So true…
Bespoke: What We Hear
March 13, 2014
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Just for Fun, Sentiment | 
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Posted by: Andy Hyer
Using the CAPE Ratio for Market Timing
March 13, 2014The Shiller Cyclically Adjusted Price to Earnings ratio (“CAPE” ratio) is getting a lot of play in the financial press as the “single best forecaster of long-term future stock returns.” Nobel Prize-winning economist Robert Shiller first published information on the CAPE ratio in 1998. While some may have used this measure as a reason to argue that the market is expensive and to stay on the sidelines for the last couple of years, one quote is worth keeping in mind. On May 17, 2011, Shiller stated:
Equity returns will be disappointing over the next decade.
From that date through December 31, 2013, two and a half years later, the S&P 500 Index total return is up 47.3% (15.9% annualized). The decade is far from over yet, but the market will have to fall a long way before the decade he refers to is disappointing. We’ll see, but it causes one to pause. (Source: Bridgeway)
Trying to time the market based on valuations can be…problematic. It is worth remembering that earnings do have some disadvantages. As stated by Bridgeway:
First, they can be manipulated by management. Second, since accounting standards change over time, a dollar of earnings in 1880 may not mean the same thing as a dollar of earnings in 1990 or in 2014.
At Dorsey Wright, price is the sole input into our models. We employ systematic models that allow us to adapt to price trends (relative strength allows us to identify the strongest of the trends). What is, is.
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Posted by: Andy Hyer
Factor Performance
March 13, 2014The Leuthold Group’s March Green Book gave an update on factor performance over the past 12 months (ending Feb 2014):
Momentum has carried over its 2013 strength into 2014 with impressive back-to-back months to start the year.
Momentum was left for dead by many investors after the disastrous 2009, when the stocks that had underperfored the most rebounded violently off of the March lows. We felt then, and now, that abacking away from the factor after the damage had been done was a mistake. Since the end of 2009 no other factor comes close to the performance that Momentum has delivered.
Compounding the problem for investors that shunned Momentum is the fact that not much else has worked of late. The chart above shows performance for the last 12 months, and the only other noteworthy category is Sentiment, which is highly correlated with Momentum. Valuation and Growth have been noticeably absent.
The favorable environment for Momentum is also reflected in the performance of the PowerShares DWA Momentum Index (PDP) over the past year. We are the index provider for this ETF and the index is constructed using Dorsey Wright’s Point & Figure Relative Strength analysis.
Performance for the 12-month period ending Feb 28, 2014 is as follows:
Source: Dorsey Wright, Returns do not include dividends or transaction costs
For reasons that we frequently discuss in this blog, we believe that Momentum is the single most effective investment methodology over time. We also know that it does periodically go out of favor (during choppy/trendless markets and markets with major reversals in leadership). However, trends have been fairly stable over the past year and Momentum is capitalizing.
This Momentum strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. Past performance is no guarantee of future returns. Potential for profits is accompanied by possibility of loss. See www.powershares.com for more information.
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Posted by: Andy Hyer
Fund Flows
March 13, 2014Mutual fund flow estimates are derived from data collected by The Investment Company Institute covering more than 95 percent of industry assets and are adjusted to represent industry totals.
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Posted by: Andy Hyer
