March 16, 2012
Here we have the next round of the Dorsey, Wright Sentiment Survey, the first third-party sentiment poll. Participate to learn more about our Dorsey, Wright Polo Shirt raffle! Just follow the instructions after taking the poll, and we’ll enter you in the contest. Thanks to all our participants from last round.
As you know, when individuals self-report, they are always taller and more beautiful than when outside observers report their perceptions! Instead of asking individual investors to self-report whether they are bullish or bearish, we’d like financial advisors to weigh in and report on the actual behavior of clients. It’s two simple questions and will take no more than 20 seconds of your time. We’ll construct indicators from the data and report the results regularly on our blog–but we need your help to get a large statistical sample!
Click here to take Dorsey, Wright’s Client Sentiment Survey.
Contribute to the greater good! It’s painless, we promise.
March 16, 2012
Although it always seems counterintuitive for incredibly simple momentum strategies to be able to beat the market, yet more evidence is provided in a brief article from CXO Advisory. (Relative strength is often called “momentum” in academic literature.)
Their method was simple. They used the nine domestic sector SPDRs, held the top one based on a simple momentum ranking, and revisited the ranks monthly, switching if necessary. Three simple models were used: 1) top 6-month return, 2) top 6-month return ending 1 month ago, and 3) top 6-month return or cash if the top sector SPDR was below its 10-month moving average (a la Mebane Faber’s paper).
You can see the equity curve below, although there is better detail in the original article. (The model that can go to cash was obviously helped by two big bear markets in the last ten years; in an up market decade it might be different.)
Now, I’m not sure any compliance department would sign off on a strategy that only held one sector at a time, but it is certainly eye-opening that all three strategies outperformed the market. This finding is rampant throughout many, many academic and practitioner studies, including ones archived on our website. Systematic use of relative strength works.
—-this article was originally published 12/22/2012. Evidence for the effectiveness of relative strength continues to pile up, most recently in the five-year performance of PDP.
March 16, 2012
John Coates, formerly a senior trader at Deutsche Bank and Goldman Sachs, has an interesting proposal for dealing with the negative consequences of emotional investing:
First, he wants banks and regulators to monitor traders’ biology; after all, he says, it would not be hard to install heart monitors, or blood tests in banks, to spot hormonal swings. Second, he wants banks to employ more women and older men on trading floors, not for reasons of political correctness, but because female traders and older men tend to have lower testosterone and better functioning vagal nerves. A better biological mix, he insists, will mean fewer swings in testosterone and cortisol, and thus fewer market dramas.
This quote led me to ask our team whether our investment model is a boy model or a girl model. I sure hope it’s a girl!
Minimizing the negative effects of emotional trading is one of the primary reasons that our investment decisions are model-based. We do extensive research to understand how best to apply relative strength to portfolio management, we build systematic investment models, and then we execute! Sometimes we have a good feeling about a particular trade, sometimes we have a terrible feeling, but we execute nonetheless (and there have been plenty of times when those terrible feelings have preceded winning trades and vice versa). When you’ve got an investment factor with results as compelling as relative strength, inserting emotions doesn’t make a whole lot of sense. If hand-wringing over particular trades can be avoided altogether by reliance on a systematic model, then why not? In the absence of systematic models, then sure, give the heart monitors and gender screening a try!
March 16, 2012
The chart below shows performance of US sectors and capitalizations over the trailing 12, 6, and 1 month(s). Performance updated through 3/15/2012.