Politics and Investing

February 21, 2017

Last week Bloomberg reported that Americans recently broke the American Psychological Association’s anxiety meter for a record level of stress.  You read that right.  No, this is not from late 2008.  This is from January 2017.

“The results of the January 2017 poll show a statistically significant increase in stress for the first time since the survey was first conducted in 2007,” the APA said on Wednesday in a report on the survey of 1,019 adults living in the U.S., conducted from Jan. 5 to Jan. 19 by Harris Poll.

Americans’ stress levels in January were worse than in August, in the middle of the angriest, most personal campaign in recent memory, when some believed the anxiety would abate after the election. At 57 percent, more than half of respondents said the current political climate was a very or somewhat significant source of stress. Stressors for everyone, including Republicans, were the fast pace of unfolding events and especially the uncertainty of the current political climate, said Vaile Wright, director of research and special projects at the APA.

What is it that has everyone so worked up?  Politics.  How many of your clients invest their politics?  When the resident of the Oval office is of their same political party, do they tend to be more bullish and when the opposite is true, do they tend to be more bearish?

When I read that article I couldn’t help but think back to something that The Motley Fool wrote last year as it relates to the problem of conflating politics and investing:

Economics is a close cousin of politics, which is dangerous because politics is a close cousin of emotional decisions detached from reality.

Not only do most of us have emotional opinions about who should/shouldn’t run the country, but we unfailingly overestimate how much influence presidents have over the economy and stock market. When presidents do impact the economy, good luck guessing how markets will respond. Lots of smart people predicted that Barack Obama’s spending plans meant surging interest rates and a collapsing dollar.

Growing the economy means getting everyone to win, whereas politics by definition means getting the opposing party to lose. Rationality melts when you set up this kind of my-team-versus-yours dilemma. Psychologist Geoffrey Cohen showed that Democratic voters supported Republican proposals when they were attributed to fellow Democrats more than they supported Democratic proposals attributed to Republicans, and vice versa. Imagine the same part of your brain analyzing investments. It’s a disaster.

I like politics, and I love investing. But I run from anything conflating the two.

Thus, the power of an emotionless method of investing.  The chart just reflects what is, not what we fear might be.  And what does that chart—using the S&P 500 as a proxy for the market—look like right now?

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As of 2/16/17

Well it doesn’t look bearish…  Invest accordingly.

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

February 21, 2017

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 (2/13/17 – 2/17/17) is as follows:

ranks

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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Sector Performance

February 16, 2017

The table below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 2/15/2017.

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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.  Source: iShares

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High RS Diffusion Index

February 15, 2017

The chart below measures the percentage of high relative strength stocks (top quartile of our ranks) that are trading above their 50-day moving average (universe of mid and large cap stocks.)  As of 2/14/17.

diffusion 02.15.17

The 10-day moving average of this indicator is 69% and the one-day reading is 81%.

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Investors cannot invest directly in an index.  Indexes have no fees.  Past performance is no guarantee of future returns.  Potential for profits is accompanied by possibility of loss.

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Relative Strength Spread

February 14, 2017

The chart below is the spread between the relative strength leaders and relative strength laggards (top quartile of stocks in our ranks divided by the bottom quartile of stocks in our ranks; universe of U.S. mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.    As of 2/13/17:

spread 02.14.17

After declining for much of the past year, the RS Spread is now on the cusp of moving above its 50 day moving average—a potentially positive development for relative strength strategies.

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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Traditional vs. Systematic Portfolio Management – What’s the Difference?

February 9, 2017

Click here for a replay of my 2/8/17 webinar.

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No Second Chances with Retirement Savings

January 23, 2017

For a financial advisor, providing the right mix of investment strategies to their clients is a critical component of their value proposition.  We all know that each client has unique needs and risk tolerances, but clients can be largely grouped into two major categories, depending on whether they are in the accumulation phase or the distribution phase of their lives.  A recent article by James B. Sandidge, JD, in The Journal of Investment Consulting provides some powerful insights:

There are no second chances with retirement savings.  When saving for retirement, time provides a safety net against short-term risk.  But retirees cannot count on time, so it’s critical to get the risk allocation right.  Figure 3 shows year-by-year account values for a portfolio allocated 70/30 beginning in 2000.  The black line shows that an investor who was accumulating wealth was able to recover from two of the worst stock markets in the past seventy-five years (2000-2002 and 2008-2009) to finish the fourteenth year with 153 percent of the original investment.

With time as a safety net, “focus long-term” or “sit tight” have been effective risk-management strategies for those accumulating wealth.  Conversely, the bars show that if the same investor employed the same portfolio to distribute wealth with a 5-percent initial withdrawal and a 3-percent annual increases, the account value never recovers from the early market losses and finishes the fourteenth year with only 26 percent of the original investment, a pace of principal erosion that could deplete the account in five more years.

Accumulating investors only have to worry about how long it would take to recover from losses.  Retirees must worry about losses triggering accelerated principal erosion and cash-flow risk, and the lack of a safety net exaggerates the importance of even small adjustments to risk.

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Sandidge, James B. 2016. Adaptive Distribution Theory. Journal of Investment Consulting 17, no. 2: 13–33.

This distinction between the distribution phase and the accumulation phase is critical to determining the appropriate types of investment strategies that should be implemented for different clients.  The bottom line is that investors in the distribution phase no longer have time on their side.  Risk management is of paramount importance in this phase of their lives.

Among the 7 strategies that are part of our family of Systematic Relative Strength Portfolios, Global Macro is among those that would be most appropriate for clients who are in the distribution phase of their lives.  In fact, I believe that this strategy is ideally suited to fit the needs of these clients who are want and need a focus on risk management.  See below for information about this strategy.

Systematic RS Global Macro Strategy

Frequently Asked Questions

What is the investment objective of the strategy?  The strategy seeks to achieve meaningful risk diversification and investment returns.  The historical correlation of this strategy to every major asset class has been relatively low over time.  Our global macro strategy is uniquely positioned from an investment opportunity perspective because it is not limited to a specific market.

What asset classes are represented in the strategy?  The strategy is designed to invest in the following asset classes:  Domestic Equities (long & inverse), International Equities (long & inverse), Fixed Income, Real Estate, Currencies, and Commodities.  Exposure to each of these areas is achieved through ETFs.

How are the investments selected?  The strategy holds approximately ten ETFs that demonstrate powerful relative strength characteristics.  The strategy is constructed pursuant to Dorsey Wright’s proprietary basket ranking and rotation methodology.

How is this different from strategic asset-allocation?  We do not approach the asset allocation from a strategic standpoint. Instead, we implement a tactical approach. Our tactical overlay is designed to own the areas of the market exhibiting the greatest relative performance and avoid or use inverse funds for the weakest areas. You can expect the weightings to change over time!  When, for example, domestic equities are performing poorly our tactical process will avoid or use inverse funds in these areas or favor an area with better relative performance, like fixed income.  We make changes to the investment mix as markets and leadership change. The portfolio is designed to be quite responsive to emerging strength.

How do all these processes come together?  The investment strategy is 100% systematic. We have designed our processes to remove the portfolio managers’ emotions and biases, which are detrimental to superior long-term performance.

How is risk managed in the portfolio?  Our investment process is designed to systematically rotate the portfolio into the strongest asset classes and individual alternatives within those asset classes. If an asset class is performing poorly the tactical asset allocation overlay will avoid or use inverse funds in that area and buy an asset class with better relative strength.  There is a stop, based on the relative strength ranking, on each holding. The asset classes used in the portfolio are not typically highly correlated, so that our investment guidelines provide enough latitude to deliver solid returns in a variety of market conditions.

Will the portfolio ever go to cash?  Our investment universe includes ETFs that represent the shorter-term sector of the United States Treasury market.  So, yes, we can effectively allocate a portion of the account to cash if that is where the best relative strength is found.

Will you be investing in all of the ETFs?  We have a rigorous process to determine what ETFs we will evaluate for our portfolios. There are many ETFs that are duplicative or not suitable for the investment strategy we are using in this portfolio, and we do not consider these for purchase in the fund. As new ETFs come to market we are committed to evaluating their investment merits and the effect they might have on our investment strategy. Any new ETFs will need to meet the same stringent criteria as existing ETFs for consideration in the portfolio.

How can investors access the Global Macro strategy?  There are three different ways that investors can access this strategy.  It is available as a managed account on a large and growing number of SMA and UMA platforms.  It is also the model used for the Arrow DWA Tactical Fund (DWTFX) and the Arrow DWA Tactical ETF (DWAT).

For more information about this strategy, please e-mail andyh@dorseymm.com or call 626-535-0630.

Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any se­curity. This report does not attempt to examine all the facts and circumstances which may be relevant to any company, industry 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.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Relative Strength is a measure of price momentum based on historical price activity.  Relative Strength is not predictive and there is no assurance that forecasts based on relative strength can be relied upon.  Dorsey Wright is a research provider for the Arrow DWA Tactical Fund and Arrow DWA Tactical ETF.

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Systematic Relative Strength Portfolios (SMA/UMA Platforms)

January 20, 2017

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Our Systematic Relative Strength Portfolios are available as managed accounts at a large and growing number of firms.

  • Wells Fargo Advisors (Global Macro available on the Masters/DMA Platforms)
  • Morgan Stanley (IMS Platform)
  • TD Ameritrade Institutional
  • UBS Financial Services (MAC Platform)
  • RBC Wealth Management (MAP Platform)
  • Raymond James (Outside Manager Platform)
  • Stifel (Opportunity Platform)
  • Kovack Securities (Growth and Global Macro approved on the UMA Platform)
  • Charles Schwab Institutional (Marketplace Platform)
  • Envestnet
  • Fidelity Institutional
  • Adhesion Wealth
  • FolioDynamix

Different Portfolios for Different Objectives: Descriptions of our seven managed accounts strategies are shown below.  All managed accounts use relative strength as the primary investment selection factor.

Aggressive:  This Mid and Large Cap U.S. equity strategy seeks to achieve long-term capital appreciation.  It invests in securities that demonstrate powerful relative strength characteristics and requires that the securities maintain strong relative strength in order to remain in the portfolio.

Core:  This Mid and Large Cap U.S. equity strategy seeks to achieve long-term capital appreciation.  This portfolio invests in securities that demonstrate powerful relative strength characteristics and requires that the securities maintain strong relative strength in order to remain in the portfolio.  This strategy tends to have lower turnover and higher tax efficiency than our Aggressive strategy.

Growth:  This Mid and Large Cap U.S. equity strategy seeks to achieve long-term capital appreciation with some degree of risk mitigation.  This portfolio invests in securities that demonstrate powerful relative strength characteristics and requires that the securities maintain strong relative strength in order to remain in the portfolio.  This portfolio also has an equity exposure overlay that, when activated, allows the account to hold up to 50% cash if necessary.

International: This All-Cap International equity strategy seeks to achieve long-term capital appreciation through a portfolio of international companies in both developed and emerging markets.  This portfolio invests in those securities with powerful relative strength characteristics and requires that the securities maintain strong relative strength in order to remain in the portfolio.  Exposure to international markets is achieved through American Depository Receipts (ADRs).

Global Macro: This global tactical asset allocation strategy seeks to achieve meaningful risk diversification and investment returns.  The strategy invests across multiple asset classes: Domestic Equities (long & inverse), International Equities (long & inverse), Fixed Income, Real Estate, Currencies, and Commodities.  Exposure to each of these areas is achieved through exchange-traded funds (ETFs).

Balanced: This strategy includes equities from our Core strategy (see above) and high-quality U.S. fixed income in approximately a 60% equity / 40% fixed income mix.  This strategy seeks to provide long-term capital appreciation and income with moderate volatility.

Tactical Fixed Income: This strategy seeks to provide current income and strong risk-adjusted fixed income returns.   The strategy invests across multiple sectors of the fixed income market:  U.S. government bonds, investment grade corporate bonds, high yield bonds, Treasury inflation protected securities (TIPS), convertible bonds, and international bonds.  Exposure to each of these areas is achieved through exchange-traded funds (ETFs).

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To receive fact sheets for any of the strategies above, please e-mail Andy Hyer at andyh@dorseymm.com or call 626-535-0630.  Past performance is no guarantee of future returns.  An investor should carefully review our brochure and consult with their financial advisor before making any investments.

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ALPS Dorsey Wright Sector Momentum (SWIN) Introduced

January 12, 2017

We are happy to announce the launch of SWIN, the ALPS Dorsey Wright Sector Momentum ETF.  From Yahoo:

ALPS, a subsidiary of DST Systems, Inc. (DST) providing products and services to the financial services industry, today announced a strategic alliance with Dorsey, Wright & Associates, a Nasdaq Company (DWA) to launch a new factor exchange-traded fund (ETF), which is designed to capture momentum investing at both the sector and stock level.

The ALPS Dorsey Wright Sector Momentum ETF (Nasdaq Ticker: SWIN) leverages Dorsey Wright’s proprietary Point and Figure Relative Strength charting to create a high conviction portfolio of 50 stocks. The Fund seeks to track, before fees and expenses, the Dorsey Wright US Sector Momentum Index (DWUSSR), an equally weighted index consisting of 50 large and midcap stocks listed in the US.

“We are excited to collaborate with such a prestigious company,” says Tom Carter, President of ALPS Advisors Inc., “The combination of Dorsey Wright’s research and our focus on product innovation has created a new strategy for enhancing portfolio construction.”

Historically, momentum strategies tend to perform best when clear leadership is established and sustained for a meaningful period; they often lag during time when there is no clear leadership among sectors. “SWIN is the first Momentum ETF to combine both macro (sector) and micro (stock) level screens,” says Mike Akins, SVP & Head of ETFs for ALPS, “We believe its unique two-screen construct creates opportunity for outperformance in strong sector momentum cycles, while simultaneously maintaining a diversification cushion to help weather periods where no clear sector leadership is present.”

Although SWIN is concentrated on the top performing momentum sectors, it maintains an equal-weighted strategy at the stock level. “At ALPS we strive to help investors and advisors build better portfolios,” says Akins, “ALPS Sector Dividend Dog ETF (SDOG), which employs an equal-weight sector and stock strategy with a tilt toward equity income, and SWIN are complementary strategies that provide diversified exposure to both value and momentum.”

Continue reading here.

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Q1 2017 PowerShares DWA Momentum ETFs

January 3, 2017

The PowerShares DWA Momentum Indexes are reconstituted on a quarterly basis.  These indexes are designed to evaluate their respective investment universes and build an index of stocks with superior relative strength characteristics.   This quarter’s allocations are shown below.

PDP: PowerShares DWA Momentum ETF

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DWAS: PowerShares DWA Small Cap Momentum ETF

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DWAQ: PowerShares DWA NASDAQ Momentum ETF

dwaq

PIZ: PowerShares DWA Developed Markets Momentum ETF

piz

PIE: PowerShares DWA Emerging Markets Momentum ETF

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Source: Dorsey Wright, MSCI, Standard & Poor’s, and NASDAQ, Allocations subject to change

We also apply this momentum-indexing methodology on a sector level:

sector-momentum

See www.powershares.com for more information.  

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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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.

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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.

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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.

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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.”

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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.

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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.

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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.

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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.

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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.

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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.

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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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Momentum Demystified

December 28, 2016

It has been stated by no less than Eugene Fama, the 2014 co-recipient of the Nobel Prize in Economics that “The premier anomaly is momentum.” [1]  This idea that past winners tend to be future winners, while past losers tend to be future losers, has been vetted and established through hundreds of academic white papers on the topic.

Yet, momentum (aka relative strength) continues to be a misunderstood approach to investing.  Why is momentum a strong investment factor that gives investors the potential to outperform over time?  How exactly can momentum be exploited?

I think Tom Dorsey explained the concept of momentum best in a recent interview:

tom-dorsey

If I gave you a list of the 100 best golfers worldwide and asked you to pick who you thought would be in the top 10 at the end of the next quarter, who would you pick? My guess is you would pick the current top ten to be in the top three months from now. Even if I asked you to pick the ones who would be in the top ten after one year, you would probably pick the current top ten.

At the end of the contest some would have fallen out and some would have moved up, but the majority would still be in the top ten. This is outperformance. It relates to Newton’s Law of motion, which suggests that objects that are in motion tend to stay in motion until an external force acts upon them. So, in my world this means that stocks that have good fundamentals, in a market that in general is supporting higher prices, and the chart pattern clearly shows that demand is in control of the stock, tend to continue to do well. Golfers who have good fundamentals, are in good shape, and at the top of their game, tend to continue to do well.

Buy the winners.

[1] Fama, E. and K. French, 2008, Dissecting Anomalies, The Journal of Finance, 63, pg. 1653-1678.

To the Data

For a simple illustration of the power of momentum, consider the following study completed by Nasdaq Dorsey Wright’s Senior Portfolio Manager, John Lewis, CMT, who has done extensive research and published numerous whitepapers on the topic of momentum investing.

Study

Out of an investment universe of the largest 1,000 U.S. stocks by market capitalization, we backtested a strategy that selected the top 100 stocks based on trailing 12 month total return.  The portfolio was rebalanced on a monthly basis.  Each of the 100 stocks in the portfolio was equal-weighted each month.

As shown below, this simple momentum strategy outperformed the Russell 1000 Total Return Index by a meaningful margin during this test period covering 12/31/1989 – 9/30/2016.

momentum-model

Additional data points:

  • Annualized return of the momentum model was 13.45% compared to 9.49% for the Russell 1000 Total Return Index over this period of time.
  • The momentum model outperformed the Russell 1000 Total Return Index in 67 percent of rolling 3 year periods and 70 percent of rolling 5 year periods.

There are a variety of ways to construct and implement a momentum strategy and this is by no means meant to be held out the only or the best method.  Rather, the purpose of this study is to demonstrate that a very simple momentum model has significant performance potential over time.  The bottom line is that any investor who seeks to employ an active investment strategy that strives to generate performance above that of a passive index over time should give strong consideration to making momentum a key component of their portfolios.

Source: FactSet.  Hypothetical Back-test Period: 12/31/1989 – 09/30/2016.  Performance information for the Momentum Model is the result of a strategy back-test on an index that is not available for direct investment.  Back-tested performance is hypothetical and is provided for informational purposes to illustrate the effects of the strategy during a specific period.  The hypothetical returns have been developed and tested by DWA, but have not been verified by any third party and are unaudited.  Back-testing performance differs from actual performance because it is achieved through retroactive application of a model investment methodology designed with the benefit of hindsight.  Model performance data (both back-tested and live) does not represent the impact of material economic and market factors might have on an investment advisor’s decision making process if the advisor were actually managing client money.  Returns include dividends, but do not include fees or 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. 

Accessing Momentum through Managed Accounts

Hopefully, at this point you are starting to wonder how you can put this powerful investment factor to work for your clients.  We have a suggestion: Take a look at our family of Systematic Relative Strength Portfolios, which are available on a large and growing number of separately managed account (SMA) and unified managed account (UMA) platforms.

First, a little history.  Since 1987, Dorsey Wright & Associates has been an advisor to financial professionals on Wall Street and investment managers worldwide, providing technical research and investment solutions.  In 2002, John Lewis joined the portfolio management team at Dorsey Wright and was instrumental in leading an extensive period of research that led to the introduction of our family of Systematic Relative Strength portfolios.  These portfolios have two major objectives:

  1. Systematize the investment management process to remove as much of the element of human emotion as possible.
  2. Focus the investment strategy around the most powerful return factor we could identify: momentum (aka relative strength).

This family of accounts now consists of seven different strategies:

sma-names

Four of the seven strategies now have 10+ year track records.  There are 3 key reasons to consider making these strategies part of your client’s portfolios:

  1. We believe that momentum is the premier investment factor and has the potential to provide meaningful investment performance for your clients.
  2. Momentum can be relatively uncorrelated to other investment strategies, such as value.
  3. Dorsey Wright, a Nasdaq Company, is committed to providing financial advisors with the highest level of investment research, tools, and investment solutions in the industry to help you succeed in serving your clients.

Where Are These Strategies Available

These portfolios are available on over 20 different platforms, including on most major wirehouses, regionals, discount brokerages, and Turnkey Asset Management Programs (TAMPs).

To find out about availability at your firm and to receive the fact sheets on these strategies, please contact Andy Hyer at andyh@dorseymm.com or by calling him at 626-535-0630.

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 investment strategies to which reference is made.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Relative Strength is a measure of price momentum based on historical price activity.  Relative Strength is not predictive and there is no assurance that forecasts based on relative strength can be relied upon. Each investor should carefully consider the investment objectives, risks, and expenses of the strategies discussed above prior to investing.  Advice from a financial professional is strongly advised. 

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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.

dali-ranks

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.

fixed-income-rank-in-dali

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.

morningstar-1

Source: Morningstar, Research Affiliates

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

morningstar-2

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:

ranks

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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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.

quadfecta

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.

imca

imca2

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).

Study

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.

Findings

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

bp1

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.

3-yr-lag

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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Relative Strength Spread

November 29, 2016

The chart below is the spread between the relative strength leaders and relative strength laggards (top quartile of stocks in our ranks divided by the bottom quartile of stocks in our ranks; universe of U.S. mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.    As of 11/28/16:

spread

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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Knowing When to Stand Still

November 28, 2016

There has been an enormous amount of commentary following the November 8th presidential election about exactly what a Trump administration will mean for the financial markets, both domestic and international.  Trump’s victory is being called one of the biggest political upsets in modern U.S. history.  I think it is fair to say that the markets were probably expecting a Clinton victory, which may account, to some degree, for the wild swings in the performance of many relative strength strategies in the days following the election.  For example, see below for the performance of our Systematic RS International model compared to its benchmark, the Nasdaq Global ex US TR Index.  In the immediate aftermath of the election, many of our Latin American holdings took it on the chin, perhaps in fears of the perceived protectionists policies that might be associated with a Trump administration.  However, you’ll notice that within a couple of days the performance of the model snapped back.

intl-perf

*Performance of the Systematic RS International model is non-inclusive of dividends or transaction costs.  The performance of the Nasdaq Global ex US Index is inclusive of dividends, but does not include transaction costs.  Period 11/8/16 – 11/22/16.

We received a number of panicked phone calls during the few days following the election when we were experiencing some sharp underperformance.  “Is the model responding too slowly?”  “Wouldn’t it make sense to get out of all Latin American stocks now?”  Those were some of the types of questions we were receiving.  Our response was that we didn’t know if the underperformance would continue or if we would see those positions snap back, but that we would stick with our relative strength discipline.  Positions that deteriorated sufficiently would be removed from the model and replaced with stronger names.  In other words, we were not overriding the model.

This does remind me of a NYT article I read a number of years ago on a related topic:

The soccer field has turned out to be a popular laboratory among economists, with penalty kicks a particular favorite.

Awarded after certain kinds of fouls, or sometimes to decide a championship match, a penalty kick pits one player against the goalkeeper. (Mano a pie instead of mano a mano, though, since the goalie is allowed to use his hands.)

Standing just 36 feet away, the kicker sends the ball hurtling at the goal at 60 to 80 m.p.h., giving the goalie just 0.2 to 0.3 second to respond. Given the speed, the goalkeeper has to decide what to do even before observing the direction of the kick. Stopping a penalty kick is considered one of the most difficult challenges in sports. Not surprisingly, 80 percent of all penalty kicks score.

For their study, Mr. Azar, along with Michael Bar-Eli, a sports psychologist; Ilana Ritov, a psychologist; and two graduate students, scanned the top leagues in the world, collecting data on 311 penalty kicks. Then they computed the probability of stopping different kicks (to the left, the right or center) with different actions (jumping left, right, or staying put) to see which one “maximizes his chance of stopping the ball.”

According to their calculations, staying in the center gives the goalkeeper the best shot at halting a penalty kick — 33.3 percent, instead of 14.2 percent on the left and 12.6 percent on the right.

Yet when the group analyzed how the goalkeepers had actually reacted to these penalty kicks, they discovered the goalies remained in the center just 6.3 percent of the time.

The reason, Mr. Azar contends, is rooted in how the players feel after failing to block the ball.

01kick_600

Source: New York Times

When it comes to soccer and investing, when choosing what to do, sometimes the best thing is nothing.  Overriding models may or may not work out in the short-run.  In the long-run, adherence to disciplined and adaptive models makes all the difference.

Over the last 10+ years the we have been managing the Systematic RS International portfolio, it has certainly had periods of underperformance, but over the last 10 years it has outperformed its benchmark by 6.4 percent annually, net of all fees.

intl-long-term-perf

As of 10/31/16

To receive the brochure on our Systematic RS Portfolios (which are available on a large number of SMA and UMA platforms), please e-mail andyh@dorseymm.com or call 626-535-0630.

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.

The performance shown above is based on monthly performance of the Systematic Relative Strength International Model.  Net performance shown is total return net of management fees, commissions, and expenses for all Dorsey, Wright & Associates managed accounts, managed for each complete quarter for each objective, regardless of levels of fixed income and cash in each account.  The advisory fees are described in Part 2A of the adviser’s Form ADV.  The starting values on 3/31/2006 are assigned an arbitrary value of 100 and statement portfolios are revalued on a trade date basis on the last day of each quarter.  All returns since inception of actual Accounts are compared against the NASDAQ Global ex US Index.  The NASDAQ Global ex US Index Total Return Index is a stock market index that is designed to measure the equity market performance of global markets outside of the United States and is maintained by Nasdaq.  A list of all holdings over the past 12 months is available upon request.  The performance information is based on data supplied by the Manager or from statistical services, reports, or other sources which the Manager believes are reliable.  There are risks inherent in international investments, which may make such investments unsuitable for certain clients. These include, for example, economic, political, currency exchange, rate fluctuations, and limited availability of information on international securities.  Past performance 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 when working with Dorsey, Wright & Associates.

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Weekly RS Recap

November 28, 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 (11/21/16 – 11/25/16) is as follows:

ranks

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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How Momentum Based ETFs Work in Portfolio Construction

November 21, 2016

ETF Trends publisher/editor Tom Lydon spoke with Andy Hyer, Client Porfolio Manager, Dorsey, Wright & Associates, a Nasdaq Company, at the Schwab Impact Conference in San Diego that ran Oct. 24-27, 2016.

Hyer discussed how its innovative momentum based ETFs work in portfolio construction.

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 and presentation do not purport to be complete descriptions of the securities or commodities, markets or developments to which reference is made.  Past performance is not indicative of future results.  Potential for Profits is accompanied by possibility of loss. 

 

Some performance information presented is the result of back-tested performance.  Back-tested performance is hypothetical (it does not reflect trading in actual accounts) and is provided for informational purposes to illustrate the effects of the discussed strategy during a specific period.  

 

Back-tested performance results have certain limitations.  Such results do not represent the impact of material economic and market factors might have on an investment advisor’s decision making process if the advisor were actually managing client money.  Back-testing performance also differs from actual performance because it is achieved through retroactive application of a model investment methodology designed with the benefit of hindsight.  Dorsey, Wright & Associates believes the data used in the testing to be from credible, reliable sources, however; Dorsey, Wright & Associates, LLC (collectively with its affiliates and parent company, “DWA”) makes no representation or warranties of any kind as to the accuracy of such data. 

 

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Relative Strength is a measure of price momentum based on historical price activity.  Relative Strength is not predictive and there is no assurance that forecasts based on relative strength can be relied upon.

 

Unless otherwise stated, the returns of the strategies do not include dividends for stocks or ETFs but do account for distributions in mutual funds.  Returns of the strategies do not include any transaction costs. Investors should have long-term financial objectives. 

 

The information contained herein 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 material 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 (“information providers”).  However, such information has not been verified by 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.  DWA and the information provider accept no liability to the recipient whatsoever whether in contract, in tort, for negligence, or otherwise for any direct, indirect, consequential, or special loss of any kind arising out of the use of this document or its contents or of the recipient relying on any such recommendation or information (except insofar as any statutory liability cannot be excluded).  Any statements nonfactual in nature constitute only current opinions, which are subject to change without notice. 

 

Each investor should carefully consider the investment objectives, risks and expenses of any Exchange-Traded Fund (“ETF”) prior to investing. The risk of loss in trading commodities and futures can be substantial. The high degree of leverage that is often obtainable in commodity trading can work against you as well as for you. You should therefore carefully consider whether such trading in ETFs is suitable for you in light of your financial condition.  Before investing in an ETF investors should obtain and carefully read the relevant prospectus and documents the issuer has filed with the SEC. ETF’s may result in the layering of fees as ETF’s impose their own advisory and other fees. 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).

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Relative Strength Spread

November 21, 2016

The chart below is the spread between the relative strength leaders and relative strength laggards (top quartile of stocks in our ranks divided by the bottom quartile of stocks in our ranks; universe of U.S. mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.    As of 11/18/16:

spread

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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Weekly RS Recap

November 21, 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 (11/14/16 – 11/18/16) is as follows:

ranks

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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Sentiment Readings At Historic Lows

November 21, 2016

Piper Jaffray’s November 2016 issue of The Informed Investor included some great insight on investor sentiment.  In short, we’ve reached bearish sentiment levels that, from a contrarian standpoint, suggests a positive outlook for equities:

The AAII Investor Sentiment survey measures the percentage of individual investors who are bullish, bearish and neutral on the stock market for the next six months.  Of particular interest is the bullish percent number that is a solid contrarian indicator and often shows investors’ complacency/fear at important turning points in the market.

From a historical perspective, the lower decile (bottom 10% readings) of the Bullish % numbers resides at 26%.  For the week ending November 2, 2016, the sentiment survey recorded a bullish % reading of 23.6%, which falls in the bottom decile of all observed values since July 1987 (as shown in the table right below).  From a contrarian perspective, the data suggests a positive bias and that the path of least resistance is likely higher.

aaii

From a performance perspective, we went back in history (1987-present) and calculated average and median market returns after such low readings were observed.  We note that the SPX index has been higher over the following 13- and 26-week periods, 74% and 81% of the time respectively.

Additionally, the SPX has recorded positive average returns of 7.7%, six months after weak readings of the Bullish % numbers were observed.

aaii2

Perhaps you are scratching your head as to how this can happen when markets are so close to all-time highs.  A couple guesses as to why this can happen.  First, the election causes politicians to focus on the things that are going wrong (and how they are going to fix them!).  The constant focus on the negative has the effect of, not surprisingly, causing people to overlook what may be going right.  Second, the market has been flatish on a year-over-basis.  When investors don’t get their expected 7-9 percent a year their mood drops (even if we’re not far from all-time highs).

Contrarian indicators such as this work best at the extremes and recent readings in the bottom decile suggest that the coming weeks and months may very well surprise to the upside.

Past performance is no guarantee of future returns.  There may be times where all investments and strategies are unfavorable and depreciate in value.

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