The “Impossible” Happens!

June 26, 2009

Clients often flock to advisors who “made a good call on the market.” They have the mistaken belief that markets—or things generally—are much more predictable than they really are.

The New York Times reports that Betfair, a London online wagering service, has gathered total bets worldwide of only $51(!) for the U.S. soccer team to win the Confederations Cup. Yet the U.S. team, by virtue of beating world #1 Spain, will be facing Brazil in the final. It just wasn’t supposed to happen.

Financial markets are much the same way. Unlikely or “impossible” things happen all the time. Rather than trying to guess what will happen, doesn’t it make more sense to stop predicting and use a method that adapts as markets change?

Leave a Comment » | Markets, Thought Process | Permalink
Posted by Mike Moody

Emerging Markets Lead

June 26, 2009

As this article from the New York Times and International Herald Tribune points out, the quickest economic recovery has been seen in Brazil, China, and India. I’m not surprised that is the case, since the EAFE index has demonstrated recent strength against the S&P 500. Our Systematic RS International portfolio is running well ahead of EAFE so far this year, probably due to its emphasis on Asia and Latin America. This is not due to any insight on our part, but simply because that’s where relative strength has been highest.

Americans tend to have a Ptolemaic worldview, where we believe everything revolves around us. Yet our economy is increasingly linked to the rest of the world through intricate mercantile relationships. It might take a while, but we’re going to need to get used to looking globally for investment themes.

Leave a Comment » | Markets | Permalink
Posted by Mike Moody

Recessionary Inflection Points And High RS

June 26, 2009

More often than not in investing, the trend is your friend. But from March 9th until June 16th the opposite was true: previous losers outperformed previous winners by a staggering 135% (best 10% minus worst 10% of O’Shaughnessey’s All Stock Universe).

(click to enlarge)

As pointed out by Jim O’Shaughnessey, there have been several other periods in which low momentum stocks outperformed high momentum stocks. In general, these periods are aligned with recessionary inflection points where stock leadership changes dramatically. Importantly, following the 10 worst periods for momentum investing, the strategy has returned to form and beaten the market by an average of roughly 7% annually over the subsequent 12 months.

We have noticed that high relative strength stocks seemed to have turned the corner in the last couple weeks.

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.
(click to enlarge)

I suspect we could be embarking on a favorable period for relative strength strategies.

1 Comment | Markets, Relative Strength Research | Permalink
Posted by Andy Hyer