Here’s to 2012!

December 30, 2011

According to an article in the Wall Street Journal reporting on research by Jason Goepfert, there’s a decent chance of a good market year in 2012:

At last check, the S&P 500 was UNCH on the day, a fitting end to a dismal year in which the big-cap stock index has gained a whopping 0.4%, behaving more like a (unusually terrifying) checking or savings account than an investment.

But wash years like 2011 are typically followed by big gains in the following year, Jason Goepfert of Sundial Capital Research writes.

The median market move following a year in which the S&P gains or loses less than 3% is a 12.3% gain, according to his research, and the market is positive 78% of the time.

The full table of instances is below.

(click on chart to enlarge)

Source: Wall Street Journal, sentimenTrader

That’s good news we can all use!

Posted by:


Sector and Capitalization Performance

December 30, 2011

The chart below shows performance of US sectors and capitalizations over the trailing 12, 6, and 1 month(s).  Performance updated through 12/29/2011.

Posted by:


Fund Flows

December 29, 2011

Ed. Note –  The ICI data team apparently took the week off!  Here’s a repost of last week’s fund flows numbers.  Even without the fresh data, we’d wager that last week we saw more of the same — equity outflows and fixed income inflows.  Maybe in 2012 we’ll see a shift in this trend.

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.

Posted by:


Saving the New Year

December 28, 2011

Saving the New Year is the title of Megan McArdle’s excellent article on saving.

If your neighbors aren’t saving much (and trust me, they aren’t), that means a less productive economy in the future–and more people trying to claim a very limited supply of public funds. You don’t want to be among them.

The whole article will make you think twice about the legitimacy of your rationalizations for failing to adequately save.

Posted by:


High RS Diffusion Index

December 28, 2011

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 12/27/11.

The 10-day moving average of this indicator is 71% and the one-day reading is 83%.

Posted by:


Dorsey, Wright Client Sentiment Survey Results – 12/16/11

December 27, 2011

Our latest sentiment survey was open from 12/16/11 to 12/23/11. The Dorsey, Wright Polo Shirt Raffle continues to drive advisor participation, and we greatly appreciate your support! This round, we had 54 advisors participate in the survey (holiday week = light traffic, again). If you believe, as we do, that markets are driven by supply and demand, client behavior is important. We’re not asking what you think of the market—since most of our blog readers are financial advisors, we’re asking instead about the behavior of your clients. Then we’re aggregating responses exclusively for our readership. Your privacy will not be compromised in any way.

After the first 30 or so responses, the established pattern was simply magnified, so we are comfortable about the statistical validity of our sample. Most of the responses were from the U.S., but we also had multiple advisors respond from at least two other countries. Let’s get down to an analysis of the data! Note: You can click on any of the charts to enlarge them.

Question 1. Based on their behavior, are your clients currently more afraid of: a) getting caught in a stock market downdraft, or b) missing a stock market upturn?


Chart 1: Greatest Fear.  From survey to survey, the S&P fell -2.0%, and the overall fear number ticked higher as a result.  The fear number rose from 91% to 93%, while the opportunity group fell from 9% to 7%.


Chart 2. Greatest Fear Spread.  Another way to look at this data is to examine the spread between the two groups.  The spread rose this round, from 83% to 85%.

Question 2. Based on their behavior, how would you rate your clients’ current appetite for risk?

Chart 3: Average Risk Appetite.  Overall risk numbers fell in-line with the market, from 2.40 to 2.19.  This indicator has been whipsawing in-line with the market for the last few weeks.

Chart 4: Risk Appetite Bell Curve. This chart uses a bell curve to break out the percentage of respondents at each risk appetite level.  Over 95% of all respondents wanted a risk appetite of 3 or below.

Chart 5: Risk Appetite Bell Curve by Group. The next three charts use cross-sectional data. This chart plots the reported client risk appetite separately for the fear of downdraft and for the fear of missing upturn groups.  This bar chart sorts out as we expect, with the fear group looking for low risk and the opportunity group looking for more risk.  Keep in mind that with the light holiday response, there were only 4 total respondents in the upturn category (again).

Chart 6: Average Risk Appetite by Group.  Both groups’ risk appetite fell this round with the market.  The upturn group’s average could be considered “skewed” by the small number of responses.  Nevertheless, it’s significant to see the upturn group at the lowest levels since June of 2010.

Chart 7: Risk Appetite Spread.  This is a spread chart constructed from the data in Chart 6, where the average risk appetite of the downdraft group is subtracted from the average risk appetite of the missing upturn group.  The spread fell from all-time highs last round, to all-time lows this round.

This round, we saw a moderate decline in the market, and all of the sentiment indicators responded as they should.  The overall risk appetite number has continued to work perfectly, rising and falling in-line with market action.  Hopefully once the new year is underway, we’ll see an uptick in advisor participation.

No one can predict the future, as we all know, so instead of prognosticating, we will sit back and enjoy the ride. A rigorously tested, systematic investment process provides a great deal of comfort for clients during these types of fearful, highly uncertain market environments. Until next time, good trading and thank you for participating.

Posted by:


Your Shrinking Nest Egg

December 27, 2011

Alicia Munnell, writing in Smart Money, discusses the retirement preparedness of the Baby Boom generation.  The highlights:

…while the boomers have been accumulating wealth at much the same pace as their parents, the world has changed in four important ways.

1) The prevalence of defined benefit pension plans has declined dramatically over the last 25 years.

2) Real interest rates have fallen significantly, so a given amount of wealth will now produce less retirement income.

3) Life expectancy has increased, so accumulated assets must support a longer period of retirement.

4) Health care costs have risen substantially and show signs of further increase, indicating a need for greater accumulation of retirement assets.

So, yeah, it’s somewhat discouraging to think that you will have to save even more since the onus of retirement has now been put entirely on your shoulders.  It just points out the need to find a competent advisor early and get cracking.  It might make a good resolution for the New Year.

Posted by:


Quote of the Month

December 27, 2011

Tim Hartford on forecasting:

Professional pundits are not usually paid to make correct forecasts. They are paid to sound convincing, whether they are columnists or figureheads for asset managers.

I agree that sounding convincing is essential in order to win and keep business.  However, I also believe that intellectual honesty is an important part of the long-term success of a business.  Forecasting is not just challenging…it’s impossible.  We have chosen to do our homework, gain a deep understanding of relative strength, and make every effort to convincingly make the case to investors for using relative strength as part of their asset allocation.  It’s also a nice benefit that the data is on our side.

HT: Abnormal Returns

Posted by:


Weekly RS Recap

December 27, 2011

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 (12/19/11 – 12/23/11) is as follows:

It was a great week for the market and an even better week for the laggards last week.

Posted by:


Happy Holidays

December 23, 2011

Posted by:


Stockpicking as a Scarce Resource

December 23, 2011

Although we are also big proponents of tactical asset allocation, Bill Smead at Advisor Perspectives has an interesting argument about why stock-picking may do well going forward.  ICI data that we highlight each week shows large capital flows out of domestic equities, and Morningstar demonstrates quite convincingly that it is possible to outperform just by purchasing what everyone else is throwing away.

It’s certainly possible that rumors of the death of the stock market are greatly exaggerated.  Although we have seen very little interest in our equity portfolios of late, they might be of interest going forward.

To receive the brochure for our Separately Managed Accounts, click here.  

Click here and here for disclosures.  Past performance is no guarantee of future returns.

Posted by:


Sector and Capitalization Performance

December 23, 2011

The chart below shows performance of US sectors and capitalizations over the trailing 12, 6, and 1 month(s).  Performance updated through 12/22/2011.

Posted by:


What Have You Done Lately?

December 22, 2011

How rational is this behavior on the part of investors?

[Bill] Gross is known as the bond king and has been likened to both Peter Lynch and Warren Buffett. That’s how good he’s been at buying and selling bonds over the years. But earlier this year he made a big bet that interest rates would rise, and when rates fell instead his fund began to lag badly.

The fund is up less than 4% this year, about half the gain of the average comparable bond fund in what has been a good year for most bond investors. In the bond world, where yields typically drive returns, such underperformance is epic. Gross ranks in the bottom 10% of bond fund managers this year.

His long-term record remains stellar. But in a what-have-you-done-lately world, investors have begun to exit his fund. Last month, his fund had net outflows of $500 million as the universe of comparable funds enjoyed net inflows of more than $10 billion. Gross likely will record his first calendar year of net outflows when 2011 draws to a close. His fund was launched in 1987.

HT: Real Clear Markets, Time

Posted by:


Japan: Prepare For The Unthinkable

December 22, 2011

Not that it could implode (everyone expects that), but that it might be a great buy.  Brett Arends writes:

The moment you read the word Japan, I’ll bet your eyes glazed over. I’ll bet you thought about flipping the page to see if there was something more interesting elsewhere in this month’s issue — on Greek bonds, maybe, or Apple. (Or gold?) You’re not alone. No one wants to hear about Japan. Fund managers have lost money on Japanese shares every year they can remember, except 2005. Tokyo has been in a bear market for 20 years — about as long as commodities were.

How are the mighty fallen! Twenty-two years ago, Japanese stocks accounted for nearly half the value of the world’s stock markets. The land occupied by the Imperial Palace in Tokyo was valued more highly than all of California. The Japanese were conquering the world. No one could stand in their path.

Today, according to FactSet, Tokyo’s share of global stock values is down to 7.5 percent, the smallest it’s been in decades.

His article then makes the case for Japan being a good value:

Most important of all, the stock market is cheap. Possibly very cheap — at a time when nearly everything else looks pricey. The Nikkei 225, Japan’s major stock market index, trades at just 10 times forecast earnings. The dividend yield is up to 2.3 percent — a hefty amount in a country with zero inflation.

Japanese equities today trade for half of annual revenues, according to FactSet. (The figure for the U.S.: 1.2 times revenues.) And they trade for less than book value, while U.S. stocks trade for twice book.

We all know that good values can become even better values, so that alone shouldn’t justify buying Japan.  However, I think it is an interesting exercise to take an absolutely hated investment (Japan in this case) and ask yourself if your investment process is flexible enough to capitalize on a change in a long-term trend.

One way to see if Japan’s apparently attractive valuations translate into strong relative strength is to watch the amount of exposure given to Japan in the PowerShares DWA Developed Markets Technical Leaders Portfolio (PIZ):

Source: PowerShares, PIZ

While the current exposure to Japanese equities in PIZ is less than the weight given to Japan in the MSCI EAFE Index (21.58%), Japanese exposure has increased from the 4% weight in PIZ at the beginning of 2011 to its current weight of 11.51%.

Please see www.powershares.com for more information about PIZ.

Posted by:


Fore!

December 22, 2011

Further evidence that money goes where it is treated best comes from the Wall Street Journal:

…Vietnamese see golf rather differently: as a way to hold on to their money after years of booms and busts.

With property prices sliding and the local stock market in free fall, some people here are investing in golf club memberships in a last-ditch bid to protect their savings from being ravaged by soaring inflation and a fading currency.

Prices for club memberships around Hanoi have risen from around $6,000 in 2004 to roughly $30,000 now, with some of the plushest, complete with swimming pools, villas and tennis courts, reaching $130,000. That’s not as expensive as top clubs in Japan or Singapore, but it is still a large slice of change in a country where the average income is around $1,200 a year.

“Buying a membership is better than putting cash in the bank, better than putting it in the stock market, and better than putting it into gold,” said Do Dinh Thuy, a 48-year-old management consultant, amid the steady thwack of balls being driven out onto a local range here in Hanoi’s suburbs. He recently bought a third membership, “and that one’s not for playing—it’s for investment.”

When nothing else is working and you can’t get capital out of the country, apparently even golf memberships can be viewed as a store of value.  Supply and demand is an amazing thing.  It seems the value of golf memberships is soaring because the Communist Party leaders are restricting new courses in the name of national interest.

Posted by:


From One Who Knows

December 22, 2011

MarketWatch’s Chuck Jaffe:

Years of working in the media have convinced me that a large measure of market talk about “what moved the market today” is hogwash. Truthfully, if the market moves by a percentage point or two on any given day, most pundits are taking nothing more than an educated guess as to what caused the move. They know their thinking —right or wrong — will be largely forgotten the next day, when there will be another opportunity to say something that sounds smart (thereby making the investment firm sound smart, no matter how accurate the information).

Thankfully, there are better alternatives to investing based on the daily opinions of journalists.

Posted by:


Fund Flows

December 22, 2011

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.

Posted by:


High RS Diffusion Index

December 21, 2011

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 12/20/11.

The 10-day moving average of this indicator is 71% and the one-day reading is 75%.

Posted by:


There Will Always Be Trends

December 20, 2011

From Financial Advisor Kid:

If it’s not one thing, it’s another thing.  There will never be a shortage of trends!

Posted by:


What’s Hot…and Not

December 20, 2011

How different investments have done over the past 12 months, 6 months, and month.

1PowerShares DB Gold, 2iShares MSCI Emerging Markets ETF, 3iShares DJ U.S. Real Estate Index, 4iShares S&P Europe 350 Index, 5Green Haven Continuous Commodity Index, 6iBoxx High Yield Corporate Bond Fund, 7JP Morgan Emerging Markets Bond Fund, 8PowerShares DB US Dollar Index, 9iBoxx Investment Grade Corporate Bond Fund, 10PowerShares DB Oil, 11iShares Barclays 20+ Year Treasury Bond

Posted by:


When To Get Out

December 19, 2011

Any time a strong asset class goes through a short-term period of underperformance the question always comes up, “Is the trend over?”  This is generally when I pull out my crystal ball.  In reality, every trend follower must decide the sell criteria for each trade.  Will it be based on the trader’s discretion (not recommended), or based on some objective rule set?  Using relative strength rank stops is a topic that is covered in the white paper Relative Strength And Asset Class Rotation by John Lewis.  For the purposes of the white paper, relative strength ranks were used to determine when to get out of a given trade.  One of the most revealing results for the study is just how much different the results are over time by using different relative strength look-back periods for portfolio formation.  For example, if you use a 3-month look-back period for your relative strength factor, the results were very different over time than if you used a 6-, 9-, or 12-month look-back period.  In fact, the white paper detailed the results of using 1-, 2-, 3-, 9-, 12-, 18-, and 24-month look-back periods for portfolio formation.

Please read the white paper to see the details of the Monte Carlo testing process used for this study.  This simulation was done on a universe of ETFs from a variety of asset classes over an 11-year period of time (2000-2010).  However, the cumulative mean results are as follows:

What conclusion can be drawn?  The best results over the 11-year period of time came from using a 6-month look-back relative strength factor.  For the purposes of the white paper, percentile ranks were used to determine when to get out of a a given trade.  Getting out of a position every time its relative strength has a bad month or even bad three months of price performance did not lead to as good of performance over time as using an intermediate relative strength ranking stop.

This underscores the importance of understanding how to thoroughly test a set of decision rules so that you can be best prepared to run those decision rules in real time and with real money!  It is human nature to want to bail out of a position after it looks like the trend may be turning.  In hindsight, we may well see that indeed we would have been better to get out much earlier.  Of course, we may also see that the relative strength stabilized and then moved higher.

The goal with any trend following system is to capitalize on long-term trends.  Relative strength is ideally suited to help you accomplish that goal.  However, it won’t come without some discomfort along the way.  Today, the question may be about gold, but tomorrow the same question will be asked about a different asset class.  Relative strength provides a clear process for determining when to get in and when to get out.

Posted by:


Don’t Eat the Marshmallow!

December 19, 2011

It turns out that one of the best predictors of future success is the ability to manage “hot” emotional states and to learn self-control.  Stanford psychologist Walter Mischel concocted an experiment involving 4-year olds and marshmallows to test self-control back in the 1960s, and only understood its significance much later.  (The experiment has been repeated more recently by others.  Here, for example, is a video of Columbian psychologist Joachim de Posada replicating the results.  Watch only if your tolerance for adorable 4-year olds trying to resist a marshmallow is extremely high!)   As Jonah Lehrer writes in The New Yorker:

For decades, psychologists have focussed on raw intelligence as the most important variable when it comes to predicting success in life. Mischel argues that intelligence is largely at the mercy of self-control: even the smartest kids still need to do their homework.

This is very true in financial markets.  Temperament trumps brains when it comes to making money over the long run.  You can have a great plan, but if you do not have the discipline to execute it, the plan is useless.

News flow in financial markets—much of it alarming, since scary new always gets better ratings–gives investors a multitude of opportunities to behave badly.  The best strategy?  Distract yourself.

At the time, psychologists assumed that children’s ability to wait depended on how badly they wanted the marshmallow. But it soon became obvious that every child craved the extra treat. What, then, determined self-control? Mischel’s conclusion, based on hundreds of hours of observation, was that the crucial skill was the “strategic allocation of attention.” Instead of getting obsessed with the marshmallow—the “hot stimulus”—the patient children distracted themselves by covering their eyes, pretending to play hide-and-seek underneath the desk, or singing songs from “Sesame Street.” Their desire wasn’t defeated—it was merely forgotten. “If you’re thinking about the marshmallow and how delicious it is, then you’re going to eat it,” Mischel says. “The key is to avoid thinking about it in the first place.”

According to Mischel, this view of will power also helps explain why the marshmallow task is such a powerfully predictive test. “If you can deal with hot emotions, then you can study for the S.A.T. instead of watching television,” Mischel says. “And you can save more money for retirement. It’s not just about marshmallows.”

As Mr. Mischel points out, it’s not just about marshmallows.  When clients ask me what to do in volatile markets, I only half-jokingly suggest that they read the sports pages.  Focusing on the business news is just going to make you more likely to react.  The more impulsive you are, the more likely you are to make a poor decision.

Self-control is very important when using return factors, none of which offer smooth sailing.  Whether you are implementing relative strength or deep value or whatever, the market is going to gyrate and test you—basically do everything possible to get you to abandon your plan.  A systematic, rules-based approach can be very helpful in this regard.  If you have chosen a successful long-term strategy, more than anything else, your results are going to be dictated by how well you can follow it over the long run.

Hands Off!

Source: www.instructables.com

Posted by:


Weekly RS Recap

December 19, 2011

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 (12/12/11 – 12/16/11) is as follows:

It was an especially lousy week for the laggards last week.

 

Posted by:


Clarion Call For Leadership

December 17, 2011

Richard W. Fisher, president and CEO of the Federal Reserve Bank of Dallas in a speech on Dec. 16:

Quoting Martin Luther King Jr. on the topic of the responsibilities of leaders in a democratic society:

“Cowardice asks the question—is it safe? Expediency asks the question—is it politic? Vanity asks the question—is it popular? But conscience asks the question—is it right? … There comes a time when one must take a position that is neither safe, nor politic, nor popular, but one must take it because it is right.”

That time is now. Our nation’s economy is at risk. The Federal Reserve has done everything it can to reduce unemployment without forsaking our sacred commitment to maintaining price stability, or crossing over the monetary river Styx into full-blown debt monetization. I personally don’t care which party is in the White House or controls Congress. All I know is that the “honorable” members of Congress and presidents past, Republicans and Democrats alike, have conspired over time, however unwittingly, to drive fiscal policy into the ditch. They purchased their elections and reelections with popular programs so poorly funded that they now threaten the economic well-being of our children and our children’s children. Instead of passing the torch on to the successor generation of Americans, they have simply passed them the bill. This is the opposite of honorable.

Like all of you here, I am sickened by our politicians’ tendency to kick the can down the road, even when it is starkly clear that doing so jeopardizes America’s well-being. Small wonder that some recent polls show only 9 percent of the American people view Congress favorably. (One senator posited that the 9 percent consisted of blood relatives and congressional staff!)

But this is the holiday season, and especially now, I am given to viewing the world through optimistic eyes. The Christmas spirit may be overwhelming my judgment, but I believe that the American people—from the mainstream to the Tea Party to the unemployed and disaffected who have taken to the streets—are in the process of forcing politicians to get their act together. There is a loud, distinct, clarion call for leadership—for the people we entrust to right the rules that determine our economic future, cast away cowardice, expediency and vanity, and get on with leading us out of our fiscal wilderness.

Posted by:


Podcast #20 Tactical Investing: Valuable or Clown Act?

December 16, 2011

Podcast #20 Tactical Investing: Valuable or Clown Act?

Mike Moody and Andy Hyer

Posted by: