisors who employ Dorsey Wright research have a number of tools to help them with that task, including D.A.L.I. (Dynamic Asset Level Investing).  For those advisors looking for a turn-key Tactical Asset Allocation solution, our Global Macro strategy is a good option.  This continues to be the Dorsey Wright strategy with the most assets under management and which continues to generate the most interest.  A brief primer of the strategy is given below:

The Dorsey Wright Systematic RS Global Macro strategy provides broad diversification across markets, sectors, styles, long and inverse domestic and international equities, fixed income, currencies, and commodities using Exchange Traded Fund (ETF) instruments.The strategy holds approximately ten ETFs that demonstrate, in our opinion, favorable relative strength characteristics.  This strategy is uniquely positioned from an investment opportunity perspective because it is not limited to a specific market. This allows for the efficient allocation of money globally to opportunities where we believe potential returns are particularly compelling.

The exposure to different asset classes in Global Macro is designed to be flexible, as shown in the following diagram:

bw093014 assetrange What scares you the most financially?

A sample aggressive allocation of the strategy might be as follows:

Sample Aggressive1 What scares you the most financially?

While a sample conservative allocation of the strategy might be as follows:

Sample Conservative1 What scares you the most financially?

There are many more potential allocations of the Global Macro strategy than are shown in those two samples, but it should give you an idea of how the portfolio has the flexibility to adapt to different environments.

This same Global Macro strategy can be accessed in a number of different ways:

  • Separately Managed Account: Global Macro is available on over 20 different platforms
  • Unified Managed Account: This strategy is available on the Wells Fargo Masters and DMA platforms
  • Mutual Fund: Since August 2009, this strategy has been the underlying model used to manage The Arrow DWA Tactical Fund(DWTFX)
  • Exchange Traded Fund: Investors can also now access the Arrow DWA Tactical strategy in an ETF (DWAT)

Being able to provide guidance to fearful investors is a key element of being a successful financial advisor.  With Dorsey Wright research and managed portfolios, like Global Macro, advisors can be well-prepared to offer solutions to their clients.  Investors want flexibility, risk management, and diversification. They want to make money, but they want to do it in a prudent way. This strategy is designed to be that solution.

For questions about this portfolio, please e-mail andy@dorseywright.com or call 626-535-0630.

The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value.  These examples are presented for illustrative purposes only and do not represent a past recommendation.

Posted by:


Global Equity Indices: Trendlines, Trendlines, Trendlines

October 22, 2014

Recent declines in global equity indices throughout much of August – mid October seemed to create a panic throughout much of the financial media.    It is this exact reason that at Dorsey Wright we believe having a systematic based process allows us to remove the human emotion and keep a consistent game plan when markets get turbulent.

One of the most simplistic ways in helping monitor supply & demand developments on traditional point & figure charts is keeping an eye on how price reacts when long term trendlines are approached.   Keep in mind, where as many technical analysis methods draw trendlines in numerous ways, the point & figure methodology adheres to a much more strict process on when and where they can be drawn.   Furthermore, due to the way point & figure charts are constructed, each trendline can only be drawn at a 45 degree line.   This is an important concept to grasp because it keeps the idea of drawing trendlines more consistent than many other charting methods.

Remember,  trendlines aren’t necessarily producing a buy or sell signal (we use our RS matrices for these) but should a long term trendline be broken it would likely lead to a declining RS reading for that particular market.

Below we inserted traditional point and figure charts for the S&P 500, German DAX, and the MSCI Japan ETF (EWJ).   Given the fact these are three of the most commonly discussed equity markets in the world, we thought  it would be interesting to take a look at each one of them and discuss some recent technical developments.

SPX:  Point & Figure

We can see below how the recent declines in the S&P 500 tested the uptrend support line which has been intact for an extended period of time   This area of demand helped provide the market with an underlying bid which thus far has produced a very sharp rally from the lows.   Developments such as this can also be helpful in helping spot pockets of relative strength when compared to other global indices which are unable to find a bid at major support trend lines.

spx updated 300x244 Global Equity Indices:   Trendlines, Trendlines, Trendlines

German DAX:  Point & Figure

The German DAX chart shows a similar set up as the S&P 500.  The market no doubt experienced a sharp sell off, but nevertheless held the longer term uptrend line.  Another example of how keeping it simple can help investors stay the course and keep their longer term investment objectives in focus.   There is no doubt European equities have been an under-performer in 2014, but holding a major level such as this can be a near term positive.

DAX UPDATED 300x203 Global Equity Indices:   Trendlines, Trendlines, Trendlines

iShares MSCI Japan ETF

To round things out, lets take a look at one more global market (Japan) to see if it experienced a similar move.   In looking at the iShares MSCI Japan ETF (EWJ) below, we can see yet another major support trend line was tested and held on the previous pullback in equity prices.  This isn’t to say share prices of the EWJ haven’t experienced some downside volatility, but it does confirm the market (thus far) has been able to find a bid at an important level where demand has shown up in the past.

ewj updated 300x187 Global Equity Indices:   Trendlines, Trendlines, Trendlines

Conclusion:

The above charts are just a fair reminder of why we adhere to the investment concept of keeping it simple in order to stay the course and follow our game plan.   A systematic process which removes human emotion is a major benefit when it comes to following a consistent investment philosophy when markets get turbulent.  Certainly there were many global indices around the world that had similar set up’s (FTSE, DJ Euro STOXX50, and the CAC40) which were unable to hold there longer term uptrend lines.   It will be worth monitoring these markets going forward to see how their relative strength rankings compare to their peers which were able to hold their respective trendlines.   Similar to the price of most everything around the world, supply & demand are the factors which ultimately move stock prices!

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

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

 

 

Posted by:


High RS Diffusion Index

October 22, 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 10/21/14.

diffusion 10.22.14 High RS Diffusion Index

After reaching a 3-year low of 12% on 10/16/14, this index has rebounded sharply.  The 10 day moving average remains in deeply oversold territory at 27%.

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. 

Posted by:


AAPL: Approaching Key Supply – A Line In The Sand at $104.00

October 21, 2014

As most of our long time followers know, at Dorsey Wright we are interested in keeping our analysis as simple as possible when making investment decisions.   When it comes down to it, we believe it’s the supply & demand of the market which actually moves asset prices.   Our systematic approach to relative strength based investing allows us to remove human emotion from the investment process and apply a robust investment philosophy to the markets.  We believe this approach allows us to eliminate the day to day market “noise.” .

Yesterday, tech giant AAPL reported earnings after the close.   This created a buzz among financial news media as AAPL is often looked at as one of the most important leadership stocks in the NASDAQ.  We thought it would be interesting to take a look at the technical set up of the traditional point and figure chart too see if the current supply & demand of the market can give us any insight in how the stock will react to the recent earnings headlines.

AAPL:  Point & Figure Chart

A quick glance at the point and figure chart below and we can see just how important the  $104.00 level is in terms of supply and demand.   This is now a quadruple top area in which the bulls have been unable to take out on previous attempts.  Note also the previous double bottom sell signal which occurred on 10/15 and had a measured move price target of $88.00.  This is now looking more like a “bear trap”, but in order for the signal to be negated AAPL will need to trade above $104.00 to confirm the quadruple top break out mentioned earlier.     As we’ve stated in previous blog posts, with false moves also come fast moves.  Furthermore, the more often a level is tested and rejected (such as the quadruple top), the more energy this market is building should it eventually break out.   Time will tell if the bulls will be able to obtain this in the near future, but it is certainly worth keeping an eye on.  A confirmed break out may be a sign that relative strength readings for AAPL are set to increase in the near term.

aapl 300x167 AAPL:   Approaching Key Supply    A Line In The Sand at $104.00

Dorsey Wright currently has a position in AAPL.

Conclusion:

In the above post, we’ve provided a good example of how analyzing traditional point & figure charts in terms of supply & demand is a simple way of eliminating much of the market “noise” on earnings report days for major market moving stocks such as AAPL.   In essence, supply & demand are in equilibrium right now just below the $104.00 level for the stock of AAPL.    Thus far, the market has been unable to generate enough momentum to take out the overhead supply and force the next leg up.   However, it’s worth keeping an eye on and should the break out be confirmed it may be a sign the relative strength readings for AAPL are set to increase against its peers.

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

Posted by:


Dorsey Wright Separately Managed Accounts

October 21, 2014

Picture1 Dorsey Wright Separately Managed Accounts

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 (MAC Platform)
  • RBC Wealth Management (MAP Platform)
  • Raymond James (Outside Manager Platform)
  • Stifel Nicolaus (Opportunity Platform)
  • Kovack Securities
  • Deutsche Bank
  • Charles Schwab Institutional (Marketplace Platform)
  • Sterne Agee
  • Scott & Stringfellow
  • Envestnet UMA
  • Placemark
  • Scottrade Institutional
  • Janney Montgomery Scott
  • Robert W. Baird
  • Prospera
  • Oppenheimer (Star Platform)
  • SunTrust
  • Lockwood

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 Dorsey Wright Separately Managed Accounts

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.

Posted by:


Weekly RS Recap

October 20, 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 (10/13/14 – 10/17/14) is as follows:

ranks 10.20.14 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. 

Posted by:


Unconstrained Fixed Income

October 17, 2014

“Why do we own bonds?” Investor in 2013

“Why don’t we own more bonds?” Same investors, now

The sharp equity market declines in recent weeks have once again confirmed that fixed income remains the ballast and primary diversifier of a portfolio.  Investors should expect that when other asset classes are experiencing losses, fixed income investments will remain resilient and mitigate a portfolio’s overall decline.  For most investors, fixed income will always remain a meaningful piece of the overall portfolio.  As part of that fixed income allocation, unconstrained fixed income strategies are growing in demand.  From the September/October 2014 IMCA Journal:

Morningstar’s nontraditional bond fund category, which contains the majority of funds classified as unconstrained, grew from $20 billion in total assets in January 2010 to $119 billion in total assets as of November 2013.

At Dorsey Wright, we believe that this category of unconstrained bond strategies will continue to become more important to investors in the years ahead.  In March of 2013, we introduced our “Tactical Fixed Income” separately managed account and we have been very happy with the results since inception.  Performance and holdings are shown below:

11 Unconstrained Fixed Income

21 Unconstrained Fixed Income

For more information about this strategy, pleas see the FAQ’s below:

Why is there a need for Tactical Fixed Income?

Bond buyers face a dilemma.  Yields are very, very low (and have recently been going even lower).  If interest rates stay low this low, bondholders are facing minimal returns, all the while having those returns eaten away by inflation. If interest rates rise, bondholders are facing potentially significant capital losses.  Both outcomes, obviously, are problematic.  This situation demands a tactical solution that can manage through either outcome.

At Dorsey Wright, we have taken our time-tested relative strength tools and have applied them in a unique way to the fixed income markets.  This solution is now available as a separately managed account.  We think it will be welcome news for bond holders and prospective bond buyers who are grappling with the current bond market dilemma.  Equally important, we think it will be a robust solution in the future across a broad range of possible interest rate environments.

What is the investment universe for the Tactical Fixed Income strategy?

The Tactical Fixed Income strategy can invest in short-term and long-term U.S. Treasurys, inflation-protected bonds, corporate, convertible, high yield, and international bonds.  This is a broad universe of fixed income types that have varying yields and volatility characteristics.

How is the risk managed in the Tactical Fixed Income portfolio?

The Tactical Fixed Income model structures the portfolio in a way that balances risk and reward.  Certain types of fixed income behave better in “risk-on” environments, while other fixed income categories are more defensive.  Our model is built to ensure that the portfolio remains diversified.  It’s very important to understand that this is designed as core fixed income exposure.  We’re trying to generate good fixed income returns, without creating equity-like volatility.

Our model compares the relative strength of all of the ETFs in the investment universe.  Those fixed income sectors exhibiting the strongest trends will be represented in the portfolio.

How does the strategy handle a rising rate environment?

Although the general trend of interest rates has been down over the past three decades, there have been periods where rates have generally risen.  The period of mid-2003 to mid-2007 was generally a period of rising interest rates, while the period of mid-2007 to present has generally been a period of declining interest rates.  Sectors like long term government bonds tend to perform much better in a declining interest rate environment while sectors like convertible bonds tend to perform much better during rising rate environments.

Our Tactical Fixed Income strategy is designed to be adaptive and seeks to add value in both environments.

Will the strategy invest in inverse bond ETFs?

We do not use inverse bond ETFs in the portfolio due to the cost of carrying the short positions, which includes the management fees of the ETFs as well as paying out the interest payments while you own these funds.  However, a rising rate environment typically is accompanied by a strong economy.  We do have ample ability to have exposure to sectors of the fixed income market, like high yield, international, and convertible bonds, that may perform well during these environments.

What is the turnover of the Tactical Fixed Income strategy?

Adapting to different fixed income environments is the nature of the Tactical Fixed Income strategy.  We built the strategy to be robust across the spectrum of bond market environments.  The model typically has about twenty swaps a year.  Our model selects approximately six ETFs to be held in the portfolio and each position remains in the portfolio only as long as it retains strong relative strength.  We have a disciplined relative strength process in place to replace any positions that weaken beyond an acceptable level.

To receive the fact sheet for this portfolio please e-mail andy@dorseywright.com or call 626-535-0630.

Net performance shown is total return net of management fees for all Dorsey, Wright & Associates accounts, managed for each complete quarter for each objective.  The advisory fees are described in Part II of the adviser’s Form ADV.  All returns since inception of actual Accounts are compared against the Barclays Aggregate Bond  Index.  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.

Posted by:


High RS Diffusion Index

October 16, 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 10/15/14.

diffusion 10.16.14 High RS Diffusion Index

The 10-day moving average of this indicator is 30% and the one-day reading is 14%—more oversold than at any time in the past three years.  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. 

Posted by:


Podcast: Oversold Markets

October 14, 2014

Podcast: Oversold Markets 

Andy Hyer and Chris Moyer

Posted by:


Commodities Corner: Coffee Futures Approaching Key Area of Supply

October 14, 2014

In some of our recent posts regarding commodities we’ve noted the large declines the majority of this asset class has seen in recent months.   Some of the hardest hit sectors have been the energies, grains, and precious metals just to name a few.   However, in further examining this universe it’s important to note there have been certain commodities showing pockets of strength when compared to the rest of asset class in general.   We noted this in a previous post regarding live cattle, which recently made a new all time high.   We will continue with our theme of identifying commodities which have been outperforming their peers.    One primary reason for doing so is reaffirm that having access to a number of investment products during times of increased market volatility can allow investors to remain tactical and continue to find strong performing markets.  At Dorsey Wright Money Management, we have a number of products that allow investors to gain access to alternative asset classes such as commodities and currencies should their relative strength ranking be high enough to become part of the portfolio.

Coffee Futures (Dec ’14):  Point & Figure

The below point & figure chart of the Dec 14 Coffee futures contract is displaying some interesting technical developments.   Let’s take a closer look to see what the current supply & demand of the coffee market is telling us.   Currently, coffee futures are approaching a previous area of supply located at 224 which thus far has helped form a double top.  In order for the double top break out pattern to be confirmed, price would need to advance through the 228 level.    A development such as this may be a sign the relative strength ranking of the coffee market may be poised to increase further when compared to those of other commodities.

KCZ4 300x216 Commodities Corner: Coffee Futures Approaching Key Area of Supply

RS Chart (Coffee Futures Dec ‘14 vs. DWA Continous Commodity Index)

Note below we have inserted the RS chart of Coffee futures vs. the DWA Continuous Commodities Index.   This is a great visual tool in confirming our above statement that coffee futures have been outperforming the majority of other commodities in recent months.  Exposure to a highly RS ranked commodity such as coffee has proved beneficial when compared to others such as crude oil or silver.

kc rs chart 300x267 Commodities Corner: Coffee Futures Approaching Key Area of Supply

Conclusion:

Although not the most commonly discussed asset class when it comes to investing,  commodities can offer opportunities and diversification away from traditional asset classes s when market volatility begins to increase.   As we have shown above, coffee futures are a great example of a market building a rather large base and possibly on the verge of a substantial move higher.   This could help lead to an even higher RS ranking for coffee futures when compared to its other commodity peers.

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

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

Posted by:


Weekly RS Recap

October 13, 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 (10/6/14 – 10/10/14) is as follows:

ranks 10.13.14 Weekly RS Recap

A week to forget…

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. 

Posted by:


Analyzing the VIX Index: Volatility On The Rise

October 10, 2014

One of the best parts about using point and figure charts to analyze the markets is that it allows us to apply the concept of supply and demand to just about anything.   Whether it be the stock price for AAPL, the price of Coffee futures, or even the strength of the US Dollar.   In taking our analysis a step further, we wanted to discuss some recent developments on the VIX.   This is a measure of expected 30 day stock market volatility and is calculated by the Chicago Board Options Exchange.   As we stated in our post about TLT yesterday, during times of heightened volatility markets are often approaching key levels of supply and demand.   This can be seen across various asset classes whether it be equities, commodities, or fixed income.

CBOE Volatility Index :  (Point & Figure)

vix 300x156 Analyzing the VIX Index: Volatility On The Rise

The point and figure chart of the VIX displays a massive base which had been forming for an extended period of time.   In other words, supply and demand for volatility had been in a state of equilibrium for the most part during this time frame.  This scenario changed on Wednesday when the VIX Index traded through 18 and confirmed a spread triple top break out.  The overhead supply which had been containing the VIX Index below 18.00 during the period of consolidation finally gave way.  The measured move target for this break out is 28.50.

Conclusion:

A brief technical update on the VIX index displays volatility may continue to rise in the near term.   The overhead supply which had been keeping the VIX in check was broken to the upside earlier this week.  Having a consistent game plan toward risk management throughout turbulent market environments is vital in order to help limit losses.  At Dorsey Wright Money Management, we achieve this by following our systematic relative strength based investing models which allow us to eliminate the human emotion during periods of heightened volatility.

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

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

Posted by:


Sector Performance

October 10, 2014

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 10/9/14.

sector 10.10.14 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

Posted by:


Momentum in a Rising Dollar Environment

October 10, 2014

Nick Kalivas, Senior Equity Product Strategist of PowerShares, has a nice write-up in ETF Trends about how Momentum has historically fared in a rising dollar environments:

Although predicting major foreign exchange (FX) trends is never easy, the potential for a major dollar bull market suggests FX could influence investment planning in the coming months. In this light, we examined how various equity risk factors have performed in a strong dollar environment, and found that the momentum factor historically outperformed.

The dollar rally and backdrop

The US Dollar Index (DXY) has risen over 8% from its May low driven by relatively strong US economic growth and favorable interest rate advantage.1 Dollar strength is well discussed in the market and the long dollar trade could be getting crowded in the short term, but fundamental factors are supportive to a sustained dollar uptrend. The Federal Reserve is ending QE3, while the European Central Bank and Bank of Japan (BOJ) continue with aggressive monetary stimulus. In fact, the BOJ was willing to buy T-bills at a negative rate in September. At the same time, global Purchasing Managers Index (PMI) data highlights the outperformance of the US economy. Recent manufacturing PMI numbers showed the US at 57.5 compared to 52.8 for Japan and 50.3 for the eurozone.2

Investment implications

As a review, there are four factors or equity risk premiums that were popularized by academics Eugene Fama, Kenneth French and Mark Carhart. These can be examined using the Kenneth French Data Library:3

  1. Market Return (Mkt – RF): Excess return of the market over the risk-free rate using all NYSE, AMEX and NASDAQ stocks, and the one-month T-bill.
  2. Momentum (MOM): Average return of two high prior return portfolios minus the average return of two low prior return portfolios.
  3. Small Minus Big (SMB): Average return of three small portfolios minus the average return of three big portfolios.
  4. High Minus Low (HML): Average return on two value portfolios minus the average return on two growth portfolios.

The US terminated the gold standard in August 1971 and allowed the dollar to be a fiat currency. A study was performed to examine factor returns during strong dollar periods. The table below highlights factor returns during periods of material dollar strength. Dollar gains based on DXY were measured from monthly trough to peak (the return was not annualized). Factor returns were annualized with values calculated from the corresponding troughs and peaks of DXY. The dollar rallied over 10% in each time periods measured. Results include:

KALIVAS BLOG 1010 chart1 e1412805787922 Momentum in a Rising Dollar Environment

  • Momentum was the strongest-performing factor with a median annualized gain of 12.61%. Momentum rose in each occurrence.  After a double take, momentum was even able to perform well during the financial crisis in 2008 when the dollar was strong. This suggests that investors may have been quick to pare lagging names from their portfolios during the crisis.
  • Value outperformed growth in five of seven strong-dollar periods, or 71.4% of the time with a median return of 7.29%. Value performed poorly during the financial crisis as investors sold to raise cash.  It should be noted that the Russell 1000 Value Index outperformed the Russell 1000 Growth Index between 1995 and 2002, displaying some of the difference between academic factors and market indices.1
  • Small-cap outperformed large-cap in six of seven periods, or 85.7% of the time with a median return of 4.48%. Large caps are more currency-exposed than small caps, which have tended to have a greater domestic influence. Outsized returns in 2013 coupled with the potential for mean reversion and a weak trend in earnings estimates are current headwinds to small-cap sector performance.
  • The market risk premium was positive in five of seven periods, or 71.4% with a median return of 7.06%. Returns were poor in the ‘73/’74 and ‘08/’09 period. Both periods were consistent with the market pricing recession. Oil prices surged and stagflation was present in ‘73/’74, while the collapse of the housing and mortgage markets damaged market returns in ‘08/’09.

Ideas for gaining exposure

Those focused on factor performance in a strong dollar environment can talk to their advisors about PowerShares’ suite of momentum ETFs based on Dorsey, Wright & Associates relative strength methodology. Click here for more information.

Dorsey Wright is the index provider for the suite of Momentum ETFs at PowerShares.  A Momentum strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.

Posted by:


Monitoring The Bond Market: Lower Yields On The Horizon?

October 9, 2014

Market volatility has come back to the forefront in recent weeks, with equity indices around the globe experiencing broad swings in both directions.   Often times during periods of heightened market volatility, it’s interesting to take a look at the US Treasury market to see if there are any noteworthy technical developments taking shape.   The global bond market is massive in size, and developments within in it can often have an outside influence on other asset classes when it comes to asset allocation and money flows.  At Dorsey Wright Money Management, investors can gain exposure to the fixed income market in a number of ways.  Both the Tactical Fixed Income & Balanced strategies are available through seperately managed accounts.   More information on these products can be found here:

TLT updated 300x227 Monitoring The Bond Market:  Lower Yields On The Horizon?

iShares Barclays 20+ Year Treasury Bond ETF (TLT):  (Point & Figure)

We wanted to take another look at the point and figure chart of TLT in order to get a better idea of the current supply & demand situation for US Treasuries.  Previously, we noted the TLT was coming into a major uptrend support line near 113.00.   This uptrend line represents an area where buyers (demand) have previously overwhelmed sellers (supply).  On the most recent test, the bond bulls once again showed up in force as the  level held firm and the TLT has since produced a significant rally.   In fact, yesterday’s move above 119.00 produced a double top break out pattern which has measured move price target of 133.00.    At Dorsey Wright Money Management, we don’t use these developments as an actual buy signal (we use our RS matrices to determine those), but we do believe it’s a development worth noting.   Time will tell if the TLT achieves its measured move target of 133.00, but given the double top break out it is surely something to keep an eye on and may signal a period of even lower interest rates lies ahead.

Dorsey Wright currently has positions in TLT

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

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

Posted by: