According to the Wall Street Journal’s MarketBeat blog, junk bonds are at historic lows in yield. One has to wonder whether high-yield investors are being compensated for their risk. I don’t know what the actual default risk is, but taking a big loss while collecting a 12% coupon seems safer than a measly 6% payout. This article was surprising to me at least.
From the Archives: RS Primer
May 10, 2011Good primer on relative strength by CSS Analytics:
I have done a lot of research in this area and the first conclusion I can make is that it should be a major portion of any trader or investors portfolio strictly because it is so durable and robust. Whether its asset classes, sectors, stocks, commodities, currencies—-you pick a time frame over the last 40-50 years and this simple method of buying strength and selling weakness has outperformed traditional buy and hold strategies. This outperformance or alpha is also robust to most transaction cost assumptions.
Four-stage model depicting how relative strength occurs:
Based on my own observation and theory I feel that a simple four-stage model best depicts how relative strength occurs and why it takes time to develop rather than occuring instantaneously. The relative strength effect is driven by behavioural feeback loops where investors sequentially pour money into the asset du jour for a plethora of reasons including positive perceived fundamentals, psychological beliefs such as fear or greed, or for positive economic or default risk factor sensitivity. Essentially it starts when certain investors create a theory such as: “emerging markets will outperform because of the accelerated pace of development” and begin to accumulate investments in assets tied to this theory (Stage 1: the early adopters). As time goes on the theory itself becomes more widely known and the rationale becomes more widely accepted. Others quickly catch on and start investing in the same idea (Stage 2: recognition and acceptance). The next stage (and longest stage) is where initial investors wait for hard proof that the idea or theory is supported by tangible evidence in a variety of forms whether economic indicators, qualitative or anectdotal accounts to mention a few. (Stage 3: validation). The “Validation Stage” tends to last long as the early investors are looking for ongoing proof that supports or refutes their theory. The nature of economic data and other information sources is that they require multiple readings to establish that a trend is in fact statistically valid. This is why it is impossible for markets to adjust instantaneously even with purely rational investors. There are two paths the validation stage can take—either the evidence to refute the theory is strong , and as a consequence momentum will fail as early investors bail out. Or if the evidence continues to support and even exceed expectations, the early investors will add to their positions alongside the second stage investors. This added money flowcements the trend and the relative strength begins to really accelerate. At this point we reach the final stage where everyone agrees that a given market is and should go up and people are hopping on the bandwagon simply because the market is going up. This is both the fastest stage and the most rewarding per unit of time (Stage 4: mania).
—This post was originally published on December 29,2009. It’s a good summary of a timeless cycle.
1 Comment | 
Relative Strength Research | 
Permalink
Posted by Andy Hyer
It’s All Relative
May 10, 2011One of the most frequent questions/comments that comes up in conversations with financial advisors (I spend a good chunk of every day in conversations with financial advisors) is a sense of amazement and awe by advisors and their clients that the myriad of global events over the past couple of years have seemingly had little effect in derailing the bull market that is under way. David Callaway of MarketWatch proposes an explanation that makes pretty good sense to me.
The sad, violent demise of the once-terrifying bogeyman was simply the latest of a series of wild news stories that could have captured the attention of investors but didn’t. The Japanese earthquake, the revolutions in the Middle East and North Africa, the new war in Libya. All these would have been enough at one point to ignite market interest. What’s changed?
Simply put, the investing world has already lived through the biggest scare of most of our lifetimes. With the dark days of the global financial crisis, with its fears of economic collapse around the world, now in the rear-view mirror, it’s going to take more than turmoil in Egypt to shake investors intent on getting some of their money back.
“If you look back over the first quarter and you look at what happened in the Middle East, in Japan, and Europe, you say, gee, those things are bad things,” said Marshall Berol, co-manager of the Encompass Fund, here in San Francisco. “Those are not going to be good for the economy or the stock market, and it didn’t turn out to be the case.”
In other words, it’s all relative.
Image Source: CLO Magazine
2 Comments | Markets, Thought Process | Permalink
Posted by Andy Hyer
Top ADR Performers Over Trailing 12 Months
May 10, 2011Although U.S. investors often focus on U.S.-based companies because of greater familiarity, I suspect that many would be interested in learning more about international companies that trade on U.S. exchanges in the form of American Depository Receipts (ADRs). The top ten performing ADRs over the past 12 months, out of our universe, are shown in the table below. As of 5/9/11.
To learn more about Dorsey Wright’s Systematic Relative Strength International portfolio, click here.
Dorsey Wright’s ADR universe is a sub-set of the entire universe of ADRs. Dorsey Wright currently owns AMRN. A list of all holdings for this portfolio over the past 12 months is available upon request.
Leave a Comment » | Markets | Permalink
Posted by Andy Hyer
