July 29, 2010
The Investment Company Institute is the national association of U.S. investment companies, including mutual funds, closed-end funds, exchange-traded funds (ETFs), and unit investment trusts (UITs). Members of ICI manage total assets of $11.82 trillion and serve nearly 90 million shareholders. Flow estimates are derived from data collected covering more than 95 percent of industry assets and are adjusted to represent industry totals.
Almost $7 billion was added to taxable bonds and $1.5 billion was withdrawn from domestic equity funds in the week ending 7/21. These flows represent a substantial increase in flows to taxable bonds, and a substantial decrease in domestic equity withdrawals. For the year, $156 billion has been added to taxable bond funds while $27 billion has been removed from domestic equity funds. Hybrids, municipal bonds, and foreign equity funds have all seen modest inflows for the year.
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Posted by JP Lee
July 29, 2010
It’s very difficult to maintain conviction in the stock market as an investment vehicle when the economy is so rotten. (Frankly, it’s never very easy!) The market was rattled a little bit this week when it was reported that one of the consumer confidence indexes was down again. The bears aggressively took to the airwaves, discussing how the economy could not recover unless and until consumers felt better about things.
This made me curious. What actually happens to the stock market when consumer sentiment is poor? J.P. dug up all of the data from the University of Michigan’s Consumer Sentiment Index, which runs back to 1978. He broke all of the monthly observations into deciles and examined stock market returns over the subsequent five years.
(click to expand image)
Interesting, isn’t it? When consumer sentiment was low–in the bottom three deciles–subsequent five-year returns in the S&P 500 were over 12% per year, significantly higher than the 9.3% average over the entire sample period. When consumers felt absolutely fantastic about things and sentiment was in the top decile, subsequent five-year returns were actually negative! Confident consumers engage in reckless behaviors that sow the seeds for the next downturn. Fearful consumers engage in behaviors that build the foundation for the next upturn.
Right now, consumer sentiment resides in the second decile. Based on historical precedent, subsequent five-year returns are likely to be above average from here.
It is well-known that advisory sentiment indexes can be interpreted in a contrary fashion, and it seems that consumer sentiment may fall into the same category, at least over the longer term. This is one of the many reasons investing is difficult–it is an uphill climb against human nature to be bullish when conditions are poor. To buy when the outlook is dim takes a real leap of faith–and a steadfast optimism that things will improve over time. When things seem like they can’t get any worse, it just might be because they really can’t get any worse–and are about to get better.
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Posted by Mike Moody
July 28, 2010
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 7/27/10.
The 10-day moving average of this indicator is 60% and the one-day reading is 84%. The diffusion index continues to shoot higher as HighRS stocks and sectors cling to gains earned in the July rally. Dips in the High RS Diffusion Index have often provided good opportunities to add to relative strength strategies.
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Posted by JP Lee
July 27, 2010
The chart below is the spread between the relative strength leaders and relative strength laggards (universe of mid and large cap stocks). When the chart is rising, relative strength leaders are performing better than relative strength laggards. As of 7/26/2010:
No change this week–or for much of the past year for this indicator. The relative strength spread continues to reflect the fact that neither the relative strength leaders nor the relative strength laggards have been able to pull away. For now, both groups continue to generate similar performance.
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Posted by JP Lee
July 26, 2010
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 (7/19/10 – 7/23/10) is as follows:
It was a flat week for stocks in all relative strength deciles. We have no out- or under-performance to speak of.
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Posted by JP Lee
July 22, 2010
Your heart will surely tell you that Bill Miller’s arguments in Large Cap Stocks Represent a Once in a Lifetime Opportunity are insane. However, your mind may tell you that he just might be right.
The public’s distaste for equities is palpable and understandable. Negative returns for 10 years in stocks while “riskless” treasuries have soared, and right after one of the best 6 months treasuries have had in the decade, is more than enough to convince folks that stocks are just not where you want to invest long term.
Then there is the really long term. Long term treasuries as measured by the Barclay’s Capital Long Term Treasury Bond total return index have beaten equities as measured by the S&P 500 year to date, and in the 1-, 3-, 5-, 10-, 15-, and 20-year time frames. It’s a tie at 25 years. Over 20 years of consistently superior returns over stocks in an asset guaranteed by the U.S. government seems to be sufficient to drive a stake through the heart of the idea that you want stocks for the long term. Gentlemen and ladies both prefer bonds. Who doesn’t?
It is almost a tautology in capital markets that the best investments are those with the worst previous returns, where expectations are low, demand is down, and prospects appear at best highly uncertain. In 1980 bonds had been through a 30 year bear market relative to stocks, inflation was soaring, yields were at historic highs, yet expected to go higher, and a long bull market in bonds was at hand. The idea that U.S. interest rates would be at all time lows 30 years later would have been dismissed as ludicrous. The situation is now reversed, with stocks having underperformed bonds for decades.
The point here is simple: U.S. large capitalization stocks represent a once in a lifetime opportunity in my opinion to buy the best quality companies in the world at bargain prices. The last time they were this cheap relative to bonds was 1951. I was 1 year old then, but did not have then sufficient sentience or capital to invest. I do now, and if you are reading this, so do you.
His whole article is well worth the read. If Bill Miller is right, does your investment strategy allow for the flexibility to capitalize on the type of move in large cap stocks that he foresees?
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Posted by Andy Hyer
July 22, 2010
The Investment Company Institute is the national association of U.S. investment companies, including mutual funds, closed-end funds, exchange-traded funds (ETFs), and unit investment trusts (UITs). Members of ICI manage total assets of $11.82 trillion and serve nearly 90 million shareholders. Flow estimates are derived from data collected covering more than 95 percent of industry assets and are adjusted to represent industry totals.
Another $5 billion was added to taxable bonds and another $3 billion was withdrawn from domestic equity funds in the week ending 7/14. For the year, $144 billion has been added to taxable bond funds while $23 billion has been removed from domestic equity funds. Hybrids, municipal bonds, and foreign equity funds have all seen modest inflows for the year.
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Posted by Andy Hyer
July 22, 2010
For months, the talk about commercial real estate centered around the fear that this could be “the next shoe to drop.” With that backdrop, I was surprised to come across Jeff Fox’s recent article Commerical Real Estate’s Death Knell May Have Been Premature.
In the face of some otherwise-daunting obstacles, commercial real estate is proving to be an attractive area for investors looking for bargains as loans come due and foreclosures mount.
Analysts have been warning for months that commercial real estate could be the next shoe to drop in the subprime mortgage collapse that came to a head in 2008.
But with signs of thawing in the securitization markets and indications that investors are ready to come to auction when properties are on the block, the idea that the industry represents a major looming danger for the economy is losing traction.
My emphasis added. At the time that we were buying commercial real estate ETFs in our Global Macro strategy in early 2010 articles like this were nowhere to be found. However, we bought it anyway because that what we do–buy and sell securities based solely on their relative strength. Performance in the table below is for the period 7/21/2009 – 7/21/2010 and YTD through 7/21/2010.
One of the realities of employing relative strength strategies is that we often buy and sell securities well before such action is being trumpeted in the main stream media. Waiting for the blessing of the main stream media before taking action is a recipe for disaster.
To receive the brochure for our Global Macro strategy, click here. For information about the Arrow DWA Tactical Fund (DWTFX), click here.
Click here and here for disclosures. ICF, IYR, RWR and other real estate securities are current holdings in products managed by Dorsey Wright Money Management. Past performance is no guarantee of future returns.
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Posted by Andy Hyer
July 21, 2010
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 7/20/10.
After spending several months bouncing around in oversold territory, the 10-day moving average of this indicator has now risen to 44%. Dips in this indicator have often provided good opportunities to add to relative strength strategies.
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Posted by Andy Hyer
July 20, 2010
The chart below is the spread between the relative strength leaders and relative strength laggards (universe of mid and large cap stocks). When the chart is rising, relative strength leaders are performing better than relative strength laggards. As of 1/8/2010:
No change this week–or for much of the past year for this indicator. The relative strength spread continues to reflect the fact that neither the relative strength leaders nor the relative strength laggards have been able to pull away. For now, both groups continue to generate similar performance.
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Posted by Andy Hyer
July 19, 2010
Last survey’s readings were the most extreme we’ve seen. Thanks for participating.
Here we have the next round of the Dorsey, Wright Sentiment Survey, the first third-party sentiment poll. As you know, when individuals self-report, they are always taller and more beautiful than when outside observers report their perceptions! Instead of asking individual investors to self-report whether they are bullish or bearish, we’d like financial advisors to weigh in and report on the actual behavior of clients. It’s two simple questions and will take no more than 20 seconds of your time. We’ll construct indicators from the data and report the results regularly on our blog–but we need your help to get a large statistical sample!
Click here to take Dorsey, Wright’s Sentiment Survey.
Contribute to the greater good! It’s painless, we promise.
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Posted by JP Lee
July 19, 2010
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 (7/12/10 – 7/16/10) is as follows:
The best relative performance last week came from the stocks in the third relative strength quartile. The stocks in the top relative strength quartile underperformed the universe last week.
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Posted by Andy Hyer
July 15, 2010
Daryl Montgomery of Seeking Alpha reconciles the stellar earnings reports this earnings season with the poor U.S economic reports.
So far this earnings season, company reports indicate that business is going gangbusters. U.S. economic reports are painting exactly the opposite picture, however. This may not be as contradictory as it appears on the surface.
As for earnings, Intel (INTC) reported record numbers yesterday, after Alcoa (AA) upgraded its forecast for global aluminum sales and U.S. railroad company CSX (CSX) said shipments were up considerably. This morning, however, U.S. retail sales numbers disappointed again, falling 0.5% in June following a 1.1% drop in May. Mortgages for home purchases fell to a 14-year low. According to the non-farms payroll reports, close to a million people net left the U.S. labor market in May and June because jobs were so scarce that they simply gave up looking. Later today, the Federal Reserve is expected to lower its expectations for second half U.S. economic growth.
One of the important things to note is that both Intel and Alcoa are global companies. While many people assume that the U.S. is Intel’s major market, it isn’t. East Asia dominates Intel’s sales. Strong Intel numbers generally indicate a robust East Asian economy. Growth has indeed been strong there. Intel’s biggest growth sector by far was servers, which were up 170%s…
…Investors should not make judgments for the U.S. economy based on figures for global companies, especially when the U.S. is only a minority of their business. The U.S. economy can be much weaker than Asian economies. Asia was in the driver’s seat pulling the world out of the Credit Crisis recession and the U.S. followed.
Just another reminder that U.S. investors would do well not to focus entirely on U.S. economic reports. As pointed out by Moody’s interactive website below, much of the world is currently experiencing strong economic growth.
HT: Barry Ritholz
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Posted by Andy Hyer
July 15, 2010
And that’s a good thing. Investor sentiment works very nicely when it is interpreted in a contrary fashion. In other words, when everyone is bearish, prices tend to go higher. One of the long-time sentiment gauges for the domestic stock market is the Advisory Sentiment Index compiled by Investors Intelligence. This indicator was originally developed by A.W. Cohen, the popularizer of the 3-box point & figure reversal chart. Bloomberg reported the most recent levels today and advisors are decidedly negative.
The following are results from Investors Intelligence’s analysis of investment newsletters for July 7 through yesterday.
This Week Last Week Comments
Bullish * 32.6% 37.0% Lowest level since March 2009
Bearish # 34.8% 34.8% Stays at highest in 12 months
Correction & 32.6% 28.2% Biggest jump since January
* The bullish reading fell to 22.2 percent in October 2008,
the lowest since November 1988.
# The bearish reading fell to 15.6 percent in December
2009, the lowest since April 1987. It rose to 54.4 percent in
October 2008, the highest since December 1994.
& The correction reading rose to 39.8 percent in February
2010, the highest since September 1983.
Since I like to stick to actual evidence and testing, I referred to Robert Colby’s Encyclopedia of Technical Market Indicators (Colby & Meyers, 1988). After examining 17 years of advisory sentiment data, they conclude:
When a relatively small percentage (37.5% or less) of advisory services were bullish, there was a significant bullish tendency for stock prices.
The 37.5% threshold applies to a 4-week average of the bullish readings–the current 4-week average is 38.0%. There was also a very bullish tendency for single week readings below 32.7% bulls, which is where we find ourselves this week. Because Colby and Meyers tested everything for statistical significance, “very bullish” readings are defined as:
Probability less than 1 in 1000 that the stock market rose by random chance alone after an indicator reading in this range of values for the specified time frame. Therefore, we can be 99.9% confident that the indicator is significant.
It’s important to note that the significance of the Advisory Sentiment Index was only apparent at the 6-month and12-month time horizons for the 4-week average and at the 12-month time horizon for the single week reading. At 1-month and 3-month time horizons, statistical significance was not achieved. In other words, stock prices are likely to be higher 12 months from now. The likely path to higher prices could be smooth or rocky from here, but nothing is certain over the near-term time frame.
To put a bow on it is an article that appeared on Doug Short’s website. He points out that often high-yield bonds lead the stock market. High yield bonds are showing a positive divergence right now.
Source: dshort/Kimble Charting Solutions (click to enlarge)
It’s interesting to note that some of the preconditions for a stock market rally are starting to appear at a time when the public is very negative on stocks. I guess it’s always darkest before the dawn. Economic data aside, stock market data is arguing that things might not be so bad.
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Posted by Mike Moody
July 15, 2010
The Investment Company Institute is the national association of U.S. investment companies, including mutual funds, closed-end funds, exchange-traded funds (ETFs), and unit investment trusts (UITs). Members of ICI manage total assets of $11.82 trillion and serve nearly 90 million shareholders. Flow estimates are derived from data collected covering more than 95 percent of industry assets and are adjusted to represent industry totals.
Domestic equity funds had estimated outflows of over $4 billion and taxable bonds had estimated inflows of over $5 billion in the week ending 7/7/10. So far in 2010, taxable bonds have had net inflows of over $144 billion while domestic equity funds have had net outflows of over $23 billion. Municipal bond funds, foreign equity funds, and hybrid funds have all had modest inflows for the year.
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Posted by Andy Hyer
July 14, 2010
So far, the low for most of the major U.S. equity indexes came on July 2. In the week and a half since that time the market has rallied sharply with all relative strength quartiles participating to roughly the same degree. 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.
Performance (7/2/10 – 7/13/10):
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Posted by Andy Hyer
July 14, 2010
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 7/13/10.
The 10-day moving average of this indicator is 27% and the one-day reading is 59%. The rally over the last week is bringing this indicator out of deeply oversold levels. Dips in the High RS Diffusion Index have often provided good opportunities to add to relative strength strategies.
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Posted by Andy Hyer
July 13, 2010
One of the great strengths of a capitalist, entreprenuerial economy is its ability to adapt. Although the politicos in Washington may have no idea how to restart the economy, it might not matter. As long as things are not completely in flux, businesses and consumers will figure out a way to move forward.
From Newsweek comes evidence that conditions for a recovery are being put in place without any help from the government:
This do-it-yourself stimulus has already started. Corporate America’s balance sheet has never looked better, and consumers are paying down debt and bolstering savings. The challenge is a reluctance to spend. To try to jump-start consumption, companies are enacting mini stimulus programs of their own. In years past, teen-oriented retailer American Eagle has given away free T shirts and movie tickets to potential shoppers as part of a back-to-school promotion. This year it’s offering a free smart phone to shoppers who try on a pair of jeans (and sign up for a plan). Chrysler just kicked off a round of promotions that includes zero-interest financing and an offer to cover the first two installment payments. With banks reluctant to lend to small businesses, warehouse giant Sam’s Club has started a program with an approved Small Business Administration lender, Superior Financial Group. Sam’s Club will essentially subsidize a chunk of the loan process to enable its members to borrow up to $25,000—with the hopes they’ll spend the proceeds in the retailer’s wide aisles.
Innovative retailers like American Eagle, Chrysler, and Wal-Mart will figure out ways to improve their sales. Other companies will too. There are always trends because there are always corporate winners and losers–and often a recession strengthens the winners and makes them stand out relative to their competition. An investment policy that makes systematic use of relative strength is well-positioned to be able to separate the winners and the losers.
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Posted by Mike Moody
July 13, 2010
The chart below is the spread between the relative strength leaders and relative strength laggards (universe of mid and large cap stocks). When the chart is rising, relative strength leaders are performing better than relative strength laggards. As of 7/12/2010:
It is almost hard to believe that this is the same indicator for the entire three year period shown (but it is, we checked…). The RS Spread was very volatile, especially from mid ’08 to early ’09 . It then declined sharply during the laggard rally off the bear market low and it has since laid flat…for almost a year. Relative strength tends to move in and out of favor over time, and I suspect that what we are seeing now will eventually lead to a very favorable environment for relative strength investing.
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Posted by Andy Hyer
July 12, 2010
Are retail or institutional investors better at getting performance out of their funds? The answer turns out to be neither! After an examination of investor returns versus NAV returns for various share classes, Morningstar comments:
One thing is clear: Across the board, investor returns are lower than total returns. Regardless of sales channel, the data don’t provide evidence that advisors and institutions do an excellent job timing their moves while other channels are rife with fickle investors. In aggregate, they’re all losing money to poor timing.
Thrashing around doesn’t help. Study the various available return factors and then stick with your program. We like relative strength because of its historical performance and great adaptability, but other factors work as well. In particular, deep value mixes nicely with relative strength.
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Posted by Mike Moody
July 9, 2010
The more commentary I read from Morningstar, the more sensible I think they are. Yet I suspect many advisors are misusing the tools that Morningstar provides, or certainly not using the tools in a nuanced way as Morningstar recommends.
For example, a recent article discussed a very topical issue: how to determine if your slumping fund or advisor has permanently lost their touch. Clients grapple with this issue all the time and, most frequently, get it wrong. Studies show that both retail and institutional investors tend to terminate advisors after a period of poor performance and to hire advisors after a period of good performance. Most often, this period tends to be temporary and the studies have demonstrated that investors cost themselves an enormous amount of money by doing so.
On the other hand, no client wants to be permanently stuck with a lousy manager. So how can you differentiate?
There are a couple of different conditions in which Morningstar suggests you not act too impetuously.
1. Funds that don’t follow the crowd often have very different performance profiles than the broad market. Their ranking can zig when the market zags. (Our Systematic portfolios tend to visit both the top and bottom deciles with regularity.)
2. Sometimes an anomalous time period can make a fund look worse than it is. Relying on the ranking of a value fund at the end of a growth cycle, or vice versa, would probably be a significant mistake.
In both cases, the fund’s peer ranking can suffer, but as Morningstar points out, the ranking often comes roaring back. The rankings are exceptionally fluid because the returns are often tightly clustered. For example:
…most category rankings are based on a tightly constrained range. In the large-value category, a 10-year annualized gain of 1.6% lands a fund in the group’s worst third, but a 3.1% gain puts it in the top third. Neither is good on an absolute basis. It is easy to see how a good month or two is all it would take to vault a fund from the group’s basement to its penthouse, and vice versa.
I’ve added the emphasis because I don’t think the fluidity in ranking is generally understood by the investing public. If a good month or two can swing your 10-year ranking significantly, it seems to me that it is much more important to understand the manager’s process than it is to worry about the temporary ranking. Rankings can be unstable; process is permanent.
Leave a Comment » | From the MM, Investor Behavior, Markets, Thought Process | Permalink
Posted by Mike Moody
July 8, 2010
The Investment Company Institute is the national association of U.S. investment companies, including mutual funds, closed-end funds, exchange-traded funds (ETFs), and unit investment trusts (UITs). Members of ICI manage total assets of $11.82 trillion and serve nearly 90 million shareholders. Flow estimates are derived from data collected covering more than 95 percent of industry assets and are adjusted to represent industry totals.
Taxable Bonds continued to attract the most net new mutual fund assets for the week ending 6/30/10.
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Posted by Andy Hyer
