U.S. vs. International Equities

November 24, 2014

Michael Batnick presents some interesting data on U.S. vs. International stock market performance since 1969:

Diversifying your equity holdings across multiple continents has been a substantial drag on returns over the last few years. At this point, It’s easy to ask ourselves, “why even bother with international stocks?” The U.S. hasn’t just been instrumental in the global equity rebound, it’s playing lead guitar, drums and doing vocals all at the same time.

But before we go all in on U.S. stocks, history has proven that we should be very careful to extrapolate recent performance out into the future. I was very surprised to learn that when looking at three-year rolling periods, U.S. stocks outperform just 53% of the time. Even more interesting, when U.S. stocks do outperform, they do so by an average of 7.7%; when international stocks outperform, they do so by an average 0f 10%!

The U.S. goes on long streaks of both leading and lagging the rest of the world. The chart below shows long periods of time where U.S. stocks outperform (gray) as well as long stretches of time that U.S. stocks fall behind (without gray).

tumblr inline nfelnnhnLq1sba62w U.S. vs. International Equities

It seems as if we’ve been hearing that U.S. stocks are “the best house in a bad neighborhood” for years now. November will be the 60th straight month of out-performance, which is the second longest stretch going back to 1972. The longest streak was from 1996 to 2002, a 70 month period of U.S. domination.

How might we know when U.S. outperformance has run its course for this cycle?

RS U.S. vs. International Equities

(click to enlarge)

An investor can get themselves into a lot of trouble by trying to forecast when the switch in relative strength between U.S. and International markets will take place.  One approach is simply to strategically weight the two in an asset allocation and completely remove any element of tactical shifts.  That approach has its strength and its weaknesses.  The strength is that you ensure that you won’t get whipsawed on any trades and you enforce diversification.  The weakness of that approach is that, as shown in both charts above, these streaks of outperformance have historically lasted for many years at a time.  With streaks that long there is an opportunity to generate superior performance by making tactical shifts between the two.  Finally, the benefit of relying on relative strength to know when to make such tactical shifts is that it removes the need to forecast (guess) when to make the change.  With a trend following approach, you will never be in at the very beginning of the trend and you will never be out at the very top, but you will be in a position to capitalize on the bulk of the trend.

This example is presented for illustrative purposes only and does not represent a past recommendation.  Prior to the inception date of EFA, performance data is calculated using extrapolated underlying index data.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.

HT: Abnormal Returns

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Weekly RS Recap

November 17, 2014

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 (11/10/14 – 11/14/14) is as follows:

ranks1 Weekly RS Recap

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

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Sector Performance

November 14, 2014

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 11/13/14.

sector Sector Performance

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

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Commodities Corner: Live Cattle vs. Cotton – A Tale of Two Tapes

November 14, 2014

At Dorsey Wright Money Management, we view dispersion among asset classes and sectors as an opportunity to gain exposure to the strongest performing markets while minimizing exposure to the weakest.  Throughout most of the year this has allowed us to maintain our highest exposure towards US equities, while keeping exposure toward under performing asset classes such as commodities to a minimum.  However, this isn’t to say there haven’t been some underlying pockets of relative strength within commodities asset class that have created opportunities.  In a blog post from a few weeks back, we noted the relative strength of the grains markets (corn, soybeans, and wheat) appeared to be strengthening.   This has continued to hold true with all three of them now trading at multi-month highs.

In this piece we will take a look at the traditional point & figure charts for both Live Cattle & Cotton.   Although not the most commonly discussed commodities, they both provide for very solid examples of how using relative strength can provide market participants with great advantages from both an offensive and defensive perspective.  We will also discuss the RS point & figure charts for each respective market in order to better display the dispersion in performance relative to their peers.

Point & Figure Chart:  Live Cattle (LC/Z4 – Dec ’14)

We can see below just how large of base the live cattle market has been forming.   The sharp move higher yesterday was able to punch through the key overhead supply level which had been located at $170.00.     From a trading perspective, it could also be viewed that a large number of sellers (or shorts) who had previously shown up at $170.00 are now holding positions which are “under-water.”    Often times this will propel the market sharply higher as race to exit losing positions creates demand (short covering).  The triple top break out pattern which was confirmed with the move above $170.00 has a measured move price objective of $180.50 and would only be negated on a move below $164.50.

live cattle trip 300x191 Commodities Corner:  Live Cattle vs. Cotton   A Tale of Two Tapes

Point & Figure Chart:  Cotton (CT/ – Continuous Contract)

On the flip side, we can see right away on the below chart that the cotton market has been displaying a very different picture in terms of supply & demand then that of live cattle.   The sharp move lower yesterday was able to punch through a key demand level located at $0.60.    This double bottom break pattern has a measured move price objective of $0.51, and would only be negated on a move above $0.67.  In terms of a trading perspective,  those previous buyers at the $0.60 level are now holding losing positions (under-water) which may spark a rush to the exits and another sharp leg down as those same market participants look to minimize losses.

cotton cont1 300x204 Commodities Corner:  Live Cattle vs. Cotton   A Tale of Two Tapes

Let’s move on to the relative strength Point & Figure charts to see if we can get a better visible picture of how each of the above commodities performance has been this year relative to their peers.   Given the patterns and targets we mapped out above, we should already have a pretty good idea of what the relative strength charts should look like.

Relative Strength P&F:  Live Cattle vs. Continuous Commodities Index (LC/ vs. UV/Y)

The relative strength chart below displays the continuous live cattle contract vs. a basket of commodities.   This is a great visual aide in showing us just how strongly the cattle market has performed relative to the rest of the commodities universe.

live cattle cont 278x300 Commodities Corner:  Live Cattle vs. Cotton   A Tale of Two Tapes

Relative Strength P&F:  Cotton vs. Continuous Commodities Index (CT/ vs. UV/Y)

A quick glance at the RS chart below and we can clearly see the under performance cotton is displaying compared to the majority of its peers.  The RS chart is now currently sitting near a double bottom level which if broken may be a sign cotton prices are set to further weaken relative to the rest of the commodities universe.

cotton con 300x250 Commodities Corner:  Live Cattle vs. Cotton   A Tale of Two Tapes

Conclusion:

In the above blog post we have identified how using traditional point and figure charts can allow market participants to identify potential trading ideas, and more importantly help aide in establishing proper risk management.   Furthermore, we displayed how following a relative strength based approach can keep investors allocated towards stronger performing markets and away from those that are under performing.   Although commodities in general continue to under perform the equity markets, the dispersion among the sector (as evidenced by live cattle & cotton) is just another example of using a relative strength based approach can be very beneficial in helping identify opportunities within asset classes.

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

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

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

A list of all holdings for the past 12 months is available upon request.

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Fund Flows

November 13, 2014

Mutual fund flow estimates are derived from data collected by The Investment Company Institute covering more than 95 percent of industry assets and are adjusted to represent industry totals.

ici 11.13.14 Fund Flows

This data is presented for illustrative purposes only and does not represent a past recommendation.

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Monitoring The Gold Market: Overhead Supply at $1180 In Focus

November 12, 2014

The gold market has been garnering a lot of attention lately, with prices touching multi-year lows near the $1130 level last week.  Volatility really picked up last Friday, with the gold market rallying $50 after the release of the Non-Farm Payroll figures.  Sharp moves like what was seen this past Friday can often have emotional effects on traders and force them out of their game plan.   This is one of the main reasons that at Dorsey Wright Money Management we view a systematic based approach as a major advantage in forming a consistent process-driven approach to investing.

In the below blog post we will discuss a recent bearish pattern which was completed on the traditional point in figure chart of gold.   Furthermore, we will take at particular price levels which if violated may be a sign the tide is starting to turn in favor of the bulls in the short term.

Point & Figure Chart:  Gold Futures (Continuous Contract)

We previously noted that in recent weeks volatility in the gold market has picked up with large price swings in both directions being displayed on numerous occasions.   One of the main advantages of using traditional point & figure chart analysis is that it aides in blocking out the so called market “noise”.    In other words, buy and sell signals are produced less often due to the way the traditional point & figure charts are constructed.   Remember, the key idea here is that we are attempting to spot areas of supply & demand which can help us form objective opinions on the near term direction of the market.   More importantly, we can also define levels that tell us where our opinion may be wrong, which therefore allows for proper risk management!  Let’s take a look at the recent developments to get a better idea of what’s been taking shape on the supply & demand front for gold.

gold futs 300x178 Monitoring The Gold Market: Overhead Supply at $1180 In Focus

The first major technical development to point out was the spread triple bottom break which was confirmed with the move below $1180.    This had previously been a level where demand had overwhelmed supply on two previous occasions.   However, on the most recent test the gold bears proved successful and the spread triple bottom was confirmed which has a measured move target of $1050.

Interesting to note the $50 reversal which occurred last Friday did reverse the chart back into a column of X’s.   However, thus far the counter-trend rally has stalled out just below the $1180 level.  Remember, this is the same area where our initial sell signal was given when supply overwhelmed demand and confirmed the spread triple bottom break.  Another way to think about this in terms of the trading aspect would be that any of those market participants holding long futures positions from the previous demand level of $1180 are currently under water and could use this as a break-even point on existing positions, thus creating supply.  Even if the gold bulls are able to force prices back above $1180, the spread triple bottom sell signal itself wouldn’t be negated until a move above $1260 was achieved.

This blog post serves as reference as to just how useful traditional point & figure charts can be in blocking out the “noise” as well as defining price levels to help develop proper risk management techniques.   At Dorsey Wright, we use traditional point & figure charts in order to help us spot where pockets of relative strength among asset classes may be changing, not necessarily as buy and sell signals.  Following our systematic based approach to relative strength investing has kept our exposure to markets like gold very minimal throughout much of the year.

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

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

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

A list of all holdings for the past 12 months is available upon request.

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The Virtues of Trend Following: Emerging Markets Edition

November 11, 2014

A key reason that the markets can be so frustrating to investors is that many of the relationships that investors believe should hold true, in fact, do not.  Take the relationship between GDP growth and stock market performance.  Many assume that investing in stock markets from economies with high economic growth rates should lead to favorable investment results.  As Institutional Investor explains, that has just not been the case:

Many investors in emerging markets believe that identifying the fastest-growing economies is the key to finding higher returns.  But while this approach has been effective in fixed-income investing, our research shows that it’s fairly useless for guiding country selection in developing-market equities.

Imagine that it’s the early 1990s and your crystal ball has identified an emerging-markets nation whose economy is on the cusp of growing more than 20-fold over the next two decades.  You’d probably think you had found the investment winner of a lifetime.  But you’d be wrong.  That country was China.  Despite compound annual gross domestic product (GDP) growth of 15 percent since 1992, Chinese stocks fell by an annualized 2 percent through December 31, 2013 (see chart below).

GDP The Virtues of Trend Following: Emerging Markets Edition

Now, what if the same crystal ball also — correctly — predicted that Mexico was headed for low-single-digit GDP growth over that same 20-year period?  You’d likely look for better investment opportunities elsewhere.  And you’d be wrong again.  Mexican stocks have delivered annualized gains of more than 18 percent since 1992, placing them among the period’s best performers, despite 2.4 percent annual GDP growth.

For comparison, the following table shows the country holdings, weight in the index, and GDP growth of the PowerShares DWA Emerging Markets Momentum ETF (PIE).  Clearly, we are not weighting the index by GDP growth:

pie1 The Virtues of Trend Following: Emerging Markets Edition

Rather, this index is constructed by using Point & Figure relative strength analysis on a universe of approximately 1,000 emerging markets stocks.  From that universe, we select the 100 stocks with the most favorable relative strength characteristics.  Again, price is the only input to the rankings.

I often use the following quote, written by one of our analysts, to explain our, admittedly, much more pragmatic approach to investing:

The market cares about what it wants, when it wants, and for this reason we find that listening to the market and following its trends is a better approach than trying to adapt an economic premise to a market prayer.

Perhaps some take our “single-factor” approach to investing as overly simplistic, but to us, price encompasses all relevant information for an investor.  And the results have been compelling.  For example, the three ETFs for which Dorsey Wright is the index provider and have been out for the past 5 years (PDP, PIZ, and PIE), all are the top strategies in their respective categories over the past 5 years.

Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  This example is presented for illustrative purposes only and does not represent a past recommendation.  All holdings for the past 12 months are available upon request.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  See www.powershares.com for a prospectus.

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Tweet of the Day

November 6, 2014

moyo Tweet of the Day

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Last Time GOP Took Senate With Sitting Democrat in White House

November 5, 2014

Tuesday was election day and now we know the results—the GOP has taken the Senate.  The last time there was a Democrat in the White House and the Republicans were in control of Congress it was followed by quite a run in the stock market.  From Business Insider:

cotd midterm election Last Time GOP Took Senate With Sitting Democrat in White House

This example is presented for illustrative purposes only and does not represent a past recommendation.  Past performance is not indicative of future results.

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High RS Diffusion Index

November 5, 2014

The chart below measures the percentage of high relative strength stocks that are trading above their 50-day moving average (universe of mid and large cap stocks.)  As of 11/4/14.

diffusion 11.05.14 High RS Diffusion Index

What a recovery from the single-day low of 12% on 10/16/14!  The 10-day moving average of this indicator is now 72% and the one-day reading is 85%.

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

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Commodities Corner: Cocoa Prices Displaying Signs of Weakness

October 28, 2014

In a recent blog post we discussed the agricultural markets (corn, soybeans, & wheat) were beginning to exhibit improving relative strength characteristics when compared to their peers within the commodities sector.  In this post, we will visit the exact opposite scenario and take at one of the soft commodities which is beginning to display signs of weakening relative strength.

Although not the most commonly discussed market, Cocoa futures have actually outperformed the majority of its peers (exceptions being Feeder Cattle, Live Cattle, & Zinc) over the last 9 months.   In fact, the year to date performance (as of 10/27) is up 8.42%.   However, as we mentioned above, recent technical developments are starting to show signs that this out performance may be coming to an end.  We will keep consistent with our theme of looking at traditional point & figure charts to determine if any of the recent developments may give us an idea what the current supply & demand characteristics are saying.

Point & Figure:  Cocoa (Dec 14 – CC/Z4)

The point and figure chart below displays a spread triple bottom break which was confirmed when Dec ’14 Cocoa futures were unable to find a bid at the previous area of demand near the 3080 level.  Once price traded below the 3060 level, a new box was formed and confirmed the pattern which currently has a measured move target down at the 2740 level.  Let’s think about that in terms of supply & demand.   On the two previous attempts the market found a firm bid near the 3080-3060 level and held firm.  On the most recent attempt, those same market participants did not show up as they have before and the supply (sellers) of the cocoa market overwhelmed the demand (buyers).  Thus far the sell signal has been working quite well, with Cocoa futures trading sharply lower over the past 2 sessions and briefly touching levels not seen since May 2014.   This is an example of a market which had been outperforming the majority of its peers and is now beginning to display signs of losing relative strength within the commodities asset class.

ccz4 300x218 Commodities Corner:   Cocoa Prices Displaying Signs of Weakness

Conclusion:

The above blog post provides some insight on using traditional point and figure charts to help identify markets which were once outperforming the majority of their peers but is now showing signs of weakness.   In the case of Cocoa futures, the spread triple bottom break which was confirmed on the move through 3060 as thus far ushered a sharp move lower.    Time will tell if the measured move target of 2740 is met or not, but one thing we can confirm is that the supply & demand picture for cocoa prices has recent shifted in favor of the bears.

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

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

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

A list of all holdings for the past 12 months is available upon

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Weekly RS Recap

October 27, 2014

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 (10/20/14 – 10/24/14) is as follows:

ranks 10.27.14 Weekly RS Recap

More like that, please.

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

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Sector Performance

October 24, 2014

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 10/23/14.

sector 10.24.14 Sector Performance

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

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Stock vs. Company

October 23, 2014

Former Microsoft CEO, Steve Ballmer: During time that our market cap went from $500 billion to $200 billion our profit tripled from $9 billion to $28 billion.  Start watching at the 33:18 mark.

Good reminder that there can be a difference (sometimes very large!) between the stock and the company.

msft Stock vs. Company

Source: Yahoo! Finance

This example is presented for illustrative purposes only and does not represent a past recommendation.

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Commodities Corner: Agricultural Markets Finding Demand

October 23, 2014

It’s no secret the majority of commodities markets have had a very tough year.   Some of the hardest hit sectors have been the energies, grains, and metals markets.     Over the last 9 months,  some of these markets are down as much as 16%.   Let’s think about that for a second and compare this to the performance of the S&P 500 which is up 6%.   We can get a fairly good idea of where the relative strength has been among asset classes just by stating those figures!

At Dorsey Wright, we use a systematic based investing process focused on relative strength to help minimize our exposure to the under-performing asset classes around the world.  This has allowed us to limit our exposure towards commodities,  while maintaining exposure towards the stronger performing asset classes around the globe such as US Equities.    However, this isn’t to say that down the road the commodities sector won’t come back into favor and having the ability to rotate back into this area should the tide turn is an added benefit of being a tactical investor.

Although the relative strength readings for the majority of commodities remain very weak, it’s worth noting some recent technical developments in the grain markets may be a sign the supply & demand relationship in the agriculture sector may be changing in favor of the bulls for the short term.  We will discuss this in further detail below.

Corn Futures (Dec ’14):  Point & Figure

In taking a look at the below point & figure chart chart, we can see there have been some positive developments which recently occurred on the Dec ’14 Corn chart.  The triple top spread break out which was confirmed with the move above $3.60 currently has a measured move target of $3.96.  Time will tell whether or not this target is achieved, but the ability of the market to take out overhead supply which had been rejected on two previous attempts is worth monitoring.

corn dec1 300x150 Commodities Corner:   Agricultural Markets Finding Demand

Soybean Futures (Jan ’15):  Point & Figure

A similar technical development also recently occurred  on the  Jan’15 Soybeans chart.  The double top break out which was confirmed with the move above $9.84 and currently has a measured move target of $10.60.   Again, this re-enforces the idea that the supply of the market which had previous rejected prices has been overcome by demand in the short term.

SF5 300x167 Commodities Corner:   Agricultural Markets Finding Demand

Wheat Futures (CBOT – Dec ’14):  Point & Figure

To round things out, lets take a look at the point & figure chart of CBOT Wheat to see if a similar situation has developed like it did in both corn and soybeans.   Sure enough, a double top break out was recently confirmed with a move above $5.15.   The measured move price target is currently $5.80.

wheat 300x173 Commodities Corner:   Agricultural Markets Finding Demand

Conclusion:

Above we have discussed some of the recent positive development on the traditional point and figure charts for a few of the commodities within the agricultural sector.   In a beaten down asset class such as commodities, this may be a sign that pockets of relative strength are beginning to show up in corn, soybeans, & wheat when compared to other peers within the commodities asset class.  The ability to gain exposure towards these sectors should their relative strength readings continue to improve is just another example in the benefits of following a tactical investment methodology.

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

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

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

A list of all holdings for the past 12 months is available upon request.

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Global Equity Indices: Trendlines, Trendlines, Trendlines

October 22, 2014

Recent declines in global equity indices throughout much of August – mid October seemed to create a panic throughout much of the financial media.    It is this exact reason that at Dorsey Wright we believe having a systematic based process allows us to remove the human emotion and keep a consistent game plan when markets get turbulent.

One of the most simplistic ways in helping monitor supply & demand developments on traditional point & figure charts is keeping an eye on how price reacts when long term trendlines are approached.   Keep in mind, where as many technical analysis methods draw trendlines in numerous ways, the point & figure methodology adheres to a much more strict process on when and where they can be drawn.   Furthermore, due to the way point & figure charts are constructed, each trendline can only be drawn at a 45 degree line.   This is an important concept to grasp because it keeps the idea of drawing trendlines more consistent than many other charting methods.

Remember,  trendlines aren’t necessarily producing a buy or sell signal (we use our RS matrices for these) but should a long term trendline be broken it would likely lead to a declining RS reading for that particular market.

Below we inserted traditional point and figure charts for the S&P 500, German DAX, and the MSCI Japan ETF (EWJ).   Given the fact these are three of the most commonly discussed equity markets in the world, we thought  it would be interesting to take a look at each one of them and discuss some recent technical developments.

SPX:  Point & Figure

We can see below how the recent declines in the S&P 500 tested the uptrend support line which has been intact for an extended period of time   This area of demand helped provide the market with an underlying bid which thus far has produced a very sharp rally from the lows.   Developments such as this can also be helpful in helping spot pockets of relative strength when compared to other global indices which are unable to find a bid at major support trend lines.

spx updated 300x244 Global Equity Indices:   Trendlines, Trendlines, Trendlines

German DAX:  Point & Figure

The German DAX chart shows a similar set up as the S&P 500.  The market no doubt experienced a sharp sell off, but nevertheless held the longer term uptrend line.  Another example of how keeping it simple can help investors stay the course and keep their longer term investment objectives in focus.   There is no doubt European equities have been an under-performer in 2014, but holding a major level such as this can be a near term positive.

DAX UPDATED 300x203 Global Equity Indices:   Trendlines, Trendlines, Trendlines

iShares MSCI Japan ETF

To round things out, lets take a look at one more global market (Japan) to see if it experienced a similar move.   In looking at the iShares MSCI Japan ETF (EWJ) below, we can see yet another major support trend line was tested and held on the previous pullback in equity prices.  This isn’t to say share prices of the EWJ haven’t experienced some downside volatility, but it does confirm the market (thus far) has been able to find a bid at an important level where demand has shown up in the past.

ewj updated 300x187 Global Equity Indices:   Trendlines, Trendlines, Trendlines

Conclusion:

The above charts are just a fair reminder of why we adhere to the investment concept of keeping it simple in order to stay the course and follow our game plan.   A systematic process which removes human emotion is a major benefit when it comes to following a consistent investment philosophy when markets get turbulent.  Certainly there were many global indices around the world that had similar set up’s (FTSE, DJ Euro STOXX50, and the CAC40) which were unable to hold there longer term uptrend lines.   It will be worth monitoring these markets going forward to see how their relative strength rankings compare to their peers which were able to hold their respective trendlines.   Similar to the price of most everything around the world, supply & demand are the factors which ultimately move stock prices!

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

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

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

A list of all holdings for the past 12 months is available upon

 

 

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AAPL: Approaching Key Supply – A Line In The Sand at $104.00

October 21, 2014

As most of our long time followers know, at Dorsey Wright we are interested in keeping our analysis as simple as possible when making investment decisions.   When it comes down to it, we believe it’s the supply & demand of the market which actually moves asset prices.   Our systematic approach to relative strength based investing allows us to remove human emotion from the investment process and apply a robust investment philosophy to the markets.  We believe this approach allows us to eliminate the day to day market “noise.” .

Yesterday, tech giant AAPL reported earnings after the close.   This created a buzz among financial news media as AAPL is often looked at as one of the most important leadership stocks in the NASDAQ.  We thought it would be interesting to take a look at the technical set up of the traditional point and figure chart too see if the current supply & demand of the market can give us any insight in how the stock will react to the recent earnings headlines.

AAPL:  Point & Figure Chart

A quick glance at the point and figure chart below and we can see just how important the  $104.00 level is in terms of supply and demand.   This is now a quadruple top area in which the bulls have been unable to take out on previous attempts.  Note also the previous double bottom sell signal which occurred on 10/15 and had a measured move price target of $88.00.  This is now looking more like a “bear trap”, but in order for the signal to be negated AAPL will need to trade above $104.00 to confirm the quadruple top break out mentioned earlier.     As we’ve stated in previous blog posts, with false moves also come fast moves.  Furthermore, the more often a level is tested and rejected (such as the quadruple top), the more energy this market is building should it eventually break out.   Time will tell if the bulls will be able to obtain this in the near future, but it is certainly worth keeping an eye on.  A confirmed break out may be a sign that relative strength readings for AAPL are set to increase in the near term.

aapl 300x167 AAPL:   Approaching Key Supply    A Line In The Sand at $104.00

Dorsey Wright currently has a position in AAPL.

Conclusion:

In the above post, we’ve provided a good example of how analyzing traditional point & figure charts in terms of supply & demand is a simple way of eliminating much of the market “noise” on earnings report days for major market moving stocks such as AAPL.   In essence, supply & demand are in equilibrium right now just below the $104.00 level for the stock of AAPL.    Thus far, the market has been unable to generate enough momentum to take out the overhead supply and force the next leg up.   However, it’s worth keeping an eye on and should the break out be confirmed it may be a sign the relative strength readings for AAPL are set to increase against its peers.

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 information found on Dorsey, Wright & Associates’ Web Pages has been prepared without regard to any particular investor’s investment objectives, financial situation, and needs. Accordingly, investors should not act on any recommendation (express or implied) or information in this report without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions. Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources, believed to be reliable. However, such information has not been verified by Dorsey, Wright and Associates, LLC (DWA) or the information provider and DWA and the information providers make no representations or warranties or take any responsibility as to the accuracy or completeness of any recommendation or information contained herein.  Neither the information nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities or commodities mentioned herein. This report or chart does not purport to be a complete description of the securities or commodities, market or developments to which reference is made. There may be instances when fundamental, technical, and quantitative opinions may not be in concert. A list of all holdings for the past 12 months is available upon request.

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Unconstrained Fixed Income

October 17, 2014

“Why do we own bonds?” Investor in 2013

“Why don’t we own more bonds?” Same investors, now

The sharp equity market declines in recent weeks have once again confirmed that fixed income remains the ballast and primary diversifier of a portfolio.  Investors should expect that when other asset classes are experiencing losses, fixed income investments will remain resilient and mitigate a portfolio’s overall decline.  For most investors, fixed income will always remain a meaningful piece of the overall portfolio.  As part of that fixed income allocation, unconstrained fixed income strategies are growing in demand.  From the September/October 2014 IMCA Journal:

Morningstar’s nontraditional bond fund category, which contains the majority of funds classified as unconstrained, grew from $20 billion in total assets in January 2010 to $119 billion in total assets as of November 2013.

At Dorsey Wright, we believe that this category of unconstrained bond strategies will continue to become more important to investors in the years ahead.  In March of 2013, we introduced our “Tactical Fixed Income” separately managed account and we have been very happy with the results since inception.  Performance and holdings are shown below:

11 Unconstrained Fixed Income

21 Unconstrained Fixed Income

For more information about this strategy, pleas see the FAQ’s below:

Why is there a need for Tactical Fixed Income?

Bond buyers face a dilemma.  Yields are very, very low (and have recently been going even lower).  If interest rates stay low this low, bondholders are facing minimal returns, all the while having those returns eaten away by inflation. If interest rates rise, bondholders are facing potentially significant capital losses.  Both outcomes, obviously, are problematic.  This situation demands a tactical solution that can manage through either outcome.

At Dorsey Wright, we have taken our time-tested relative strength tools and have applied them in a unique way to the fixed income markets.  This solution is now available as a separately managed account.  We think it will be welcome news for bond holders and prospective bond buyers who are grappling with the current bond market dilemma.  Equally important, we think it will be a robust solution in the future across a broad range of possible interest rate environments.

What is the investment universe for the Tactical Fixed Income strategy?

The Tactical Fixed Income strategy can invest in short-term and long-term U.S. Treasurys, inflation-protected bonds, corporate, convertible, high yield, and international bonds.  This is a broad universe of fixed income types that have varying yields and volatility characteristics.

How is the risk managed in the Tactical Fixed Income portfolio?

The Tactical Fixed Income model structures the portfolio in a way that balances risk and reward.  Certain types of fixed income behave better in “risk-on” environments, while other fixed income categories are more defensive.  Our model is built to ensure that the portfolio remains diversified.  It’s very important to understand that this is designed as core fixed income exposure.  We’re trying to generate good fixed income returns, without creating equity-like volatility.

Our model compares the relative strength of all of the ETFs in the investment universe.  Those fixed income sectors exhibiting the strongest trends will be represented in the portfolio.

How does the strategy handle a rising rate environment?

Although the general trend of interest rates has been down over the past three decades, there have been periods where rates have generally risen.  The period of mid-2003 to mid-2007 was generally a period of rising interest rates, while the period of mid-2007 to present has generally been a period of declining interest rates.  Sectors like long term government bonds tend to perform much better in a declining interest rate environment while sectors like convertible bonds tend to perform much better during rising rate environments.

Our Tactical Fixed Income strategy is designed to be adaptive and seeks to add value in both environments.

Will the strategy invest in inverse bond ETFs?

We do not use inverse bond ETFs in the portfolio due to the cost of carrying the short positions, which includes the management fees of the ETFs as well as paying out the interest payments while you own these funds.  However, a rising rate environment typically is accompanied by a strong economy.  We do have ample ability to have exposure to sectors of the fixed income market, like high yield, international, and convertible bonds, that may perform well during these environments.

What is the turnover of the Tactical Fixed Income strategy?

Adapting to different fixed income environments is the nature of the Tactical Fixed Income strategy.  We built the strategy to be robust across the spectrum of bond market environments.  The model typically has about twenty swaps a year.  Our model selects approximately six ETFs to be held in the portfolio and each position remains in the portfolio only as long as it retains strong relative strength.  We have a disciplined relative strength process in place to replace any positions that weaken beyond an acceptable level.

To receive the fact sheet for this portfolio please e-mail andy@dorseywright.com or call 626-535-0630.

Net performance shown is total return net of management fees for all Dorsey, Wright & Associates accounts, managed for each complete quarter for each objective.  The advisory fees are described in Part II of the adviser’s Form ADV.  All returns since inception of actual Accounts are compared against the Barclays Aggregate Bond  Index.  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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Analyzing the VIX Index: Volatility On The Rise

October 10, 2014

One of the best parts about using point and figure charts to analyze the markets is that it allows us to apply the concept of supply and demand to just about anything.   Whether it be the stock price for AAPL, the price of Coffee futures, or even the strength of the US Dollar.   In taking our analysis a step further, we wanted to discuss some recent developments on the VIX.   This is a measure of expected 30 day stock market volatility and is calculated by the Chicago Board Options Exchange.   As we stated in our post about TLT yesterday, during times of heightened volatility markets are often approaching key levels of supply and demand.   This can be seen across various asset classes whether it be equities, commodities, or fixed income.

CBOE Volatility Index :  (Point & Figure)

vix 300x156 Analyzing the VIX Index: Volatility On The Rise

The point and figure chart of the VIX displays a massive base which had been forming for an extended period of time.   In other words, supply and demand for volatility had been in a state of equilibrium for the most part during this time frame.  This scenario changed on Wednesday when the VIX Index traded through 18 and confirmed a spread triple top break out.  The overhead supply which had been containing the VIX Index below 18.00 during the period of consolidation finally gave way.  The measured move target for this break out is 28.50.

Conclusion:

A brief technical update on the VIX index displays volatility may continue to rise in the near term.   The overhead supply which had been keeping the VIX in check was broken to the upside earlier this week.  Having a consistent game plan toward risk management throughout turbulent market environments is vital in order to help limit losses.  At Dorsey Wright Money Management, we achieve this by following our systematic relative strength based investing models which allow us to eliminate the human emotion during periods of heightened volatility.

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

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

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

A list of all holdings for the past 12 months is available upon request.

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Sector Performance

October 10, 2014

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 10/9/14.

sector 10.10.14 Sector Performance

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

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Monitoring The Bond Market: Lower Yields On The Horizon?

October 9, 2014

Market volatility has come back to the forefront in recent weeks, with equity indices around the globe experiencing broad swings in both directions.   Often times during periods of heightened market volatility, it’s interesting to take a look at the US Treasury market to see if there are any noteworthy technical developments taking shape.   The global bond market is massive in size, and developments within in it can often have an outside influence on other asset classes when it comes to asset allocation and money flows.  At Dorsey Wright Money Management, investors can gain exposure to the fixed income market in a number of ways.  Both the Tactical Fixed Income & Balanced strategies are available through seperately managed accounts.   More information on these products can be found here:

TLT updated 300x227 Monitoring The Bond Market:  Lower Yields On The Horizon?

iShares Barclays 20+ Year Treasury Bond ETF (TLT):  (Point & Figure)

We wanted to take another look at the point and figure chart of TLT in order to get a better idea of the current supply & demand situation for US Treasuries.  Previously, we noted the TLT was coming into a major uptrend support line near 113.00.   This uptrend line represents an area where buyers (demand) have previously overwhelmed sellers (supply).  On the most recent test, the bond bulls once again showed up in force as the  level held firm and the TLT has since produced a significant rally.   In fact, yesterday’s move above 119.00 produced a double top break out pattern which has measured move price target of 133.00.    At Dorsey Wright Money Management, we don’t use these developments as an actual buy signal (we use our RS matrices to determine those), but we do believe it’s a development worth noting.   Time will tell if the TLT achieves its measured move target of 133.00, but given the double top break out it is surely something to keep an eye on and may signal a period of even lower interest rates lies ahead.

Dorsey Wright currently has positions in TLT

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

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

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

A list of all holdings for the past 12 months is available upon request.

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Technology Momentum: Another Major Test for Tech?

October 8, 2014

In keeping with our recent theme of monitoring noteworthy technical developments throughout the different Dorsey Wright Money Management Investment Products, we would like to point a a few things we noticed on the PowerShares DWA Technology Momentum Portfolio (PTF).  This underlying index is composed of at least 30 common stocks of companies in the technology sector with powerful relative strength characteristics.

We are just using this traditional point and figure analysis as a simple way of monitoring supply & demand, not necessarily to make an actual buy or sell recommendation which are instead done using our RS matrix models.  The key point not to overlook is that often times technical developments on traditional point & figure charts are noteworthy and can help give us an idea of where pockets of relative strength may begin to increase or decrease.

PowerShares DWA Technology Momentum Portfolio (PTF):  (Point & Figure)

As we can see on the point and figure chart of PTF, there was a double bottom pattern break on 10/2 which was confirmed with the move below 33.50.   In other words, this previous level of demand failed to hold as sellers (supply) overwhelemed buyers (demand).  This pattern has a potential measured move price objective of 30.00.  Furthermore, we can also note the long term uptrend line on which has been intact for an extended period of time. Looking back we can see the number of occasions this line has held as firm support.  Let’s think about that for a second and apply it to our concept of supply and demand.    Ultimately, this is the concept we believe is what moves stock prices.  In other words, this uptrend line has been an area where buyers have stepped in and provided the market with a firm bid to overwhelm the sellers (or supply of stock) in the past.  The longer a trend line has been intact and the more times it has held typically means it’s more important to monitor.

PTF 300x226 Technology Momentum:  Another Major Test for Tech?

Dorsey Wright is the index provider for PTF

Conclusion:

This research article gives us a brief overview regarding the current point and figure technical set up of the PowerShares DWA Technology Momentum Portfolio ETF.   As we’ve pointed out above, PTF is currently sitting just above an uptrend line which has been an area of demand on previous occasions.   It will be interesting to see if this level can once again prove itself as it has in the past.   Price levels such as this which have been tested and held firm on numerous occasions can sometimes lead to heightened levels of volatility should they be breached.

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

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

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

A list of all holdings for the past 12 months is available upon request.

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Small Cap Stocks: Keeping It Simple with Supply & Demand

October 3, 2014

It’s no secret to most that small cap stocks have been the under-performing market cap sector of US equities in 2014.  In fact, the IWM (iShares Russell Small Cap ETF)  is down 5.69% over the last 9 months,  which compares to the SPY which is up 6.70%.  Obviously this a very large difference, particularly given the fact both ETF’s are representing different baskets of the US stocks!

At Dorsey Wright Money Management we tend to try and keep things as simple as possible when analyzing the markets.   Our systematic approach to relative strength based investing is done by analyzing all of the markets across the globe and looking to gain exposure to the ones with the strongest rankings.   Obviously this strategy has been helpful in minimizing exposure to the small caps sector in recent months in many of our models.   However, there will be a time at some point where money will funnel back into the small caps.  Our trend following approach is typically not associated with trying to “find the bottom” of the market, but more so geared to gain exposure later in the move and catch the “bulk “of the trend instead of the top and/or bottom.

In this blog post we take a look at current technical set ups on the traditional point & figure charts of both the iShares Russell Small Cap ETF (IWM) and PowerShares DWA SmallCap Momentum Portfolio (DWAS).

 iShares Russell 2000 Index Fund:  (Point & Figure)

In analyzing the global markets, we view each point and figure chart as a simple concept of supply & demand.   Regardless of the many  reasons people believe markets move, supply & demand are ultimately what determine asset prices around globe.  Let’s take a quick look at the traditional point & figure chart of the IWM to see what the supply & demand factors are saying regarding the current levels of small cap stocks.

Just recently (10/1), a double bottom pattern break was confirmed which has a measured move price target of 98.00.    However, in taking a closer glance at the chart below we can also see prices are resting on a triple bottom support level which would only be broken should a move  down through 106.00 occur.  Let’s think about that in terms of supply & demand.   On the two previous attempts to break this level the market found support as willing buyers decided to step back in and overwhelm the sellers.  It will be interesting to see if these same buyers once again come back in and help give the market a firm bid as they did previously!  A move below the 106.00 level may be a sign supply is overwhelming demand this time and the small cap bulls are in retreat mode.  The potential measured move price target should the triple bottom break be confirmed is 94.00.

IWM pnf 300x260 Small Cap Stocks:  Keeping It Simple with Supply & Demand

 

PowerShares DWA Small Cap ETF (DWAS):  (Point & Figure)

Let’s take our analysis a step further and see if the PowerShares DWA Small Cap Momentum Portfolio (DWAS) has a similar technical structure at the moment.   Again, as we stated above, we are just using traditional point and figure charts to determine if there are any areas where we might expect the small cap sector to find some under-lying demand.   These areas of demand aren’t necessarily buy signals (we use our relative strength matrix for those decisions), but they may help us spot when pockets of relative strength start to develop within the small cap sector.

The  DWAS is also approaching an area where demand has shown up in the past.  A quadruple bottom pattern is setting up should price re-test the 34.50 level in the near future.  This level has held 3 times in the past and would only confirmed with a move through the 34.00 level.

dwas 300x267 Small Cap Stocks:  Keeping It Simple with Supply & Demand

 

Dorsey Wright is the index provider for DWAS

Conclusion:

This note serves as a brief update regarding the current technical structure of the small cap sector within US Equities.   In a sector that has trailed most of its peers throughout 2014, we can see that both the IWM and DWAS products are near levels where demand overwhelmed supply in recent attempts.   As we stated above, at Dorsey Wright Money Management we don’t necessarily view these levels as buy signals, but they give us a general idea of where RS rankings for such a beaten down sector may begin to improve.

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

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

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

A list of all holdings for the past 12 months is available upon request.

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Live Cattle: Monitoring Recent Technical Developments

September 30, 2014

In monitoring the commodities universe, much has been made in recent weeks about the sharp declines seen across the board in the hard assets sector.   The price of grains (corn, soybeans, wheat) and precious metals (gold, silver, platinum) have seen some of the largest declines.   Regardless of the reason (most are chalking it up to a sharply higher US Dollar Strength), holding onto these assets over the course of the past month has been quite painful.

However, in looking at the commodities complex in more detail there have been some pockets of out-performance.   Our relative strength-based approach to investing allows us to sort through the various asset classes around the globe and then break each one down by sector to gain exposure to the strongest trending markets.   Our discussion today will be a brief technical update on the Live Cattle market.  For those of you who are not avid followers of these markets, the price of live cattle has surged to record highs this year.  This has also had an influence on the price of beef at grocery stores so it might be affecting your pocketbook more then you realize!

Point & Figure Chart:  Live Cattle (LC/)

The traditional point and figure chart of the continuous live cattle contract achieved a double top break out on Friday (9/26).  Note we chose the continuous chart instead of the front month Oct 14 contract in order to display more price historical price data.  The measured move target for double top break out pattern is $174.50.  Of course, as with any pattern nothing is guaranteed and time will tell whether or not the target is achieved.  However, in a sector that has been largely beaten up over the past month, owning Live Cattle proved to be much more beneficial then most other commodities.

2014 09 30 12 34 18 279x300 Live Cattle:  Monitoring Recent Technical Developments

Live Cattle RS Chart (vs UV/Y –Continuous Commodities Index)

In taking our analysis a step further, we have also posted a relative strength chart below which compares live cattle to the continuous commodities index.  The chart paints a very clear picture of the out-performance live cattle has had compared to other areas such as energy, grains, and precious metals.

lc RS chart 278x300 Live Cattle:  Monitoring Recent Technical Developments

Conclusion:

This brief update on the live cattle market was just to point out that although commodities in general have had a rough go of it lately, there have been pockets of strength such as the live cattle market.   An investor’s ability to be tactical and gain exposure to markets other than just the traditional asset classes of stocks and bonds can be very beneficial.  Furthermore, gaining access to these markets has never been easier as product development continues to evolve.

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

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

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

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Do You Feel Lucky?

September 29, 2014

Part of what seems to motivate investors is a desire to make money in the context of working towards their financial goals.  However, part of the motivation for many investors is the accolades that come when they get a call right.  Think about all the bragging rights when you call a stock out as overvalued!  ”Yea, I shorted XYZ stock all the way down.  The numbers just didn’t make sense to me.”  If you can pull that off a couple times, CNBC will be booking you ASAP.  However, does it really make sense to try to short “overvalued” stocks—either from a financial perspective or from an accolades perspective?

Alon Bochman, CFA, of the CFA Institute has some data that should make you think twice.

Valuation shorts have a bad reputation on Wall Street. You may be right in the long run, but you may not be able to hold the position long enough to get there. As David Einhorn puts it, “We have repeatedly noted that it is dangerous to short stocks that have disconnected from traditional valuation methods. After all, twice a silly price is not twice as silly; it’s still just silly.

Valuation shorts are a dicey proposition on intellectual grounds, too. John Hempton, who is the chief investment officer at Bronte Capital and publishes one of my favorite investment blogs, puts it this way: “In a valuation short we are working on the same information as everyone else has. This makes me uncomfortable. There is an arrogance in suggesting we can analyze the information better than anyone else. We find it harder to answer the question of what we see when others don’t and hence harder to justify the position at all.”

I was curious whether valuation shorts work as a whole, and have recently had occasion to test this question using a new research service called Activist Shorts Research. They have compiled data on more than 400 campaigns by noted short-sellers from 2002 to the present. The returns look like this:

alon1 500x445 Do You Feel Lucky?

The mean price change (not including dividends), indicated by the blue line, was −14.2% over an entire “campaign,” which can be arbitrarily long. Additionally, 65% of campaigns were “successful” in the sense that the price of the target stock dropped since the campaign was announced. In 4% of campaigns, the price dropped 99% or more. These figures sound quite good, but it is important to note the sample is biased because the service does not cover all short-sellers, only the “best” and “most public” ones. These two groups likely overlap but not completely.

Despite the biases of the overall sample, the question I was most interested in was whether valuation shorts work better than fraud shorts. For each campaign in the dataset, we have a “Primary Allegation” which is the reason the short-seller used to publicly justify the short call. The reasons provided are many and varied, but I have grouped them into the two buckets we are interested in. The results are stark:

Primary Allegation Fraud Valuation Total
Mean Return −30% 3% −14%
Campaigns 229 219 448

Short campaigns that allege a stock is overvalued are wrong as a group: the target stock rises 3% over the life of the campaign, on average. Shorts that allege fraud are much more effective: the target stock drops 30% on average. We can see this result in some more detail by comparing return distributions:

My emphasis added.  On average, shorting stocks based on valuation hasn’t worked out so well.  You might win, but the odds aren’t in your favor.  Kind of like Vegas.

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