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.

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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.

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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

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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.

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