Global equity markets continue to grind higher during 2014, with the S&P 500 notching a new all -time closing high yesterday at 2,011. However, not all groups of stocks have performed well during the course of the year, with certain sectors outperforming others. Furthermore, large caps and mid -caps have outperformed small caps. The ability for investors to gain exposure to the strongest performing sectors of the equity market is something our relative strength models at Dorsey Wright attempt to capture on a daily basis. We are not looking to catch the very initial leg or final leg of a trend, but more importantly the “middle” portion of the trend where the majority of the gains are found. Having a solid game plan intact to take advantage when these moves occur is essential in helping achieve consistent returns.
PowerShares DWA Financial Momentum Portfolio (PFI)
At Dorsey Wright, we have a number of products that allow investors to take advantage of secular market rotation. We do so in a systematic way which allows us to eliminate human emotion and not take proper action until our relative strength rankings give confirmation.
In this piece, we want to focus on the point and figure chart of the PowerShares DWA Financial Momentum Portfolio (PFI). The PFI Index is derived by analyzing a matrix of stocks and finding the top 30-75 financial stocks in terms of relative strength. The reason for discussion about PFI today is a notable technical development on the point and figure chart.
Point & Figure – Technical Developments on PFI:
Range bound markets are often difficult for momentum strategies because of the whipsaw like action which can occur at the top and bottom ends of the range. Of course, periods of price congestion during an uptrend often lead to a sub-par relative strength ranking until the market can take out the overhead supply and confirm a new buy signal. The discipline to avoid these markets (until a proper signal is given) in search of stronger trends is something our model-based approach is designed to help do.
A quick glance at the chart below shows the sideways consolidation that PFI is in. Consolidations in steady trends are usually considered healthy as supply and demand will tend to battle it out over a period of time before one side eventually wins and the next major leg up (or down) commences. The PFI point and figure currently remains on a sell signal, and a buy signal will not be given till a move through 30 occurs. The longer PFI continues to consolidate, the more likely the move out of this pattern will be substantial which will likely contribute to stronger RS ratings for the product.
Conclusion:
The above article gives a good example of why rules-based systematic approach to the markets can be so beneficial when investing. As we stated above, financials as a group have struggled this year, underperforming the general market while other sectors have outperformed. However, although the current relative strength ranking remains somewhere in the middle of the pack, the overall technical structure is worth keeping an eye on as price once again approaches the upper end of the range near $30.00. The potential measured move target would be 34.50.
***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 is the index provider for PFI. See www.powershares.com for more information.
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