Dorsey, Wright Client Sentiment Survey Results – 1/6/12

January 17, 2012

Our latest sentiment survey was open from 1/6/12 to 1/13/12. The Dorsey, Wright Polo Shirt Raffle continues to drive advisor participation, and we greatly appreciate your support! This round, we had 63 advisors participate in the survey. 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 four 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 rose by +4.8%, and the overall fear numbers reacted as they should.  The fear group fell from 93% to 83%, while the upturn group rose from 7% to 17%.

Chart 2. Greatest Fear Spread.  Another way to look at this data is to examine the spread between the two groups.  The spread fell this round from 85% to 65%.  We’ve still got a long way to go until we hit par.

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

Chart 3: Average Risk Appetite.  The overall risk appetite numbers continue to whipsaw for the 4th straight survey in a row.  The overall number frose from 2.19 to 2.57, the highest levels we’ve seen since mid-summer.

Chart 4: Risk Appetite Bell Curve. This chart uses a bell curve to break out the percentage of respondents at each risk appetite level.  The bell curve layout has shifted towards more risk, with more than a smattering of 4’s and 5’s this round.  If the market can continue to rally, we’ll probably see a continued shift to the right on this chart.

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.

Chart 6: Average Risk Appetite by Group.  Both groups’ risk appetite pushed higher this round with a rising market.  The upturn group has had a very volatile past few surveys, due to light holiday response.

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 snapped back this round after a few whipsaws.

This survey, we saw a respectable market rally nearing +5%, and all of our sentiment indicators respond as they should.  The overall fear number pushed lower to sentiment levels we last saw at mid-summer.  The overall risk appetite indicator also pushed higher with a rising market, towards mid-summer levels.  If the market can keep up this momentum out of the gate into the new year, hopefully we’ll see some strong improvement in overall client sentiment.

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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Anything Can Happen–and Probably Will

January 17, 2012

Investors have their hands full right now.  There are a lot of global political and economic uncertainties, as well as a few complicating factors that we haven’t seen before (i.e., interest rates at zero).  Trying to figure out what might happen next is next to impossible.  In a recent commentary in Advisor Perspectives, Neel Kashkari of PIMCO laid out a number of possible outcomes.

  1. Austerity and deflation
  2. Explicit default
  3. Mild inflation
  4. Runaway inflation
  5. Miraculous growth

He points out further that this state of affairs is pretty chaotic–and that every opinion can be supported with precedents and sound reasoning.  There’s no easy way to figure out what is more or less likely.  Not to mention that the range of outcomes pretty much covers the waterfront.

In a “normal” economic environment investors debate a narrow range of outcomes: will the U.S. grow by 2.8% or 3.2%? Will inflation remain at 2.0% or climb to 2.3%? Debating a future of inflation vs. deflation is radically new territory for investors. The chaotic nature of the choice facing societies is whipsawing equity markets and dominating bottom-up factors.

There is a wide range of opinions, each supported by relevant precedents and sound economic reasoning. Yet despite our intense focus, we don’t know the answer with certainty.

This is brutal for investors, at least if you are trying to construct a strategic asset allocation.  Your ideal allocations would be almost diametrically opposed if they were optimized for austerity/deflation or runaway inflation!

The situation is further complicated by the fact that different players may make different choices.  For example, what if Greece decides on explicit default, but the UK opts for austerity and deflation?  Trying to figure out the net result of that interaction for a multitude of financial assets is a daunting prospect.

No investment method is going to get everything right ever, and especially not in this environment.  Yet, it seems to me that an adaptive process powered by relative strength has a good chance of rolling with the punches enough to capture returns from some of the themes.  Different assets will respond to evidence of different outcomes, and while there will doubtless be any number of cross-currents, the strongest assets will probably point us toward the weight of the evidence.  A disciplined tactical asset allocation process might be the best we can do when the range of possible outcomes is so wide.

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Weekly RS Recap

January 17, 2012

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 (1/9/12 – 1/13/12) is as follows:

The relative strength laggards had another strong week last week.

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Expert Opinion: Tom Brady Edition

January 17, 2012

In light of the Patriots’ blowout victory over the Broncos during Saturday’s AFC Divisional Playoff game, in which Tom Brady threw for 6 touchdowns, I thought it would be worthwhile to look back at the conventional wisdom on Tom Brady when he came into the league:

Tom Brady wasn’t supposed to be here.  He was the 199th pick in the 2000 draft.  Although Brady had broken passing records at the University of Michigan, most team scouts thought he was too fragile to play with the big boys.  The predraft report on Brady by Pro Football Weekly summarized the conventional wisdom: “Poor build.  Very skinny and narrow.  Ended the ’99 season weighing 195 pounds, and still looks like a rail at 211.  Lacks great physical stature and strength.  Can get pushed down more easily than you’d like.”  The report devoted only a few words to Brady’s positive attribute: “decision-making.” —How We Decide, Jonah Lehrer

So far, Brady has won three Super Bowls, two Super Bowl MVP awards, and has been selected to seven Pro Bowls.

Just another tidbit to tuck away for when you are tempted to yield to expert forecasts.

Prediction is very difficult, especially if it’s about the future. –Nils Bohr

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