Dorsey, Wright Client Sentiment Survey Results – 3/16/12

March 27, 2012

Our latest sentiment survey was open from 3/16/12 to 3/23/12. The Dorsey, Wright Polo Shirt Raffle continues to drive advisor participation, and we greatly appreciate your support! This round, we had 45 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 500 rallied +2.3%, and all of our client sentiment indicators responded positively.  The greatest fear number fell to its all-time lows, from 83% to 62%.  It’s hard to believe we’ve been running the survey for 2 whole years, and clients still have not even hit the high 50’s.  On the flip side, the opportunity group rose from 17% to 38%.

Chart 2. Greatest Fear Spread.  Another way to look at this data is to examine the spread between the two groups.  The spread fell to its all-time lows this round at 24%.

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 number rose to just under its all-time highs which were set in April of 2011.  Close, but no cigar.  This round, we saw an average risk appetite of 3.02.  If the market continues to rally, so will the overall risk appetite number.

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 continues its recend trend towards more risk.  This round, over half of all respodents wanted a risk appetite of 3.

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 chart sorts out as expected, with the upturn group wanting more risk than the downturn group.

Chart 6: Average Risk Appetite by Group.  Historically, this is one of the most volatile indicators in the survey.  This round, the upturn group actually fell, while the dowturn group moved higher.  We’d expect both groups to move higher in a risingmarket, but the upturn group has been known to buck the trend.

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 this round.

From survey to survey, the market was up +2.3%, and all the indicators performed as expected.  We’re now sitting at the lowest fear levels we’ve ever seen in the history of the survey.  The market has rallied roughly +23% from recent lows in September, and our sentiment indicators are responding to that information.  If the market continues to move higher, we will eventually hit par on the overall fear indicator (50-50 split), which might happen sooner than you expect.

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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PDP: Leading the Strategy Indexing Revolution?

March 27, 2012

Strategy indexing is hot, according to John Prestbo of Dow Jones.  In a recent interview carried in Index Universe, he discussed what he meant by strategy index:

[Index Universe editor Olivier] Ludwig: What are we talking about here? Things like what Rob Arnott’s up to, or to those smart-beta indexes that have proliferated in the last 12 months?

Prestbo: That’s exactly what I’m talking about. I group them all together into a broad category called “strategy indexes,” where the index is not tracking a traditional segment of the market so much as it’s tracking a way of approaching the market. A lot of people want to get the best return they can, and they are willing to put in the time and effort to be flexible and manipulate their portfolio among various offerings. They combine the benefits of semi-active investing with the lower costs that come with it. The cost may be higher than the plain-vanilla indexes, but they are lower than an active manager.

I added the italics.  The Technical Leaders indexes must have been far ahead of the wave, since Powershares launched PDP more than five years ago, not in the last 12 months!  Academic factor models, like Carhart’s four-factor model suggest that there is a return premium (above inflation) available from:

  • the market itself
  • small-cap stocks
  • value stocks
  • momentum stocks (relative strength)

There are hundreds of ETFs that can give you market exposure, and many more focusing on small-cap and value stocks.  If you look hard enough, you can probably find even ETFs for small-cap value stocks in almost every market.

To my knowledge, for many years, only the Technical Leaders ETF family focused on relative strength.  PDP was launched in March 2007.  Developed (PIZ) and emerging markets (PIE) were added later, in December 2007.  Russell now has a couple of momentum indexes out, although they are less than 12 months old.

Here’s a quiz for you: Of Carhart’s four factors, which has the largest return premium?  Maybe the graphic below will help you answer the question.

Which factor has the largest return premium?

Source: Mercer Advisors

The best returns belong to the return factor that has been most neglected: relative strength.  It is a source of continuing amazement to everyone in our office that PDP has $500 million in assets, rather than billions like some of its competitors, especially given its performance.  Perhaps value investing sounds more sophisticated and small-cap investing is racier, but historically it’s been relative strength that has provided the biggest raw returns.

Good investing requires education, so maybe PDP is just ahead of the curve.  We’re hoping that, over time, there will be more discussion of relative strength as a return factor and that it will get a more prominent (and well-deserved) place within investor portfolios.

See for more information about PDP.  Past performance is no guarantee of future returns.  A list of all holdings for the trailing 12 months is available upon request.

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From the Archives: Essence of Relative Strength

March 27, 2012

“I can’t change the direction of the wind, but I can adjust my sails to always reach my destination.” – Jimmy Dean

—-this article originally appeared 12/11/2009.  Who knew the sausage king knew anything about relative strength?

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Relative Strength Spread

March 27, 2012

The chart below is the spread between the relative strength leaders and relative strength laggards (universe of mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.    As of 3/26/2012:

RS leaders and RS laggards have had similar performance over the past couple of years.  History would strongly suggest that we will eventually see RS leaders resume their outperformance.

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