Looking to 2017

December 30, 2016

As we close out 2017 the final week of the year the markets have not been as cooperative as investors would have liked.  The markets have pulled back from historic highs and the Dow was not able to hit the elusive 20,000 mark. Looking forward to 2017 here are several issues that may impact clients and markets.


New President: President elect Trump takes the oath of office on Friday January 20th in Washington, D.C.  The US markets have reacted mostly positive to the Trump election based on promises of lower taxes, faster growth and more US based jobs. Here is a link if you would like more information on the inauguration.

Tensions with Russia?: Obama announced sanctions against Russia yesterday afternoon and expelled 35 Russian official in response to the allegations of Russian cyber-attacks during the election. Russia has not yet retaliated but Russian Foreign Minister Sergei Lavrov “We of course cannot leave these stunts unanswered. Reciprocity is the law in diplomacy and international relations.”

Social Security

Tax cap increase: Workers and employers each pay in 6.2% of wages into the Social Security system until the salary cap of $118,500. In 2017 the tax rate will stay the same but the cap is being raised to $127,200 to adjust for higher wages in the US.

Payments increase: The cost of living adjustment for 2017 will be a modest 0.3% or about $5 per month. This increase is in line with 2016  which did not see any raise. Increases to Social security are based on the Consumer Price Index for Urban Wage Earners and Clerical Workers.

Earning Limits: The earnings limit for people  65 and younger will increase from $15,720 in 2016 to $16,920 in 2017. While those who turn 66 in 2017 the limit increases by $3,000 to $44,880.

For a full list of changes, here is the 2017 Social Security Changes Fact Sheet.


China: China is trying to reduce the impact of the Dollar on the Yuan as the Yuan trades at an eight year low. They are introducing 11 more countries into its currency basket.

Euro: The Financial Times polled 28 economists and over 60% believe that the Euro and dollar will hit parity next year for the first time in 14 years. Rising interest rates in the US and continued QE in Europe are thought to be two of the main factors in the shift.

Dorsey, Wright & Associates, LLC, a Nasdaq Company, is a registered investment advisory firm

 Neither the information within this article, nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities, commodities or exchange traded products. This article does not purport to be complete description of the securities or commodities, markets or developments to which reference is made.

Past performance, hypothetical or actual, does not guarantee future results. In all securities trading there is a potential for loss as well as profit. It should not be assumed that recommendations made in the future will be profitable or will equal the performance as shown. Investors should have long-term financial objectives.  Advice from a financial professional is strongly advised.

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Top business stories of 2016–PnF Edition

December 29, 2016

USA Today identified the following as “The top 10 business stories of 2016.”  I’ve added PnF charts for some of the topics mentioned in the article to provide some additional insight.

1. Donald Trump elected president. New presidents always portend massive changes. But the election of Trump, with his promises to upend Washington and roll back regulations, could shake business and economic establishments to their foundations. While he has hinted at keeping some popular provisions of Obamacare, Trump will be politically pressured to repeal much of the health care law that mandated universal coverage. Having promised to bring jobs back to Rust Belt states, Trump is likely to renegotiate trade deals and possibly even raise tariffs, a move that could trigger global disputes. The Dodd-Frank Act, enacted after the national financial crisis to lower excessive risk-taking by banks, could be under assault as lobbyists push for easing its restrictions. Trump has professed a desire to maintain the current low-interest-rate policy.




2. Brexit. In late June, the United Kingdom defied polling forecasts and voted to leave the European Union, setting off reverberations across the globe. U.S. stocks fell 5% as fears spread of disrupted trade relationships with Europe and of other countries that could follow the U.K.’s lead. Yet the market recovered within days as investors realized the immediate effects on American businesses were limited. There were even some winners among U.S. banks and tech firms that may have gained from a shift in investment from the U.K. But the economic fallout won’t really be clear until the U.K. renegotiates trade deals with European countries before it leaves the EU in 2019.



3. The Dow closes in on 20,000. Wall Street stumbled into 2016, with stocks suffering their worst-ever first week of trading. But the gloom gave way to bullish optimism, especially after the presidential election when the “Trump Rally” put the 120-year-old Dow Jones industrial average on a track for a “Dow 20,000” milestone, racking up more than 25 record highs in 2016 so far along the way. The stock rebound occurred despite the Federal Reserve’s decision to hike short-term interest rates for the first time in 2016  at its December meeting — when the central bank also let investors know it expects three more rate increases in 2017.


4. Prescription drug prices bring controversy. The rising cost of prescription drug prices captured headlines, generated rising criticism and sparked investigations. At center stage was Turing Pharmaceuticals CEO Martin Shkreli’s decision to impose a more than 5,000% price spike of a drug used to treat a parasitic illness suffered by AIDS patients. Summoned to appear before a congressional committee in February, he went silent, invoking his Fifth Amendment right to avoid testifying against himself. But he unloaded after the hearing, calling members of Congress “imbeciles” in a tweet. Turing wasn’t the only drugmaker taking fire. Health care providers, patients and others criticized Mylan for a series of increases that raised the price for a two-pack of EpiPens, a potentially life-saving injection for allergy sufferers, to $600, up from about $100 in 2009. By year’s end, Mylan had introduced a generic version of the medication for $300 per two-pack. All of these events drew fire from a Senate committee report in December that warned “staggering” increases in the cost of some prescription drugs threaten the health of patients and “the economic stability of American households.”


5. Wells Fargo’s scandal. In September, the San Francisco-based bank agreed to a $185 million settlement with federal regulators after an investigation showed Wells Fargo had secretly opened millions of unauthorized deposit and credit card accounts that weren’t authorized by customers. An estimated 5,300 employees were fired over several years for pressuring customers to accept the largely unwanted accounts, the bank acknowledged in its settlement with the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency and Los Angeles city and county legal officials. Wells Fargo CEO John Stumpf resigned in October, but investigations of the bank’s conduct continued.

6. Unemployment rate falls. The unemployment rate, which hit 10% in 2009, continued its remarkable descent, falling to 4.6% in November from 5% early in the year. Many economists believe that rate, the lowest since August 2007, represents full employment and can’t fall much further without generating a run-up in inflation as wages rise. The Federal Reserve is coming around to that view and so, at a mid-December meeting, unexpectedly forecast three interest rate hikes in 2017, throwing cold water on the post-election market rally. The low jobless rate is already pushing up pay increases as employers compete for fewer available workers. That smaller pool of workers is also tempering average monthly job gains, which have fallen from 229,000 in 2015 to 180,000 this year.


7. Oil prices plunge, then rebound. They fell below $27 per barrel in mid-February as a global glut of production fueled a surplus and concerns about economic growth dealt a blow. The commodity’s sharp descent, dropping nearly in half over a four-month stretch, contributed to bankruptcies of dozens of U.S. energy companies and thousands of layoffs. But oil rebounded to more than $50 per barrel after the Organization of the Petroleum Exporting Countries and certain non-OPEC states, including Russia, agreed in November to slash production in a bid to bolster prices.


8. The U.S. dollar shines. The greenback hit its highest level vs. the euro in 14 years as global investors began pricing in less Fed stimulus and stronger U.S. growth. The dollar surged in value against currencies around the world following the election of Trump. It showed particular strength against the Chinese yuan, which Trump repeatedly targeted in his campaign after accusing the Chinese government of currency manipulation to benefit its economy.


9. Pressure on free trade. A decades-long movement toward free trade and globalization appeared to stop in its tracks as presidential candidates Donald Trump and Hillary Clinton both vowed to withdraw from the Trans-Pacific Partnership, which would have relaxed trade restrictions with Asian nations. Trump threatened to pull out of the North American Free Trade Agreement if Mexico doesn’t renegotiate the deal and to slap Mexico and China with tariffs of 35% and 45%, respectively. His aim: to partly reverse the millions of layoffs at U.S. factories as jobs were offshored to China, Mexico and other countries. But many economists say those jobs aren’t coming back and tariffs risk retaliation that could ravage U.S. exports and jobs.



10. Fake news fears. Fake news bubbled up during the political campaign and became a business issue for the place where many people get their news: Facebook. A post-election analysis by BuzzFeed found that fake stories shared on Facebook outperformed real news stories during the final three months of the campaign cycle. The most shared story was a fake report about Pope Francis’ endorsement of then-Republican nominee Donald Trump. Facebook CEO and co-founder Mark Zuckerberg said it was ”extremely unlikely” that it affected the election outcome, but the company is making changes so users of the social network can more easily flag news that is fake. A Pew Research Center survey, released earlier this month, found that 63% say fake news creates “great confusion” among the public about current events.


Source of charts is Dorsey Wright.  Charts are as of 12/28/16.  Dorsey, Wright & Associates, a Nasdaq Company, is a registered investment advisory firm. Neither the information nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities, commodities or exchange traded products.  This document does not purport to be complete description of the securities to which reference is made.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Technical Analysis is not predictive and there is no assurance that forecasts based on charts can be relied upon. Each investor should carefully consider the investment objectives, risks, and expenses of the securities discussed above prior to investing.  Advice from a financial professional is strongly advised.  Dorsey Wright currently owns FB in some of its managed accounts.  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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Fixed Income Under the Microscope

December 27, 2016

Earlier this month we saw a noteworthy shift in DALI, which ranks six asset classes by relative strength from strongest to weakest.  Fixed Income came into 2016 ranked number two in DALI and spent much of the first half of the year ranked number one.


As of 12/22/16

As shown below, Fixed Income fell to the fourth rank in the middle of this month after having been ranked three or higher since early 2012.


Period: 1/3/07 – 12/19/16, based on weekly tally ranking

Bonds are typically the portion of the allocation that investors worry least about, especially over the past 35 years.  Fixed Income tends to have lower volatility than most other asset classes and if you just look at the nominal returns of bonds over time, you would probably be reassured.  After all, as shown in the first table below, nominal Fixed Income returns have been positive in every single decade since the 1870s.  In the tables below, losing performances are shaded in red, those with annualized gains of 0% to 1.9% in yellow, and left unshaded are any gains of 2% or higher.


Source: Morningstar, Research Affiliates

However, real annualized returns show a very different story.  After accounting for inflation, bonds have not always been so stellar.


Source: Morningstar, Research Affiliates

What action should be taken if fixed income were to enter into another extended period where its real returns weren’t so favorable?  That will depend on each client’s circumstances, but DALI will be a good way to gauge the overall environment for this very important asset class.

The 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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Steve Forbes Interviews Tom Dorsey

December 27, 2016

Steve Forbes Interviews Tom Dorsey, Founder, Dorsey, Wright & Associates

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Weekly RS Recap

December 27, 2016

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 (12/19/16 – 12/23/16) is as follows:


This example is presented for illustrative purposes only and does not represent a past or present recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  The performance above is based on pure price returns, not inclusive of dividends, fees, or other expenses.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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All I want for Christmas is… low volatility?

December 23, 2016

The month of December sees some of the lowest volume trade days of the year. People are on vacation, holiday parties are in full swing and allocations for the next year are being finalized. S&P 500 volatility has also decided it wants to take a step back from the roller coaster of the year. VIX futures hit a 16 month low on Wednesday to 10.97, a level not seen since August of 2015.

The VIX had sharp increase in volatility leading up to the election, post-election it has been on a sharp decline following the announcement that Trump beat Clinton.


With the S&P 500 trading almost flat for the week as of market close on December 22nd  and today shaping up to be another non eventful day, all eyes will be looking to the markets next week. In the next week we will see the final tax loss trades of the Obama Presidency and we may even see the Dow Jones finally break through 20,000.
Investors cannot invest directly in an index. Indexes have no fees. Past Performance is not indicative of future results. Potential for profits is accompanies by possibility of loss.

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Quadfecta Highs

December 20, 2016

How uncommon is it to see the S&P 500, Dow Jones Industrial Average, The Nasdaq Composite, and the Russell 2000 Indexes all break out to new all-time highs on the same day?  Since 1979, there have only been 13 such occurrences, including the most recent occurrence on 11/21/2016.  Piper Jaffrey’s December issue of The Informed Investor, included a nice summary the types of market returns we have seen after such “Quadfecta” days.

Following the republican’s ‘trifecta’ sweep during the election, the popular averages posted ‘quadfecta’ highs, representing the rare occurrence when the SPX, DJIA, COMPQ and RUT all close at record highs on the same trading day. The recent November ‘quadfecta’ highs was the first time this has occurred since Dec. 1999. From our perspective, the major averages simultaneously breaking out to new highs confirms broad participation in the rally and provides further evidence to our secular bull market thesis.  A historical review of other ‘quadfecta’ highs offers compelling results in regards to expected future returns.  Although there are a limited number of occurrences since 1979, the major indices have generated meaningfully returns over the ensuing 26-week and 52-week periods. Additionally, the percent of positive returns has far outpaced negative returns on a historical basis.


The table above highlights various return metrics after quadfecta highs have been reached. As you can see, the SPX, DJIA and COMPQ traded higher 75% of the on a 52-week basis. The RUT was higher 67% of the time after the same time period. Average returns also look healthy across the board with at the major indices averaging at least 8% returns over the next 52-weeks.

When clients ask our thoughts on the markets in 2017, this might be something you consider discussing with them.  Strong indications of healthy market breadth have historically tended to be a good sign for future equity returns.

Price performance only, not inclusive of dividends or transaction costs.  Past performance is no guarantee of future returns.

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Some Perspective on Tactical Asset Allocation

December 13, 2016

I recently saw a presentation by Nadia Papagiannis, CFA, of Goldman Sachs Asset Management that provided some important insights into the landscape for asset allocation.  Consider the table below, which shows  the performance of a number of asset classes (Commodities, Emerging Market Debt, U.S. Bonds, High Yield, U.S. Real Estate, International Real Estate, Bank Loans, Hedge Funds, Emerging Market Equities, International Equities, International Small Cap, U.S Small Cap) to the performance of U.S. Large Cap Equities.



What stands out about the years 2013-2015?  Very few asset classes outperformed U.S. Large Cap Equities during those years.  This goes a long ways towards explaining why most people who have employed some form of asset allocation (anything that diversified away from Large Cap US Equities) have probably been left underwhelmed with their performance during those 3 years.

True to the human condition, recency bias has been in full effect in recent years as it applies to tactical allocation with people questioning the category’s merits.  However, I would suggest that clients may benefit from reviewing a table like that shown above to remember that not all years are like 2013-2015 (if they were there wouldn’t be much need to own anything besides U.S. Large Cap Equities).

To me, there are 5 key reasons why investors would do well to consider making tactical asset allocation part of the mix:

  1. Asset classes go through bull and bear markets.  A relative strength-driven tactical asset allocation strategy can seek to overweight those asset classes in favor and underweight those asset classes that are out of favor.
  2. Many investors can’t handle the volatility associated with a buy and hold approach of investing solely in U.S. Large Cap Equities.  Tactical Asset Allocation has the potential to provide some diversification and help smooth out the ride.
  3. After seeing a couple year environment in which tactical asset allocation struggled, now may be a very good time to beef up that exposure or to make new allocation to tactical asset allocation.
  4. From a client management standpoint, my experience is that clients love to talk about the tactical portion of their overall asset allocation.  Clients like to see how their portfolio is adapting to the current environment.  Give them something they want (flexibility).  This is very different than just giving into their emotional investment desires because a relative strength-driven asset allocation strategy objectively respond to market trends.
  5. Tactical Asset Allocation can be the glue that keeps a clients’ hands off the more aggressive portions of their allocation that may be fully invested in Equities.

Dorsey Wright provides a full suite of tactical asset allocation tools and solutions such as our Global Macro SMA/UMA, The Arrow DWA Tactical and Balanced Funds, The Arrow DWA Tactical ETF, DALI, Tactical Tilt Models, and more.  If you would like to discuss different tools and solutions in this area, please call Andy Hyer at 626-535-0630 or andyh@dorseymm.com.

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

Indices are unmanaged.  The figures for the index reflect the reinvestment of all income or dividends, as applicable, but do not reflect the deduction of any fees or expenses which would reduce returns.  Investors cannot invest directly in indices.  The indices referenced herein have been selected because they are well known, easily recognized by investors, and reflect those indeces that the Investment Manager believes, in part based on industry practice, provide a suitable benchmark against which to evaluate the investment or broader market described herein.  The exclusion of “failed” or closed hedge funds may mean that each index overstates the performance of hedge funds generally.  Starting point selected given longest common index inception.  HFRI FoF = HFRI Fund of Funds Composite Index; HFRI and related indices are trademarks and service marks of Hedge Fund Research, Inc. (“HFR”) which has no affliation with GSAM.  Information regarding HFR indices was obtained from HFR’s website and other public sources and is provided for comparison purposes only.  HFR does not endorse or approve any of the statements made herein.

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What Winning Looks Like (Probably Not What You Expect)

December 6, 2016

The blog Basis Pointing has an excellent write up on the performance profile of winning funds.  I suspect most investors will be very surprised at its findings.  It’s not that winning funds don’t exist–they most definitely do.  Rather, it is that the path to long-term outperformance is far lumpier than most investors probably expect.

Investors tend to have some pretty ingrained misconceptions of what “winning” funds look like. For instance, winning funds lay waste to the index and category peers; they do so over the short- and long-term; they corner really well, deftly avoiding big drawdowns and rocking during rallies; they don’t rattle around much; they succeed like clockwork. They’re Tom Brady.

For those who have gotten to know markets, randomness, and the resultant unpredictability of short and even intermediate-term performance, we know this is nuts. Winning funds do not succeed anywhere near linearly. Performance is jagged; success and failure arrive abruptly; it often takes years to grind out an advantage; and so forth. This is pure torture for many investors, who bail (and that pattern reveals itself in the form of hideous dollar-weighted returns; if there’s any consistency in markets, it’s that, but I digress).


However, this concept is often too abstract so I thought I’d try to semi-simply illustrate it through an example. Here’s what I did (which will win no points for elegance or precision but last time I checked this blog was free):

  1. Grouped together all diversified U.S. open-end equity mutual funds (i.e., the nine style-box categories; active and index funds; no ETFs)
  2. Limited to unique funds (i.e., oldest shareclass)
  3. Calculated the twenty year annual excess returns of the unique funds I grouped (excess returns = fund’s total return minus return of benchmark index assigned to the category that fund was assigned to)
  4. Sorted the funds into deciles by excess returns (top=group with highest excess returns; bottom=group with lowest excess returns)

There were around 680 unique funds that had twenty-year excess returns, so we’re talking about 68 per decile grouping.


Here’s the predictable stairstep pattern from the top to bottom decile when sorted by excess return:


Click here to read all of the different elements of this study, be see below for the one that I found most interesting:

As shown below the more-successful funds did indeed lag less often (measured as number of rolling 36-month periods during the twenty year span where the decile grouping had negative average excess returns) than the less-successful funds.


But it’s not like they were strangers to underperformance. In fact, the best-performing funds lagged their indexes in more than one of every three rolling three-year periods.So, investors in these funds spent roughly a third of the past two decades looking up, not down, at the index (when measured over rolling three-year periods).

My emphasis added.  As shown in the first chart, there are plenty of funds that have outperformed over the past 20 years.  However, any investor who expected consistent outperformance would have been sorely disappointed.  Even the best performing funds lagged their benchmark about one third of rolling 3-year periods.  The lessons should be clear.  Investors would be well served to do meaningful due diligence on active strategies before putting money to work.  Once investors feel confident that they have settled on strategies/management teams that they believe are likely to outperform over time, they would be well served to demonstrate a very high level of patience.

There may be times where all investments and strategies are unfavorable and depreciate in value.

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The roller coaster ride of oil

December 1, 2016

Millions of American every year pay a hefty sum of money to be thrilled by some of the world’s fastest rollercoasters. The feeling of being suspended above the world as you climb higher and higher only to have crashing down is an amazing feeling.  If you have not conquered the rational part of your brain that says that it is not logical to put yourself in those metal contraptions I highly recommend a trip to your local amusement park. Another option has been to stay long oil over the past year, below is a chart showing roller coaster ride of Brent Crude Futures over the past year.


In January we hit the bottom turn of the roller coaster and analysts did not have a consensus on oils next direction.

“The price of Brent crude fell to $27.67 a barrel at one point, its lowest since 2003, while US crude fell as low as $28.36.

Many analysts have slashed their 2016 oil price forecasts, with Morgan Stanley analysts saying that “oil in the $20s is possible”, if China devalues its currency further.

Economists at the Royal Bank of Scotland say that oil could fall to $16, while Standard Chartered predicts that prices could hit just $10 a barrel.”1

Looking back now it was just a market overreaction. The client calls and excessive worry that the world was slowing down are now just a bad memory. Since the bottom in January: oil prices have recovered, China is still growing at a respectable rate and Latin America did not fall apart as many people feared. After the OPEC meeting yesterday we saw oil prices once again climb above $50.00 to close out the day over 8% ahead.  Today as of writing this the Brent Crude markets are up over 3% and gasoline futures are up over 5%. While we do not how the cuts to oil production that have been approved will happen or if the countries involved will follow through, we have a short term relief in the energy market’s low prices.

In our Aggressive SRS mode we rotated two additional energy names into the model in the past month allowing us to capitalize on the energy spike, while at the start of the year we held no energy names going into the January selloff.  That account is a concentrated portfolio (20-25 holdings). Two of our energy names were up mid 20% and a third was up 10%. Needless to say, we haven’t seen a day like today since Hurricane Katrina caused all the refiners to have problems.  The long term goal like every other money manager is to outperform our index, while that does not always happen in short time periods, days like yesterday are the reason you invest for longer periods and follow your investment thesis.

If you would like more information on our Systematic RS Aggressive Portfolio, please e-mail andyh@dorseymm.com or call 626-535-0630. Andy will also be hosting a webinar on Friday December 2, 2016 at 2 PM ET introducing our family of Systematic Relative Strength Portfolios.

 Upcoming Events

Please join Andy Hyer, Client Portfolio Manager at DWA, for an introduction to our family of Systematic Relative Strength Portfolios on Friday, December 2nd at 2 p.m. ET.  These portfolios provide disciplined access to relative strength strategies including U.S. Equities, International Equities, Fixed Income, and Global Macro and are available on UMA and SMA strategies at a large and growing number of firms.  Click here to register for the webinar. The event password is dwadwa.


This example is presented for illustrative purposes only and does not represent a past or present recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  The performance above is based on pure price returns, not inclusive of dividends, fees, or other expenses.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

1 West, Matthew. “Just How Low Can Oil Prices Go and Who Is Hardest Hit?” BBC News. January 18, 2016. Accessed December 01, 2016. http://www.bbc.com/news/business-35245133.


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