Relative Strength Spread

June 30, 2015

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 6/29/15:

spread

This example is presented for illustrative purposes only and does not represent a past recommendation.  The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.   Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. 

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Weekly RS Recap

June 29, 2015

The table below shows the performance of a universe of mid and large cap U.S. equities, broken down by relative strength decile and quartile and then compared to the universe return.  Those at the top of the ranks are those stocks which have the best intermediate-term relative strength.  Relative strength strategies buy securities that have strong intermediate-term relative strength and hold them as long as they remain strong.

Last week’s performance (6/22/15 – 6/26/15) is as follows:

ranks

This example is presented for illustrative purposes only and does not represent a past recommendation.  The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.  Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. 

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YTD Performance of DWA ETFs

June 25, 2015

YTD performance of the 17 ETFs that Dorsey Wright manages (or is the index or signal provider for) is shown below:

ETFs

Source: Yahoo! Finance; 1/1/15 – 6/24/15

See www.powershares.com, www.ftportfolios.com, and www.arrowshares.com for more information.

The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security.  This post does not attempt to examine all the facts and circumstances which may be relevant to any product or security mentioned herein.  We are not soliciting any action based on this post.  It is for the general information of readers of this blog.  This post does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients.  Before acting on any analysis, advice or recommendation in this post, investors should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice.  Dorsey Wright & Associates is the index provider for the above ETFs.

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Quote of the Week

June 24, 2015

From Tadas Viskanta of Abnormal Returns:

One of the mistakes novice investors make is that they think they need to stay on top of all of the news that gets generated. They plow through the Wall Street Journal everyday, spend hours with a copy of Barron’s on the weekend and keep financial television all day. The problem is that there is little correlation between keeping up the financial media and actual performance.

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High RS Diffusion Index

June 24, 2015

The chart below measures the percentage of high relative strength stocks that are trading above their 50-day moving average (universe of mid and large cap stocks.)  As of 6/23/15.

diffusion

The 10-day moving average of this indicator is 76% and the one-day reading is 86%.

This example is presented for illustrative purposes only and does not represent a past recommendation.  The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.   Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. 

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Tweet of the Day

June 23, 2015

Why an exclusive focus on yield can be a problem, via Bespoke:

bespoke

Ultimately, total return is what matters.

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Champions Don’t Do Extraordinary Things

June 23, 2015

Great insight from Ben Carlson at A Wealth of Common Sense:

Trying to knock it out of the park at all times can lead to poor habits in your investment process. I just finished the book The Power of Habit by Charles Duhigg, who explains why this is the case. The reason habits, both good and bad, exist is because the brain is constantly looking for ways to save energy. Habits allow our mind to rest more often because our actions become almost second nature. What gets people in trouble is that we usually default to poor habits.

My favorite example in the book tells the tale of former NFL coach Tony Dungy. When he was an assistant coach, Dungy was constantly passed over for head coaching jobs. In part this had to do with his philosophy, which was too simple for many organizations:

Part of the problem was Dungy’s coaching philosophy. In his job interviews, he would patiently explain his belief that the key to winning was changing players’ habits. He wanted to get players to stop making so many decisions during a game, he said. He wanted them to react automatically, habitually. If he could instill the right habits, his team would win. Period.

“Champions don’t do extraordinary things,” Dungy would explain. “They do ordinary things, but they do them without thinking, too fast for the other team to react. They follow the habit they’ve learned.”

Dungy was finally hired by the Tampa Bay Buccaneers and it only took him a few years to turn around what was once the laughing stock of the league. The players bought into his philosophy, but it seemed to breakdown in big games:

“We would practice, and everything would come together and then we’d get to a big game and it was like the training disappeared,” Dungy told me. “Afterward, my players would say, ‘Well it was a critical play and I went back to what I knew,’ or ‘I felt like I had to step it up.’ What they were really saying was they trusted our system most of the time, but when everything was on the line, that belief broke down.”

Dungy was fired by the Bucs after a few consecutive losses in the conference championship game (they won it all with Jon Gruden the very next year), but eventually went on to win a Super Bowl with the Indianapolis Colts, who finally trusted his philosophy in the big games.

I had to smile at the part describing how Dungy was passed over for many head coaching jobs because his philosophy “was too simple for many organizations.”  Part of my every day is explaining the concept of momentum investing to potential clients (either individuals, financial advisors, or managed accounts departments) and it is not uncommon for me to hear a similar response, “that’s it, it’s 100% based on relative strength?”  Our investment process is essentially bringing Tony Dungy’s philosophy to portfolio management.  We have built our investment strategies around a proven factor–relative strength—and we have systematized our models so that we don’t have to overthink things.  Yet, many seem to feel more comfortable with something that sounds incredibly complex.

I’ve seen money run non-systematically and I’ve seen money run systematically.  In my view, here are the key benefits to systematizing the investment process:

  • In order to systematize a strategy, extensive research is required to understand what rules should be implemented.  Such testing makes it clear what works and what doesn’t over time.  Quiet confidence is a natural results of completing this research before the first dollar is invested.
  • Stress goes way down.  Simply systematizing an investment strategy does not remove periods of underperformance (unfortunately!).  However, it does make us think much more about process than short-term outcome.  The role of luck becomes greatly minimized and we are much better prepared to weather the inevitable rough patches without making hasty changes to our model.
  • Better results for our clients.  I firmly believe that our client’s lives will be better off because we employ a systematic process.  I believe they will have more money than they would otherwise have and I believe that they are more likely to become comfortable with our investment process and and stay with the strategy for longer periods of time.

So why don’t more people systematize their investment strategies?  Lack of computer programming ability, lack of access to data to do proper testing, lack of self-discipline to refrain from constantly tweaking a good model, and perhaps most of all, searching for the perfect rather than acceptance of the good.  However, if you can overcome those obstacles I believe you will put yourself in a position to be in very select company over time.

A relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.

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Relative Strength Spread

June 23, 2015

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 6/22/15:

spread

This example is presented for illustrative purposes only and does not represent a past recommendation.  The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.   Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. 

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Weekly RS Recap

June 22, 2015

The table below shows the performance of a universe of mid and large cap U.S. equities, broken down by relative strength decile and quartile and then compared to the universe return.  Those at the top of the ranks are those stocks which have the best intermediate-term relative strength.  Relative strength strategies buy securities that have strong intermediate-term relative strength and hold them as long as they remain strong.

Last week’s performance (6/15/15 – 6/19/15) is as follows:

ranks

This example is presented for illustrative purposes only and does not represent a past recommendation.  The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.  Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. 

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RS Charts of The Day

June 19, 2015

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Point and Figure RS Charts are calculated by dividing one security by another and plotting the ratio on a PnF chart.  When the ratio is rising, it is plotted in a column of X’s and reflects the numerator outperforming the denominator.  Likewise, when the relative strength ratio is declining, it is plotted in a column of O’s and reflects the outperformance of the denominator.

Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  This example is presented for illustrative purposes only and does not represent a past recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security.  This post does not attempt to examine all the facts and circumstances which may be relevant to any product or security mentioned herein.  We are not soliciting any action based on this document.  It is for the general information of clients of Dorsey, Wright & Associates, LLC (“Dorsey, Wright & Associates”).  This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients.  Before acting on any analysis, advice or recommendation in this document, clients should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice.

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Dorsey Wright Indexes Webinar

June 19, 2015

Click here to view yesterday’s webinar with Dave Gedeon and John Lewis on the methodology behind the Dorsey Wright Indexes.

nasdaq

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Sector Performance

June 19, 2015

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 6/18/2015.

gics

The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.    Source: iShares

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A World of Languages

June 18, 2015

A proportional visualization of the world’s most popular languages from Open Culture:

languages

 

Click here for a larger format.

And here is a mind blowing stat:

Although the 23 languages visualized above are collectively spoken by 4.1 billion people, there are at least another 6700 known languages alive in the world today.

From an investment perspective, analyzing companies across all these languages, countries, and cultures can be a daunting, if not impossible, task.  However, a momentum strategy is built from just one input–price–and that common denominator enables us to use essentially the same relative strength engine on a variety of investment universes.  Just one of the many benefits of a momentum-based approach to investing.

HT: Jim O’Shaughnessy

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“An Indomitable Rise for This ETF”

June 17, 2015

Nice profile of the First Trust Dorsey Wright Focus 5 ETF (FV) by ETF Trends:

Hundreds of new exchange traded products come to market every year. Some take the long road to asset-gathering proficiency while others gain investors’ affinity in a matter of months. Then there is the rare breed that finds success right out of the gate.

The First Trust Dorsey Wright Focus 5 ETF (NasdaqGM: FV) is in that category. FV debuted in March 2014 and today it is a $3.55 billion fund, easily making it one of the most successful ETFs to debut last year. Impressively, FV needed less than nine months of work to top $1 billion in assets and has needed just seven months to more than triple in size from there. [Another Good Year for New ETFs]

“What causes a fund to collect $3 billion in about one year? 1) a great marketing organization – First Trust, the Focus Five sponsor, grew 68% last year and has total assets in excess of $100 billion with a 100-plus person nationwide sales team, 2) an easy to explain story, 3) convenience and 4) performance,” according to Morningstar.

FV makes a Dorsey Wright strategy used by advisors and institutional investors accessible to a broader audience. FV tracks the Dorsey Wright Focus Five Index which is comprised of “five First Trust sector and industry based ETFs identified by DWA’s index methodology to offer the greatest potential to outperform the other ETFs in the selection universe,” according to First Trust.

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Latest Dalbar Numbers

June 17, 2015

The latest Dalbar numbers, via NYT:

For the two decades through December, Dalbar found, the actual annualized return for the average stock mutual fund investor was only 5.19 percent, 4.66 percentage points lower than the 9.85 percent return for the Standard & Poor’s 500-stock index. Bond investors did even worse, trailing the benchmark Barclays Aggregate Bond index by 4.71 percentage points.

In isolation, these figures, which aren’t adjusted for inflation, may seem small. But they aren’t when they recur year after year. In fact, because of the effects of compounding — in which a positive return in one year adds to your stash and can grow further in subsequent years — those annualized numbers translate into life-changing disparities.

Consider a $10,000 investment in the S.&P. 500 index. Using the Dalbar rates, my calculations show that with dividends, that $10,000 would grow to $65,464 over 20 years, compared with only $27,510 over the same period for the return of the average stock mutual fund investors.

That gap grows over time. At those rates after 40 years, with compounding, the nest egg invested in the plain vanilla stock index would grow to about $428,550, compared with only $75,680 for the average returns of stock mutual fund investors, a $352,870 difference. Disparities of this order have been showing up year after year in the Dalbar numbers. And with so many Americans forced to rely on their own investing acumen because of the decline of traditional pension plans and lax government rules about financial advice, these awful returns really matter.

Keep in mind that those numbers are just average investor returns.  Plenty of people excel in the financial markets and, no, passive cap-weighted indexing is not the only (or perhaps not even the best) solution.  However, succeeding in the financial markets does require an understanding (or use of a professional who understands) what factors work over time and what investor behavior practices are most likely to lead to good outcomes.

HT: Abnormal Returns

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Crash Dieting for Savers

June 17, 2015

From Crash Dieting Doesn’t Work for Savers, Either, by Anthony Isola:

Sure, deprivation diets can work temporarily. Brides preparing for weddings rely on this short-term effect, as do celebrities who want to fit into designer gowns for awards shows. But the more we deny ourselves, the more we crave what we deny.

Result? According to Bloomberg, the share of the population classified as obese has ballooned from 14% in 1960 to 36% in 2010. That’s a problem. Here’s another: CBS Moneywatch reports that 26% of people ages 50-54 and 14% of those over 65 have no savings. Boosting savings is critical, but just as you can’t live long-term on a starvation diet, you can’t realistically expect to build up a nest egg for tomorrow by starving yourself financially today.

I am still convinced that that the only savings plan anyone needs is to save 15% of every dollar ever earned (and invest that money wisely).  Learn this as a teenager and live it throughout your life and personal finances will be a breeze.

HT: Abnormal Returns

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Small Cap Momentum

June 16, 2015

As shown in the relative strength chart below, small caps have had the upper hand compared to large caps for most of the last 15 years (the RS ratio is plotted in a column of X’s when small caps are outperforming large caps and shaded in green when small caps are on a PnF buy signal).  However, I have to admit that I thought that 2014 (when small underperformed large by over 10 percent in the first three quarters of the year) would be an inflection point for this relative strength relationship and that large caps may take the baton.  However, that is not really how it has played out.  Small caps started outperforming large caps in the last couple months of 2014 and that outperformance of small caps has continued in the first half of 2015.

sm lg rs chart

In fact, when you look at the head to head comparison of small caps versus large caps in each of the time periods below small caps have the advantage.

sm v lg_06.19.15

Source: Yahoo! Finance, as of 6/18/15.  The performance is based on total returns, inclusive of dividends, but does not include all transaction costs.  Investors cannot invest directly in an index.  Indexes have no fees.

Given the favorable performance and relative strength of small caps, investors may very well be considering how to increase their exposure to this area.  With that in mind, we wanted to review the methodology we use to construct the index for The PowerShares DWA Small Cap Momentum ETF (DWAS).

  • Inception of DWAS was July 19, 2012
  • Start with an investment universe of approximately 2,000 U.S. small cap stocks
  • Use Point & Figure relative strength analysis to rank that universe of securities
  • In order to qualify for the index, stocks must exhibit both near-term and longer-term favorable relative strength
  • 200 stocks are selected for the index and are weighted by relative strength so that the stocks with the best relative strength get the most weight in the index
  • There are no sector constraints
  • The index is reconstituted on a quarterly basis

dwas_06.19.15

Source: Yahoo! Finance, as of 6/18/15.  The performance is based on total returns, inclusive of dividends, but does not include all transaction costs.

See www.powershares.com for more information about the PowerShares DWA Small Cap Momentum Portfolio (DWAS).

This information 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.   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 information does not purport to be a complete description of the securities or commodities, market or developments to which reference is made.  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).  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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Relative Strength Spread

June 16, 2015

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 6/15/2015:

spread

This example is presented for illustrative purposes only and does not represent a past recommendation.  The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.   Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. 

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Weekly RS Recap

June 15, 2015

The table below shows the performance of a universe of mid and large cap U.S. equities, broken down by relative strength decile and quartile and then compared to the universe return.  Those at the top of the ranks are those stocks which have the best intermediate-term relative strength.  Relative strength strategies buy securities that have strong intermediate-term relative strength and hold them as long as they remain strong.

Last week’s performance (6/8/15 – 6/12/15) is as follows:

ranks

 

The sector breakdown for the week was as follows:

sector

This example is presented for illustrative purposes only and does not represent a past recommendation.  The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.  Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. 

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RS Chart of The Day

June 11, 2015

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Point and Figure RS Charts are calculated by dividing one security by another and plotting the ratio on a PnF chart.  When the ratio is rising, it is plotted in a column of X’s and reflects the numerator outperforming the denominator.  Likewise, when the relative strength ratio is declining, it is plotted in a column of O’s and reflects the outperformance of the denominator.

http://Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  This example is presented for illustrative purposes only and does not represent a past recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security.  This post does not attempt to examine all the facts and circumstances which may be relevant to any product or security mentioned herein.  We are not soliciting any action based on this document.  It is for the general information of clients of Dorsey, Wright & Associates, LLC (“Dorsey, Wright & Associates”).  This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients.  Before acting on any analysis, advice or recommendation in this document, clients should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice.

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Average is Over

June 5, 2015

Tyler Cowen’s book Average Is Over provided me some important insight into the ever-changing nature of our global economy—and particular insight into why some financial advisors are seeing their businesses thrive and others are struggling to stay afloat.  Growing income inequality seems to be a hard trend that economists and politicians have debated ad nauseam in recent decades.  Consider Cowen’s take on why this growing disparity is taking place and where we go from here:

This imbalance in technological growth will have some surprising implications.  For instance, workers more and more will come to be classified into two categories.  The key questions will be:  Are you good at working with intelligent machines or not?  Are your skills a complement to the skills of the computer, or is the computer doing better without you?  Worst of all, are you competing against the computer?

…If you and your skills are a complement to the computer, your wage and labor market prospects are likely to be cheery.  If your skills do not complement the computer, you may want to address that mismatch.  Ever more people are starting to fall on one side of the divide or the other.  That’s why average is over.

Surely, we in the financial services industry can attest that this is true.  Those advisors who have embraced technology have likely seen their businesses rapidly expand over the past decade.  They find themselves to be significantly more productive, able to manage much more money with seemingly less effort, and better able to stay connected to their growing number of clients in meaningful ways.  Those advisors who have not embraced technology, still trying to do business the way they did it in years past, are being left behind.

Subscribers of DWA research are keenly aware that there has been a wee bit (ok an enormous amount) of innovation over the years in our research database.  The core PnF principles from decades past are still there (supply and demand still determine price just like they always have).  However, this method that once involved hand charting stocks on a piece of graph paper has been computerized.  Now, our research is focused on rules-based asset allocation models, guided ETF models, and relative strength matrices that allow advisors to customize and systematize their own investment strategies at the click of a mouse.

We have also seen our assets under advisement take giant leaps forward…yet the firm still has about the same number of employees we had a decade ago.  How is this possible?  We are managing money with a reliance on systematized relative strength models which allow for tremendous efficiency and, we believe, better investment results that non-systematized approaches to investing.  Are there still money management firms that employ vast armies of analysts feeding data to investment committees who regularly meet for long meetings to debate investment strategy?  Yes, but those are among the people that Cowen is talking about when he asks, “are you competing against the computer?”

The future is very bright for those advisors who stay on the right side of technology.  For those that don’t, they are going to find it harder and harder to stay average.

A relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.

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RS Chart of The Day

June 4, 2015

 photo SPYVSEEM_zps4votqfzi.png

Point and Figure RS Charts are calculated by dividing one security by another and plotting the ratio on a PnF chart.  When the ratio is rising, it is plotted in a column of X’s and reflects the numerator outperforming the denominator.  Likewise, when the relative strength ratio is declining, it is plotted in a column of O’s and reflects the outperformance of the denominator.

Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  This example is presented for illustrative purposes only and does not represent a past recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security.  This post does not attempt to examine all the facts and circumstances which may be relevant to any product or security mentioned herein.  We are not soliciting any action based on this document.  It is for the general information of clients of Dorsey, Wright & Associates, LLC (“Dorsey, Wright & Associates”).  This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients.  Before acting on any analysis, advice or recommendation in this document, clients should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice.

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RS Chart of The Day

June 3, 2015

 photo SPYVSGCC_zpskarc4mw5.png

Point and Figure RS Charts are calculated by dividing one security by another and plotting the ratio on a PnF chart.  When the ratio is rising, it is plotted in a column of X’s and reflects the numerator outperforming the denominator.  Likewise, when the relative strength ratio is declining, it is plotted in a column of O’s and reflects the outperformance of the denominator.

Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  This example is presented for illustrative purposes only and does not represent a past recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security.  This post does not attempt to examine all the facts and circumstances which may be relevant to any product or security mentioned herein.  We are not soliciting any action based on this document.  It is for the general information of clients of Dorsey, Wright & Associates, LLC (“Dorsey, Wright & Associates”).  This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients.  Before acting on any analysis, advice or recommendation in this document, clients should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice.

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Momentum Rules the World

June 2, 2015

Momentum is the rule, not the exception.  It is how the world generally works, not an anomaly.  We really should be less surprised to learn that research suggests that momentum is an effective way to generate excess returns over time.   Momentum is pervasive, both in the financial markets and in life in general.  I was struck by this passage in Andre Agassi’s autobiography, Open:

Our best intentions are often thwarted by external forces—forces that we ourselves set in motion long ago.  Decisions, especially bad ones, create their own kind of momentum, and momentum can be a b*@!~ to stop, as every athlete knows.  Even when we vow to change, even when we sorrow and atone for our mistakes, the momentum of our past keeps carrying us down the wrong road.  Momentum rules the world.  Momentum says: Hold on, not so fast, I’m still running things here.  As a friend likes to say, quoting an old Greek poem: The minds of the everlasting gods are not changed suddenly.

Agassi wrote this about a period in his life (around 1997) that was filled with defeat (both personal and professional), drugs, and yet a desire for a change for the better.  Agassi found that past decisions created a momentum-effect in his life that made it very difficult for him to change course.  Eventually, Agassi was able to right his own ship in many ways, including returning to the top of the tennis world to win the 1999 French Open and, as he writes in his book, discover a much deeper sense of purpose by embarking on an effort to bring charter schools to at-risk children and communities.  Fascinating autobiography and worthwhile read.

These same principles apply in the financial markets.  Some companies do thing better than others—think culture, incentives, vision, etc.  Those companies that are more successful than their peers tend to have their stock prices rewarded accordingly.  Furthermore, those companies that perform better than their peers often do so for extended periods of time.  In other words, there is momentum in the underlying fundamentals of the company which tends to lead to momentum in the price of its stock.  The best companies tend to get overbought…and then stay that way for extended periods of time.  The opposite is also true, once a company becomes an underperformer it can stay that way for years at a time.  The result is that far from the market being statistically normally distributed, the market actually has fat tails.  Consider the following from The Capitalism Distribution published by BlackStar Funds a number of years ago.

BlackStar

If, by employing a disciplined momentum strategy, you are able to capture a bunch of the returns of those positive outliers and avoid much of the negative outliers, your chances of generating favorable returns over time are very good.

Thus, before you refer to momentum as an anomaly in an otherwise efficient market, you might pause and ask yourself if momentum is really a deviation from the normal order of things.  For me, it fits right into the pattern of life.

A relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.

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RS Chart of The Day

June 2, 2015

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Point and Figure RS Charts are calculated by dividing one security by another and plotting the ratio on a PnF chart.  When the ratio is rising, it is plotted in a column of X’s and reflects the numerator outperforming the denominator.  Likewise, when the relative strength ratio is declining, it is plotted in a column of O’s and reflects the outperformance of the denominator.

Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  This example is presented for illustrative purposes only and does not represent a past recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security.  This post does not attempt to examine all the facts and circumstances which may be relevant to any product or security mentioned herein.  We are not soliciting any action based on this document.  It is for the general information of clients of Dorsey, Wright & Associates, LLC (“Dorsey, Wright & Associates”).  This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients.  Before acting on any analysis, advice or recommendation in this document, clients should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice.

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