Relative Strength Spread

April 15, 2014

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 4/14/2014:

spread 04.15.14 Relative Strength Spread

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European Improvement

April 9, 2014

In light of European equities being among the best performing asset classes over the past year, consider what The Economist has to say about the economic improvement in that area:

A reassuring feature of the recovery is that it is spreading to the once-afflicted countries of southern Europe. Germany, which remains the main engine of growth in the euro zone, is likely to have expanded strongly in the first quarter of 2014, according to the Bundesbank. But the recovery is also being boosted by a return to growth, albeit sluggish, on the part of both Italy and Spain, the third- and fourth-biggest economies in the euro zone.

The peripheral economies are benefiting from falling long-term interest rates. Ten-year government-bond yields in Italy, Spain and Portugal are now lower than they were four years ago, shortly before the Greek crisis flared up and led to the first bail-out (see chart). Remarkably, yields in Ireland, which exited its rescue programme only last December, have fallen to their lowest since the euro started 15 years ago. Peripheral yields have been dragged down both by the fall in German yields and the narrowing of their spreads over German bonds since the height of the crisis. Although the spreads are still wider than before the crisis, their tightening reflects a broader reassessment of risk: investors no longer shun peripheral Europe on fears of a euro-zone break-up, whereas they fret about emerging markets.

asset class ranks 04.09.14 European Improvement

Source: Yahoo! Finance, Returns include dividends and interest payments, but do not include transaction costs

1PowerShares DB Gold, 2iShares MSCI Emerging Markets ETF, 3iShares DJ U.S. Real Estate Index, 4iShares S&P Europe 350 Index, 5Green Haven Continuous Commodity Index, 6iBoxx High Yield Corporate Bond Fund, 7JP Morgan Emerging Markets Bond Fund, 8PowerShares DB US Dollar Index, 9iBoxx Investment Grade Corporate Bond Fund, 10PowerShares DB Oil, 11iShares Barclays 20+ Year Treasury Bond

Exposure to Europe in the PowerShares DWA Developed Markets Momentum ETF (PIZ) has increased over the last couple of years.

PIZ exposure European Improvement

Source: PowerShares

A relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Past performance is no guarantee of future returns. Potential for profits is accompanied by possibility of loss.  A list of all holdings for the trailing 12 months is available upon request.  Dorsey Wright & Associates is the index provider for The PowerShares DWA Developed Markets Momentum ETF (PIZ).  See www.powershares.com for more information.

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High RS Diffusion Index

April 9, 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 4/8/14.

diffusion 04.09.14 High RS Diffusion Index

The 10-day moving average of this indicator is 66% and the one-day reading is 47%.  Dips in this indicator have often provided good opportunities to add money to relative strength strategies.

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Relative Strength Spread

April 8, 2014

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 4/7/2014:

RS Spread 04.08.14 Relative Strength Spread

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What to Make of Valuations

April 2, 2014

Jeffrey Kleintop of LPL Financial has an interesting rebuttal to the argument that the market is overvalued:

At any given time, there are always some bubbly valuations among industries and stocks that are hot. But overall, the S&P 500 PE is currently a bit over 16 on current fiscal year estimates, slightly above the long-term average, but only half of what it was in late March 2000. Looking at valuations, compared to 14 years ago, the party in the stock market may not be just getting started — but it is not yet close to being over.

champagne 22 What to Make of Valuations

The whole article is worth the read.

Here is what John Lewis, our Senior Portfolio Manager, had to say about valuations in our quarterly letter to clients:

A lot of the volatility and rotation we have seen this year can be attributed to this current bull market turning 5 years old.  The stock market has had tremendous gains since the bear market lows in 2009, and that has finally led to serious talk about stretched equity valuations.  Some of the good momentum areas like solar stocks and biotechnology certainly fall into this theme, and were sold off during the last couple of weeks of the quarter as these concerns came to the forefront.  These concerns surface as any bull market matures, and the truly strong stocks often perform very well long after the serious valuation discussions begin.  As valuations become stretched, markets tend to focus more on growth opportunities.  That is a positive for our strategies.  Relative strength is very good at picking out high growth stocks.  Yes, the overall market or certain pockets of the market may be pricey, but that doesn’t mean there aren’t well managed companies capitalizing on current trends that will continue to perform.  That is often a great environment for our strategies.

The debate about valuation will rage on, but for momentum investors, having slightly stretched valuations may just be the environment where we can really shine.

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“The European Rally Has Legs”

March 31, 2014

PowerShares makes the case for increasing exposure to Europe generally and to PIZ in particular:

The DWA Developed Markets Technical Leaders Index has produced a strong track record of outperformance relative to major market cap-weighted European equity market indices and the MSCI EAFE.  The Euro Stoxx 50, FTSE Developed Europe, and iShares MSCI EMU are benchmarks for European equity performance based on ETF volumes and flows, while the MSCI EAFE is regarded as an institutional benchmark for Developed World equity investment excluding the U.S.  The tabel below highlights the ouperformance of the DWA Technical Leaders Index.  The Index has produced a higher annualized return compared to its peers over the past five years outright and also on a risk adjusted basis given its higher Sharpe Ratio.

piz perf The European Rally Has Legs

PIZ currently has 75% exposure to Europe:

PIZ exposure The European Rally Has Legs

Read the whole report here.

A relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Past performance is no guarantee of future returns. Potential for profits is accompanied by possibility of loss.  Dorsey Wright & Associates is the index provider for The PowerShares DWA Developed Markets Momentum ETF (PIZ).

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Weekly RS Recap

March 31, 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 (3/24/14 – 3/28/14) is as follows:

ranks 03.31.14 Weekly RS Recap

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Sector Performance

March 28, 2014

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 3/27/14.

s c 03.28.14 Sector Performance

Numbers shown are price returns only and are not inclusive of transaction costs.    Source: iShares

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Examining Sector Strength

March 27, 2014

Good discussion here about sector relative strength by our analysts, Susan Morrison and Jay Gragnani.  Their discussion made me think of this study, published in the NYT:

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

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

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

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

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

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

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

01kick 600 Examining Sector Strength

Source: New York Times

When it comes to soccer and investing, when choosing what to do, sometimes the best thing is nothing.

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Fund Flows

March 27, 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 03.27.14 Fund Flows

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High RS Diffusion Index

March 26, 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 3/25/2014.

diffusion 03.26.14 High RS Diffusion Index

The 10-day moving average of this indicator is 82% and the one-day reading is 75%.

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Relative Strength Spread

March 25, 2014

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 3/24/2014:

spread 03.25.14 Relative Strength Spread

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Weekly RS Recap

March 24, 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 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 (3/17/14 – 3/21/14) is as follows:

ranks 03.24.14 Weekly RS Recap

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Relative Strength Spread

March 18, 2014

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 3/17/2014:

spread 03.18.14 Relative Strength Spread

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Quote of the Week

March 17, 2014

Philosophical Economics:

We select from the options that are there, not from the options that used to be there, and especially not from the options that we think “should be” there in a moral sense.

The financial markets can be an expensive place to be dogmatic.

HT: Abnormal Returns

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Sector Performance

March 14, 2014

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 3/13/2014.

gics 03.14.14 Sector Performance

Numbers shown are price returns only and are not inclusive of transaction costs.    Source: iShares

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Using the CAPE Ratio for Market Timing

March 13, 2014

The Shiller Cyclically Adjusted Price to Earnings ratio (“CAPE” ratio) is getting a lot of play in the financial press as the “single best forecaster of long-term future stock returns.”  Nobel Prize-winning economist Robert Shiller first published information on the CAPE ratio in 1998.  While some may have used this measure as a reason to argue that the market is expensive and to stay on the sidelines for the last couple of years, one quote is worth keeping in mind.  On May 17, 2011, Shiller stated:

Equity returns will be disappointing over the next decade.

From that date through December 31, 2013, two and a half years later, the S&P 500 Index total return is up 47.3% (15.9% annualized).  The decade is far from over yet, but the market will have to fall a long way before the decade he refers to is disappointing.  We’ll see, but it causes one to pause. (Source: Bridgeway)

Trying to time the market based on valuations can be…problematic.  It is worth remembering that earnings do have some disadvantages.  As stated by Bridgeway:

First, they can be manipulated by management.  Second, since accounting standards change over time, a dollar of earnings in 1880 may not mean the same thing as a dollar of earnings in 1990 or in 2014.

At Dorsey Wright, price is the sole input into our models.  We employ systematic models that allow us to adapt to price trends (relative strength allows us to identify the strongest of the trends).  What is, is.

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Fund Flows

March 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 03.13.14 Fund Flows

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High RS Diffusion Index

March 12, 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 3/11/14.

diffusion 03.12.14 High RS Diffusion Index

The 10-day moving average of this indicator is 85% and the one-day reading is 87%.

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Relative Strength Spread

March 11, 2014

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 3/10/2014:

spread 03.11.14 Relative Strength Spread

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Weekly RS Recap

March 10, 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 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 (3/3/14 – 3/7/14) is as follows:

ranks 03.10.14 Weekly RS Recap

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Fund Flows

March 6, 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 03.06.14 Fund Flows

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High RS Diffusion Index

March 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 3/4/14.

diffusion 03.05.14 High RS Diffusion Index

The 10-day moving average of this indicator is 79% and the one-day reading is 87%.

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Relative Strength Spread

March 4, 2014

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 3/3/2014:

spread 03.04.14 Relative Strength Spread

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The Coming Mega-Bull Market?

March 2, 2014

Investor behavior has a lot to do with how markets behave, and with how investors perform.  To profit from a long mega-bull market, investors have to be willing to buy stocks and hold them through the inevitable ups and downs along the way.  Risk tolerance greatly influences their willing to do that—and risk tolerance is greatly influenced by their past experience.

From an article on risk in The Economist:

People’s financial history has a strong impact on their taste for risk. Looking at surveys of American household finances from 1960 to 2007, Ulrike Malmendier of the University of California at Berkeley and Stefan Nagel, now at the University of Michigan, found that people who experienced high returns on the stockmarket earlier in life were, years later, likelier to report a higher tolerance for risk, to own shares and to invest a bigger slice of their assets in shares.

But exposure to economic turmoil appears to dampen people’s appetite for risk irrespective of their personal financial losses. That is the conclusion of a paper by Samuli Knüpfer of London Business School and two co-authors. In the early 1990s a severe recession caused Finland’s GDP to sink by 10% and unemployment to soar from 3% to 16%. Using detailed data on tax, unemployment and military conscription, the authors were able to analyse the investment choices of those affected by Finland’s “Great Depression”. Controlling for age, education, gender and marital status, they found that those in occupations, industries and regions hit harder by unemployment were less likely to own stocks a decade later. Individuals’ personal misfortunes, however, could explain at most half of the variation in stock ownership, the authors reckon. They attribute the remainder to “changes in beliefs and preferences” that are not easily measured.

The same seems to be true for financial trauma. Luigi Guiso of the Einaudi Institute for Economics and Finance and two co-authors examined the investments of several hundred clients of a large Italian bank in 2007 and again in 2009 (ie, before and after the plunge in global stockmarkets). The authors also asked the clients about their attitudes towards risk and got them to play a game modelled on a television show in which they could either pocket a small but guaranteed prize or gamble on winning a bigger one. Risk aversion, by these measures, rose sharply after the crash, even among investors who had suffered no losses in the stockmarket. The reaction to the financial crisis, the authors conclude, looked less like a proportionate response to the losses suffered and “more like old-fashioned ‘panic’.”

I’ve bolded a couple of sections that I think are particularly interesting.  Investors who came of age in the 1930s tended to have an aversion to stocks also—an aversion that caused them to miss the next mega-bull market in the 1950s.  Today’s investors may be similarly traumatized, having just lived through two bear markets in the last decade or so.

Bull markets climb a wall of worry and today’s prospective investors are plenty worried.  Evidence of this is how quickly risk-averse bond-buying picks up during even small corrections in the stock market.  If history is any guide, investors could be overly cautious for a very long time.

Of course, I don’t know whether we’re going to have a mega-bull market for the next ten or fifteen years or not.  Anything can happen.  But it wouldn’t surprise me if the stock market does very well going forward—and it would surprise me even less if most investors miss out.

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