Systematic Relative Strength

In today’s ever changing market environment, keeping a strict rules-based investment focus is essential in helping asset manages achieve favorable returns. As stated in numerous relative strength-based white papers published by Dorsey Wright, we have found momentum to be an effective return factor over time. Our advantage in doing so, we believe, is allowing us to find strongly performing markets which have strong possibilities of exhibiting trending moves. This process starts at the asset class level and then is broken down to sectors, sub sectors, and individual equities and or commodities.

In reviewing 3 major macro-related charts this past weekend, we noticed some interesting developments in the US Dollar Index (DX/Y), Greenhaven Continuous Commodities Index ETF (GCC), and iShares 20+ Year Treasury Bond ETF (TLT). Remember, in terms of asset allocation, shifts in major macro-related markets like these can play a major impact on money flows into different asset classes during re-balancing periods.

DXY (US Dollar Index)

The US Dollar Index (DXY) has risen sharply higher since the beginning of August. We can see on the below Point and Figure chart the downtrend line which was broken and produced a buy signal when price broke out above 83.00. In terms of technical developments, price is now trading at the upper end of the range just below $85.00. Note a move through the 85.00 level would confirm a triple top buy signal with a potential measured move target of 96.00. Up until recently, the currency markets had been primarily range bound. However, as we can see below it appears the USD may be on the verge of starting a major move higher as the Federal Reserve continues to scale back is QE policies.

GCC (Greenhaven Continuous Commodities)

The commodities sector, of course, is the flip side to the US dollar strength. Due to the fact most commodities are priced in US Dollars, a stronger USD effects the ability of other countries to import them and will inhibit global demand. After starting the months of January and February with impressive strength, the sector has suffered some steep losses across the board. This comes as no surprise with the relative strength rankings for commodities remaining abysmal in recent months. The GCC ETF (seen below) is now coming into a major support level at 25.50. A move through 25.00 would confirm a double bottom break and have a potential price target of 20.00.

TLT (ishares 20+ year Treasury Bond)

The last Point & Figure chart we are going to take a look at is the TLT. Another major macro asset class ETF which is resting on an up-trend line that has been intact for quite some time. The potential measured move target would be 107.00. Again, this signal has not been confirmed yet but the development should be noted due to the size of the US treasury market and its importance regarding asset allocation and interest rates in general.

Conclusion:

Let’s give a brief recap of what we just discussed above. Our primary goal in this post is to use basic point and figure charts to help identify any macro related themes which may be starting to take shape. The reason this is important is that due to size of these asset classes. Major technical developments may influence money flows and asset allocation going forward. Will a shift into US Dollars and out of both commodities/fixed income help contribute additional money flow into global equity markets? Time will tell. Furthermore, a stronger dollar, lower commodity prices, and higher interest rates all play an effect our daily lives too.

***The relative strength strategy is not a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. The information found on Dorsey, Wright & Associates’ Web Pages has been prepared without regard to any particular investor’s investment objectives, financial situation, and needs. Accordingly, investors should not act on any recommendation (express or implied) or information in this report without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions. Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources, believed to be reliable. However, such information has not been verified by Dorsey, Wright and Associates, LLC (DWA) or the information provider and DWA and the information providers make no representations or warranties or take any responsibility as to the accuracy or completeness of any recommendation or information contained herein.

Neither the information nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities or commodities mentioned herein. This report or chart does not purport to be a complete description of the securities or commodities, market or developments to which reference is made. There may be instances when fundamental, technical, and quantitative opinions may not be in concert.

Each investor should carefully consider the investment objectives, risks and expenses of any Exchange-Traded Fund (“ETF”) prior to investing. Before investing in an ETF investors should obtain and carefully read the relevant prospectus and documents the issuer has filed with the SEC. To obtain more complete information about the product the documents are publicly available for free via EDGAR on the SEC website (http://www.sec.gov).

Dorsey Wright currently has a position in TLT.

This entry was posted on Monday, September 15th, 2014 at 11:06 am and is filed under Markets, Tactical Asset Alloc. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.