Quote of the Week

September 19, 2014

People want to believe the present is different than the past. Markets are now computerized, high-frequency and block traders dominate, the individual investor is gone and in his place sit a plethora of huge mutual and hedge funds to which he has given his money. Some people think these masters of money make decisions differently, and believe that looking at how a strategy performed in the 1950s or 1960s offers little insight into how it will perform in the future.

But while we humans passionately believe that our own current circumstances are somehow unique, not much has really changed since the inarguably brilliant Isaac Newton lost a fortune in the South Sea Trading Company bubble of 1720.  Newton lamented that he could “calculate the motions of heavenly bodies but not the madness of men.”  Herein lays the key to why basing investment decisions on long-term results is vital: the price of a stock is still determined by people.

  –Jim O’Shaughnessey

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PFI Point & Figure Chart: Are Financial Stocks Poised For Rotation?

September 19, 2014

Global equity markets continue to grind higher during 2014, with the S&P 500 notching a new all -time closing high yesterday at 2,011.  However, not all groups of stocks have performed well during the course of the year, with certain sectors outperforming others.  Furthermore, large caps and mid -caps have outperformed small caps.   The ability for investors to gain exposure to the strongest performing sectors of the equity market is something our relative strength models at Dorsey Wright attempt to capture on a daily basis.  We are not looking to catch the very initial leg or final leg of a trend, but more importantly the “middle” portion of the trend where the majority of the gains are found.  Having a solid game plan intact to take advantage when these moves occur is essential in helping achieve consistent returns.

PowerShares DWA Financial Momentum Portfolio  (PFI)

At Dorsey Wright, we have a number of products that allow investors to take advantage of secular market rotation.   We do so in a systematic way which allows us to eliminate human emotion and not take proper action until our relative strength rankings give confirmation.

In this piece, we want to focus on the point and figure chart of the PowerShares DWA Financial Momentum Portfolio (PFI).   The PFI Index is derived by analyzing a matrix of stocks and finding the top 30-75 financial stocks in terms of relative strength.   The reason for discussion about PFI today is a notable technical development on the point and figure chart.

Point & Figure – Technical Developments on PFI:

Range bound markets are often difficult for momentum strategies because of the whipsaw like action which can occur at the top and bottom ends of the range.   Of course, periods of price congestion during an uptrend often lead to a sub-par relative strength ranking until the market can take out the overhead supply and confirm a new buy signal.  The discipline to avoid these markets (until a proper signal is given) in search of stronger trends is something our model-based approach is designed to help do.

A quick glance at the chart below shows the sideways consolidation that PFI is in.   Consolidations in steady trends are usually considered healthy as supply and demand will tend to battle it out over a period of time before one side eventually wins and the next major leg up (or down) commences.  The PFI point and figure currently remains on a sell signal, and a buy signal will not be given till a move through 30 occurs.   The longer PFI continues to consolidate, the more likely the move out of this pattern will be substantial which will likely contribute to stronger RS ratings for the product.

PFIUPDATED 300x240 PFI Point & Figure Chart:  Are Financial Stocks Poised For Rotation?

Conclusion:

The above article gives a good example of why rules-based systematic approach to the markets can be so beneficial when investing.   As we stated above, financials as a group have struggled this year, underperforming the general market while other sectors have outperformed.  However, although the current relative strength ranking remains somewhere in the middle of the pack, the overall technical structure is worth keeping an eye on as price once again approaches the upper end of the range near $30.00.   The potential measured move target would be 34.50.

***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).     

Dorsey Wright is the index provider for PFI.  See www.powershares.com for more information.

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Sector Performance

September 19, 2014

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 9/18/14.

sector 09.19.14 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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Tactical Fixed Income: Point & Figure Technical Developments

September 17, 2014

In keeping with our macro based theme in a blog post earlier this week, we thought it would be interesting to dive deeper into the fixed income market and take a look at a few other ETF products (other than the TLT) available for exposure within the Tactical Fixed income strategy here at Dorsey Wright.     As we stated in a recent post, due to the large size of the fixed income markets,  major technical developments in this asset class should not be overlooked  as it can have an effect on asset allocation shifts during heavy re-balancing periods such as quarter end.

Recall previously how we noted the residing strength of the US Dollar over the last 5 weeks, which in turn has seemed to help contribute to the lackluster performance in commodities   We also noted the TLT (iShares Barclays 20+ Year Treasury Bond Fund) attempting to hold a longer term uptrend line near the 113.00  level.   In diving a bit deeper into the fixed income realm, we will now take a look at the updated point and figure charts for both the iShares Barclays TIPS bond fund (TIP) and the Barclays SPDR Convertible Bond ETF (CWB) to see if any technical developments worth noting are being displayed.   Clients of Dorsey Wright can gain exposure to both of these products through the Tactical Fixed Income product, should there relative strength ratings be satisfactory for holding.

iShares Barclays TIPS Bond Fund ETF (Point & Figure)

The first product we will take a look at is the iShares Barclays TIPS Bond Fund ETF (TIP).  For those of you not familiar with this product,  TIPS stand for Treasury Inflated Protective Security.   In other words, unlike traditional fixed income products that typically lose value during periods of  rising inflation, the principal on a TIPS product will rise and fall with CPI (consumer price index) readings.

tip 300x186 Tactical Fixed Income:  Point & Figure Technical Developments

From a technical perspective, the uptrend line which was intact on the point and figure chart of TIP was recently broken to the downside.  Furthermore , a double bottom break was also confirmed which has a measured move target of $109.50.    It appears (at least for the time being) the stronger US Dollar and lower commodity prices  have seemed to tame the markets expectations of seeing higher inflation in the near future.   We thought it would be worth pointing out that the labor department released the most recent CPI reading earlier this morning which came in at -0.2%, marking the first decrease since April 2013.   Given the technical developments we discussed on the TIP point and figure chart, it appears the price action of the market had been reflecting this decline.

DORSEY Wright currently has no position in TIPS

SPDR Convertible Bond ETF (CWB)

The final product we will take a look at is the SPDR Convertible Bond ETF (CWB).  This post will not dive into the details of the convertible bond market, but for a brief introduction a convertible bond is a ‘hybrid’ product of both debt and equity.   A convertible bond is typically issued at a discount to the current stock price of a company with a specific conversion price that will allow investors to exchange it for common stock if certain conditions are met.  Once the share price climbs above the conversion price, it allows for the exchange to be done.  We can see below, the current point & figure set up of this product looks quite different from the TIPS chart we analyzed earlier.   The relative strength of this product continues to remain strong in comparison to most others  in its space. The CWB is currently a component of  the tactical fixed income strategy.

cwb 273x300 Tactical Fixed Income:  Point & Figure Technical Developments

 

Conclusion:

This note serves as a brief follow up to our previous write up about using point and figure charts to monitor market rotation.   In going into further analysis of the fixed income market, we can see how relative strength strategies have certainly served the Tactical Fixed Income fund well by staying allocated towards the CWB and minimizing exposure to TIP.  As with any other asset class, markets cycles in fixed income will change at some point.   However, investors can gain exposure to both products through Dorsey Wright in order to help diversify their fixed income holdings based on the current market environment.  Furthermore, point and figure charts can also be used to observe different metrics of the economy (in this case, inflation expectations) when being applied to ETF products such as TIPS.   The Dorsey Wright Tactical Fixed income model currently has no allocation towards this product, but does have the ability to gain exposure should inflation expectations start to rise along with the relative strength ranking of the product itself.

***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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Ignoring Volume

September 16, 2014

Some have asked why we don’t incorporate volume into our work.  This is why (via WSJ):

In the second quarter, U.S. stock-market volume averaged 6.03 billion shares a day, the lowest level for the period in seven years, according to Credit Suisse Group. Amid the trading slowdown, the S&P 500 is up 7.3% this year.

Money can be made or lost with increasing or declining volume.

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Point & Figure Charts: Analyzing patterns for market rotation

September 15, 2014

In today’s ever changing market environment, keeping a strict rules-based investment focus is essential in helping asset manages achieve favorable returns.  As stated in numerous relative strength-based white papers published by Dorsey Wright, we have found momentum  to be an effective return factor over time.  Our advantage in doing so, we believe, is allowing us to find strongly performing markets which have strong possibilities of exhibiting trending moves.  This process starts at the asset class level and then  is broken down to sectors, sub sectors, and individual equities and or commodities.

In reviewing 3 major macro-related charts this past weekend, we noticed some interesting developments in the US Dollar Index (DX/Y), Greenhaven Continuous Commodities Index ETF (GCC), and iShares 20+  Year Treasury Bond ETF (TLT).   Remember, in terms of asset allocation, shifts in major macro-related markets like these can play a major impact on money flows into different asset classes during re-balancing periods.

DXY (US Dollar Index)

The US Dollar Index (DXY) has risen sharply higher since the beginning of August.  We can see on the below Point and Figure chart the downtrend line which was broken and  produced a buy signal when price broke out above 83.00.  In terms of technical developments, price is now trading at the upper end of the range just below $85.00.  Note a move through the 85.00 level would confirm a triple  top buy signal with a potential measured  move target of 96.00.  Up until recently, the currency markets had been  primarily range bound.  However,  as we can see below it appears the USD may be on the verge of starting  a major move higher as the Federal Reserve continues to scale back is QE policies.

dxy1 Point & Figure Charts:  Analyzing patterns for market rotation

GCC (Greenhaven Continuous Commodities)

The commodities sector, of course, is the flip side to the US dollar strength.    Due to the fact most commodities are priced in US Dollars, a stronger USD effects the ability of other  countries to import them and will inhibit global demand.  After starting the months of January and February with impressive strength, the sector has suffered some steep losses across the board.  This comes as no surprise with the relative strength rankings for commodities remaining abysmal in recent months.  The GCC ETF (seen below) is now coming into a major support level at 25.50.   A move through 25.00 would confirm a double bottom break and  have a potential price target of 20.00.

gcc1 Point & Figure Charts:  Analyzing patterns for market rotation

TLT  (ishares 20+ year Treasury Bond)

The last Point & Figure chart we are going to take a look at is the TLT.  Another major macro asset class ETF which is resting on an up-trend line that has been intact for quite some time.  The potential measured move target would be 107.00.  Again, this signal has not been confirmed yet but the development should be noted due to the size of the US treasury market and its importance regarding asset allocation and interest rates in general.

tlt1 Point & Figure Charts:  Analyzing patterns for market rotation

Conclusion:

Let’s give a brief recap of what we just discussed above.   Our primary goal in this post is to use basic point and figure charts to help identify any macro related themes which may be starting to take shape.   The reason this is important is that due to size of these asset classes.  Major technical developments may influence money flows and asset allocation going forward.   Will a shift into US Dollars and out of both commodities/fixed income help contribute additional money flow into global equity markets?  Time will tell.   Furthermore, a stronger dollar, lower commodity prices, and higher interest rates all play an effect our daily lives too.

***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).     

Dorsey Wright currently has a position in TLT.

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Weekly RS Recap

September 15, 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 (9/8/14 – 9/12/14) is as follows:

ranks 09.15.14 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

September 12, 2014

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 9/11/14.

sector 09.12.14 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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Room to Run

September 10, 2014

Piper Jaffray Sr. Technical Analyst, Craig Johnson, compares today’s markets to the 1950′s in their recent Informed Investor report:

History Does Not Always Repeat, but It Does Seem to Rhyme with the Early 1950′s

As market technicians we often use history as a guide to understanding current market environments.  Two years-ago when we wrote our “SPX 2000 – The Next Great Equity Rally” report we drew comparisons with the latter stages of the 1970′s bear market and start of a new secular bull market (at that point unconfirmed as the SPX was still below its ’00 and ’07 highs).  However, while the comparison with the late 1970′s was good, we now believe a better comparison is with the early 1950′s.  First, in both periods, the U.S. economy was just starting to emerge from an extended period of weakness.  As you can see in the chart below, the broader market has been in a secular consolidation range for more than 10 years.  Second, similarly to the bear market in the 1940′s, the bear market that began in 2000 had two well-defined peaks before breaking out to new highs.  Third, interest rates in the U.S. in the 1940-1950 period were near historic lows (similar to today).  Thus, based on history, we believe the broader market has now entered the early stages of a secular bull market that we believe still has a lot of room to run.  In prior secular bull markets, investors made five times their money from 1952 through the mid-1960′s and fifteen times their money  from 1982 through 1999.

piper Room to Run

While there is no need to commit to a static allocation that counts on the parallel to the 1950′s continuing and resulting in another decade+ of strong equity returns, I do think the comparison is plausible.  At a minimum, investors should invest in strategies that give them the opportunity to participate in secular bull markets.  After all, part of risk management is managing (participating) on the upside.  Frequent conversations with financial advisors confirm to me that there are many that remain focused on mitigating losses when “the other shoe drops.”  The psychological damage inflicted on investors in the last two bear markets has left many seemingly unable to see anything but risk.

At Dorsey Wright, we are big proponents of employing strategies that can help mitigate the downside risk.  However, there are ways to do that without locking the investor into consistently conservative strategies.  Three ideas for strategies that seek to mitigate some of the downside risk (but also have the ability to “play offense”) are shown below:

  1. DWA PowerShares Sector 4 Model (has the ability to rotate into cash in poor equity markets)
  2. Global Macro SMA (available on the Masters and DMA platforms at Wells Fargo and several other platforms)
  3. Systematic RS Growth SMA (has the ability to raise up to 50 percent cash in bear markets)

As an example, although the Systematic RS Growth portfolio has the ability to get very defensive in bear markets, it can play strong offense and has actually outperformed the S&P 500 over the past 5 years.

For questions about any of these strategies, please contact Andy Hyer at 626-535-0630 or andy@dorseywright.com

Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any se­curity. This report does not attempt to examine all the facts and circumstances which may be relevant to any company, industry or security mentioned herein. We are not soliciting any action based on this document. It is for the general information of clients of Dorsey, Wright & Associates, LLC (“Dorsey, Wright & Associates”). This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation in this document, clients should consider whether the security or strategy in question is suitable for their particular circumstances and, if neces­sary, seek professional advice.

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

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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Parsing the Narrative

September 10, 2014

There are changes afoot in the Fast Food industry.  From USA Today:

Fast-food’s old guard is giving way to a savvy new guard that is slowing-down the process and giving a needed nod to healthier ingredients…

…”Today’s 22-year-olds don’t frequent fast-food like the generation before them,” says Robin B. DiPietro, professor of hospitality at University of South Carolina. “Fast food will have to morph into something fresher and healthier.”

Among the companies that the article suggests are the future of Fast Food: Chipotle (CMG), Panera (PNRA), and Starbucks (SBUX).

Among the companies that are labeled the has-beens: Burger King (BKW), McDonald’s (MCD), Wendy’s (WEN), and KFC (owned by YUM).

Do the technicals match the narrative?  Generally, yes.  But, not in every case.  Dorsey Wright assigns a technical attribute score to every stock, which is derived from the relative strength and the trend of the stock.  The attributes range from 0-5, with 5 being the strongest.

Fast Food of the future (per article):

new Parsing the Narrative

Fast Food of the past (per article):

old Parsing the Narrative

A technical screen allows us to employ a variation of the old adage “Trust but verify.” The story line makes sense. Some of my own experiences tend to support the narrative that there are indeed major changes taking place in Fast Food, but there are clearly exceptions to the rule.  The stocks of some of the old guard are doing just fine, while the stocks of some of those thought to be the future are in fact lagging.

As with all narratives, best to let the technicals filter through the ideas to identify those that are being validated in the marketplace.  Change is a constant and relative strength is well-suited to objectively identify when those changes take place.

This example is presented for illustrative purposes only and does not represent a past recommendation.  A list of all holdings for the trailing 12 months is available upon request.  Past performance is no guarantee of future returns.  A relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.

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Sector Performance

September 5, 2014

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 9/4/14.

sector 09.05.14 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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Sector Performance

August 29, 2014

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 8/28/2014.

sector 08.29.14 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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Corporate Repurchases: “Single Biggest Category of Stock Buyers Today”

August 27, 2014

The longer this market moves higher, the more questions there seem to be about why.  ”What is causing the market to move up?”  Is it corporate earnings, interest rates, The Federal Reserve, companies buying back their own stock, or something else?  Admittedly, we spend little time trying to pinpoint what is causing demand (buying) or supply (selling) because it changes over time, and ultimately it is not necessary for an investor to understand the reason for the trend in order to participate.   In the words of Tom Dorsey:

While many of the concepts I learned in Economics 101 have been improved on over the years, one remains unchanged—supply and demand.  It is the driving force behind all price changes.  If there are more buyers than sellers willing to sell, then the price will rise.  If there are more sellers than buyers willing to buy, then the price will decline.  This is as true for the price of tomatoes as it is for the price of stocks.

That said, here is some interesting information about one very strong source of demand today.  From MarketWatch:

From arlines to 21st Century Fox Inc., U.S. companies keep buying back their own shares.

Buyback announcements jumped to a three-month high in July after faltering for a couple of months, and 2014 is on track to become the third-biggest year for buybacks ever, according to Minyi Chen, portfolio manager for the AdvisorShares TrimTabs Float Shrink ETF which picks stocks in part on their buyback trends.

He sees three big reasons for the boom in buybacks, and argues that companies shouldn’t be criticized so much for repurchasing shares in bull markets. Here are the three reasons:

1. Financial engineering: By repurchasing shares, companies can maintain or boost their earnings per share, even when their actual earnings aren’t so hot. The buyback shrinks the denominator — shares outstanding. “You can call it a little bit of financial engineering,” Chen told MarketWatch, but he said he sees the logic behind it for a company that wants to bolster its per-share earnings and sustain its stock’s momentum.

2. A better way to return money to shareholders: Companies are often criticized for buying back shares instead of investing in equipment or hiring, but Chen suggests that makes about as much sense as blasting dividend payments. He said a buyback is just another way of distributing corporate profit to shareholders, and it could be seen as a better (and increasingly popular) way of doing so because it avoids the double-taxation issue seen with cash dividends.

3. Offsetting employees who cash in: “A lot of people are criticizing the public companies for being poor market timers,” Chen said, referring to buybacks ramping up after stocks have climbed. But these critics don’t understand that “companies need to buy high,” he said, as they try to offset employees cashing in. When stock prices advance, more employees have in-the-money stock options and exercise them, while when stocks drop, employees hold back from exercising their options because they’re out of the money, the TrimTabs portfolio manager said.

Just how significant have corporate repurchases been?  According the the WSJ:

Companies purchasing their own shares represent the single biggest category of stock buyers today, according to a study this month by Jeffrey Kleintop, chief market strategist at brokerage firm LPL Financial.

Maybe, retail investors will come back to the equity markets en masse in the years ahead.  Maybe, corporations will continue to buy back shares.  Again, as trend followers it is most important to follow the trends, even without a full knowledge of the underlying sources of supply and demand.  The beauty of a point & figure chart is its ability to clearly reflect the broad trends in the market and that trend continues to be positive, as shown below in the chart of the S&P 500.

SP 500 Corporate Repurchases: Single Biggest Category of Stock Buyers Today

As of 8/27/14

This example is presented for illustrative purposes only and does not represent a past recommendation.  Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. 

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Rebirth of Separately Managed Accounts

August 18, 2014

InvestmentNews on the strong growth of separately managed accounts:

A class of products that have been around for a long time are undergoing a rebirth: separately managed accounts, or SMAs.

The recent sales figures have been impressive. SMA market assets have bounced back to levels last seen before the financial crisis — more than $762 billion at year-end 2013, according to Cerulli Associates Inc., with one-year growth of 23.1%. Cerulli Associates projects growth rates in separate accounts of 11.3% to 12.2% in each of the next four years.

The success of SMAs lies in their advantages: customization, transparency, tax efficiency and professional management. They can also offer flexibility in fees and a high value perception for clients attracted by the cachet of owning a professionally managed strategy in a more exclusive wrapper.

The concept is easy to explain, one reason that SMAs are gaining traction with clients. They fill the needs of retail investors wealthy enough to invest $100,000, and in some cases as little as $50,000, who want to move beyond pooled vehicles like mutual funds into portfolios with individual security ownership that are actively managed by professional asset managers.

Customization is a key differentiator in the marketplace. SMAs can help financial advisers demonstrate they are listening to the individual needs of their clients. Each SMA can be tailored to meet specific needs and goals. When investing in SMAs, advisers and clients can express preferences or restrictions concerning strategies or individual stocks, which can give them a greater sense of control.

For this reason, they are particularly attractive to clients with specific investment guidelines, and those who require additional hand-holding from their adviser. Increased demand for environmental, social and governance portfolios is fueling momentum in SMA strategies that apply sustainability-focused ESG integration. A shift away from traditional style box investing to outcome-oriented solutions is also fueling the movement to SMAs, as investors express greater desire for products addressing income, longevity and volatility risk.

In the wake of the financial crisis, transparency has become even more important to clients. With SMAs, advisers and clients see their actual holdings. They also receive full details on fees. This level of transparency lets high-quality asset managers prove their worth.

SMAs also provide excellent vehicles to assess and balance tax liabilities. The run-up of the equity markets has created considerable tax implications for many investors. The fiscal condition of public budgets indicates that taxes are likely to increase, not decrease, and many investors are seeking tax advantages mutual funds do not offer. Within an SMA there are no unearned gains and often trades can be balanced to address tax loss and gain harvesting. That can be highly attractive to investors who have large taxable assets and want access to particular portfolio managers or investment strategies. SMAs can also help those who want to create benefits for charitable giving.

All of the points that are made in this article ring true to my experience as well.  Click here to see where our SMAs are currently available.

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Buffett’s Drawdowns

August 15, 2014

Drawdowns of perhaps the world’s greatest investor, Warren Buffett:

Yesterday Warren Buffett’s Berkshire Hathaway stock price broke $200,000. Buffett’s performance over the years is an amazing feat.

Since 1980, when the price was in the $200-300 range, the stock has compounded at an annual rate of 21% per year. That’s good enough to double your money every three-and-a-half years.

But those returns didn’t always come easy to Buffett or his investors. There were times when his patient style of value investing was out of favor and the stock experienced large losses. Here are the biggest losses in Berkshire Hathaway stock since 1980:

buffett Buffetts Drawdowns

No way to earn the types of returns he has generated without taking some lumps along the way.

Source: Ben Carlson

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Sector Performance

August 15, 2014

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 8/14/14.

sector 08.15.14 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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Sector Performance

August 8, 2014

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 8/7/2014.

sector 08.08.14 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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Sector Performance

August 1, 2014

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 7/31/14.

sector 08.01.14 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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Reality Check for Forecasting

July 28, 2014

I’d say this is a pretty compelling argument for trend following.  As shown below, the average strategist forecast for the S&P 500 is routinely way off.

forecasts Reality Check for Forecasting

Source: WSJ

Rather than even attempt to forecast the unknowable, trend followers simply stay with the trend, until it is time to move on.  See here, here, and here.

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Sector Performance

July 25, 2014

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 7/24/14.

sector 7.25.14 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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Cullen Roche on Michael Covel’s Podcast

July 18, 2014

Listen to the 12:45 – 15:20 mark in this interview.  Cullen Roche has some key comments on pragmatism (something that we discuss regularly at DWA and a concept that separates winning investors from the rest).

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DWA Q3 2014 Update Webinar

July 18, 2014

Click here for our quarterly DWA webinar with Tom Dorsey, Tammy DeRosier, and John Lewis.

DWA Webinar DWA Q3 2014 Update Webinar

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Reconciling S&P 500 with US Economy

July 14, 2014

Interesting insights from Cullen Roche in Pragmatic Capitalism for those who have been having great difficulty trying to reconcile the strong performance of the S&P 500 in recent years with the less strong US economy.

The S&P 500 is no longer a US index.  It is becoming a global index, and understanding its constituents requires a global big-picture understanding as never before.  The big picture matters to market participants because US stock markets are becoming increasingly dependent on a stream of foreign revenues as they tap into foreign markets for business expansion.

Since 1990 S&P 500 companies have grown from generating 22 percent of their revenue from abroad to 30 percent.

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Sector Performance

July 11, 2014

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 7/10/14.

s c 07.11.14 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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The Virtues of Pragmatism

July 10, 2014

Aren’t you glad you are a trend follower?  Leaving aside the potential performance advantages of trend following  for a moment, it is just less drama.  Case in point, as a trend follower you can avoid getting caught up in the endless debate about whether or not the market is overvalued.  Consider the following analysis from Barry Ritholtz:

It has become commonly accepted that stocks are very expensive, overbought and perhaps even in a bubble.

JPMorgan Chase & Co.’s latest quarterly chart book (you can download it here) takes issue with those conventions.

ii19S2zDTQng The Virtues of Pragmatism

As you can see from the chart above, U.S. equity prices closely match their long-term average price-to-earnings ratio of 15.5. That’s precisely at fair value if you are comparing it to the Standard & Poor’s 500 Index earnings-per-share average of analyst estimates for the next 12 months.

That is one of the most common ways to value companies, but there are plenty of other approaches that show stocks either over or undervalued.

It is commonly stated by those immersed is the valuation debate that valuations may not matter in the short-run, but they absolutely matter in the long-run.  That may be true, but when it comes to your experience as an advisor with your clients, what are the practical implications of getting out the of the market 3 years (as an example) before the bull market ends?  That’s right, you get fired.

The principle of keeping it simple, has served Dorsey Wright very well for almost three decades now.  What is a trend follower’s interpretation of the following chart of the S&P 500?  A positive trend with no signs of deterioration at this point.

SP 500 The Virtues of Pragmatism

Source: Dorsey Wright, as of 7/10/14

This is no way negates the need for prudent financial planning and asset allocation.  Nor does this make us perma-bulls.  It does, however, make us pragmatic.  As to whether or not trend following “works” I would recommend reading the following white papers by John Lewis:

This example is presented for illustrative purposes only and does not represent a past recommendation.  A relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.

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