As Mike pointed out in an earlier post, this bull market is in the middle of the pack as far as magnitude and duration. It seems like a good place to stand back and see how our Technical Leaders Portfolios have performed since the March 9th, 2009 bear market lows.
(Click to Enlarge)
We like what we see!
See www.powershares.com for more information. Past performance is no guarantee of future returns.
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Posted by: Andy Hyer
The goal of any relative strength strategy is to have exposure to those securities in the investment universe that are performing relatively well while seeking to minimize exposure to those that are performing relatively poorly. Our first Technical Leaders Portfolios to begin trading is PDP, which is an index of 100 high relative strength securities. This ETF began trading on March 1, 2007 and we are pleased that it has outperformed the S&P 500 since inception.
To illustrate this ETF’s ability to adapt and overweight strong areas of the market, see the chart below which shows the percentage of the index that has been allocated to Industrials (one of the stronger sectors over the last couple of years) and the percentage allocated to Financials (one of the weaker sectors over the last couple of years).
(Click to Enlarge)
As shown in the table below, there has been large dispersion in performance between Industrials and Financials over this period of time.
IYJ is used as a proxy for Industrials and IYF is used as a proxy for Financials.
At some point in the future, there will be another group that rises to the top and PDP will then seek to adapt to those changes. By the way, ETFdb reports that PDP is the 3rd best performing quant-based ETF year-to-date, as well as the largest.
(Click to Enlarge)
See www.powershares.com for more information about PDP.
Leave a Comment » | Tactical Asset Alloc | Permalink
Posted by: Andy Hyer
From FT Alphaville, an incredibly well-produced and entertaining piece on the economic theories of Keynes and Hayek. Trust me, you’ve never seen anything like it!
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Posted by: Mike Moody
For every one of our failures, we had spreadsheets that looked awesome—-Scott Cook, founder of Intuit
One of the real bugaboos in finance is confirmation bias. Confirmation bias is the tendency to look for what you want to see. Coupled with cognitive dissonance—the desire to reconcile your actions and beliefs—it causes all manner of terrible decision-making.
The naive view is that we all have certain firm beliefs and we endeavor to act appropriately, so that our beliefs and actions are aligned. Lots of psychological research shows otherwise. In fact, we make decisions (act) and then construct our beliefs so as to rationalize those decisions! Confirmation bias comes in handy here, because it allows us to see what we want to see, thus making rationalization much easier.
Like Scott Cook said, anyone can construct an awesome spreadsheet, but does it actually conform to reality?
If you are a researcher into systematic investment processes, it is easy to fall into this trap. You have a great idea that should work theoretically—and when you test it, it is fantastic. Yet when you try to implement it, somehow all sorts of problems crop up. You, my friend, have just become a victim of confirmation bias.
An appropriate testing process proceeds by using the scientific method—by trying to disprove your hypothesis. You want to make sure that the phenomenon is real by testing it lots of different ways, to see if you can make it break. If the process is robust and resistant to all of your attempts to beat it up, you might have something beyond an awesome spreadsheet.
The best thing about our testing process is that it has survived and thrived in the real world—repeatedly. The reason that the Arrow DWA Balanced Fund (DWAFX), the Global Macro strategy, the Arrow DWA Tactical Fund (DWTFX), not to mention the Systematic RS separate accounts and the old Rydex Dynamic Advantage program before them, have performed well in the real world is due to a realistic and robust strategy test. The next best thing about our testing process is that all of our investment processes are designed to be adaptive. This is not to suggest they will never have losses or periods of underperformance—they can and do, like any other strategy. But when the environment changes they are designed to change along with it and conform to the new trends. Rapid trend changes always create uncomfortable adjustment periods, but investors are typically rewarded for their patience with relative strength as a return factor.
For more information on our robust testing process, you may read our whitepapers here and here. If you are interested in third-party research on relative strength, you may find resources here.
For information about the Arrow DWA Tactical Fund (DWTFX) and the Arrow DWA Balanced Fund (DWAFX), click here.
Click here and here for disclosures. Past performance is no guarantee of future returns.
1 Comment | Markets, Thought Process | Permalink
Posted by: Mike Moody
When you came into this world, you had nothing. And when you leave this world, you’ll take nothing with you. So don’t hate your stockbroker… He’s just doing God’s work.—-attributed to Ian McAvity
Unfortunately, many consumers seem to subscribe to Mr. McAvity’s tongue-in-cheek description of advisors. It is, however, to their detriment. Financial markets can be difficult and it’s not a good idea to go it alone. At least that is the conclusion of a 2010 study by Hewitt Associates and Financial Engines. Hewitt is one of the largest 401k custodians, so they had good access to a participant database. They looked at 400,000 401k participants between 2006 and 2008, some particularly difficult years for the market, to see how they performed and how they handled their investments. Here’s what they found:
401(k) participants who use target-date funds, managed accounts, or online advice get better returns on their retirement investments than those who do not, according to a Hewitt Associates and Financial Engines study released Monday. The median annual return for 401(k) account holders using any of these forms of investing assistance was 1.86 percent higher than among investors who choose their own investments with no guidance…
According to the study, it didn’t matter what kind of help the investors received, but the type of help tended to vary to investor type. Target-date funds tended to be used most by younger and newer employees with smaller balances. Managed accounts were the choice for older employees with the largest balances. The users of online help tended to fall in between.
Here’s the bad news: only 25% of the participants availed themselves of help! 75% chose to go it alone and suffered lower returns as a result. As Hewitt pointed out in the article, a nearly 2% gap in annual returns compounded over a working lifetime means thousands and thousands of additional dollars for retirement.
I suppose people look at the advice business with a jaundiced eye, but Hewitt’s study shows it really can make a big difference. Part of the problem may also be that retail investors have been encouraged to think that financial markets are easy and that they can handle it themselves without any problem. The E-Trade baby makes it look so simple! As an advertising gimmick it’s very effective, but the reality as shown by the Hewitt study is far different. (Click here to see what happens when the E-Trade baby gets in over his head.)
Americans have a rugged independent streak and don’t like to admit there’s anything they can’t handle, but frankly, it is ridiculous not to take advantage of help if it is available. Even the Lone Ranger had Tonto.
2 Comments | Investor Behavior, Markets, Thought Process | Permalink
Posted by: Mike Moody
Although many investors are reluctant to enter the market because they feel it is tremendously overextended, Bespoke Investments shows that this bull market is in the middle of the pack as far as magnitude and duration. It’s never clear when, if, or how a bull market will end, but their data shows this one has been merely average so far!
1 Comment | Investor Behavior, Markets | Permalink
Posted by: Mike Moody
The debt crisis spreading across parts of Europe is seen as the biggest threat to the performance of the U.S. stock market over the next 12 months, according to a survey of professional money managers.
In its latest quarterly survey of investment professionals by Russell Investments, respondents ranked European economic issues above all other major threats, with a top ranking of 73%.
Here’s the catch: this is from an article in Investment News from June 23, 2010! At the moment, the European debt crisis was big news. Now look at it, less than a year later. Besides Greece, both Ireland and Portugal have blown up and agreed to bailouts—and no one cares. Most Americans probably couldn’t find Greece on a map now.
How soon we forget that the burning problems of today are completely forgotten tomorrow! Keep your perspective about the news of the day and don’t get emotionally sucked in. Headline risk is only risk if you are making goofy decisions because of the news environment. To paraphrase G.K. Chesterton’s quip about exercise, if you have an urge to trade on news, lie down until it passes.
Source: www.wembleymattersblogspot.com
Leave a Comment » | Investor Behavior, Markets, Sentiment, Thought Process | Permalink
Posted by: Mike Moody
The Investment Company Institute is the national association of U.S. investment companies, including mutual funds, closed-end funds, exchange-traded funds (ETFs), and unit investment trusts (UITs). Members of ICI manage total assets of $11.82 trillion and serve nearly 90 million shareholders. Flow estimates are derived from data collected covering more than 95 percent of industry assets and are adjusted to represent industry totals.
Investors must have serious fears of municipal bond defaults as they continue to pull money out of that asset class. The other asset classes all had strong flows, led again by taxable bond funds which have now racked up $53 billion for the year.
Leave a Comment » | Markets | Permalink
Posted by: Andy Hyer
You are currently browsing the Systematic Relative Strength blog archives for the day Thursday, April 28th, 2011.
