Sector Performance

February 5, 2016

The table below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 2/4/16.

sector

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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Instability At The Top

February 3, 2016

It requires a huge run of success to make it into the list of the top 5 stocks based on market capitalization, but how durable is the performance of those mega caps after they make it to the top?  Justin Fox at Bloomberg took a look at this question.  Consider the following two charts.  The first chart shows today’s top 5 market-cap stocks (Alphabet/Google, Apple, Microsoft, Facebook, and Berkshire Hathaway) and the trajectory they took to get there.

today's top 5

The second chart looks at the top 5 market cap stocks from a decade ago (Exxon Mobil, General Electric, Microsoft, BP, and Citigroup), and how they have fared since.

top 5 from a decade ago

Only Microsoft remains in both lists.  In fact, Microsoft was the only one of those stocks that beat the S&P 500 over the past decade.  Two of the stocks are still well underwater from where they were a decade ago.

return

Source: Yahoo! Finance.  Returns are inclusive of dividends, but do not include any transaction costs.  2/2/06 – 2/2/16

Admittedly, this is not a comprehensive study.  Rather, it simply illustrates the fact that success is not guaranteed.  Just because a company has been successful in the past does not guarantee that it will be successful in the future.  As we commonly point out, there is no shortage of data showing the rationale for buying high momentum stocks.  Sometimes those high momentum stocks are also mega-cap stocks.  However, having a good sell discipline is essential!

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

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Interpreting Oversold Conditions

January 21, 2016

How oversold is the U.S. equity market at this point?  One way to answer that is by looking at the Sector Bell Curve that plots the sector bullish percent charts for the 40 Dorsey Wright sectors.  A broad universe of U.S. equities is categorized into these 40 sectors.  The bullish percent for each sector measures the percentage of stocks in each of those sectors on a point and figure buy signal (short-term indication of positive trend).  The average of those 40 bullish percent readings (BPAVG) was 21.20% as of 1/20/16.  Visually, this oversold condition can be observed by the chart below which shows this sector bell curve skewed to the left hand side of the chart.

sector bell curve

We have data on BPAVG going back to 6/13/1997.  Over that period of time, only 1.5% of all measurements have been lower than today’s reading.  So, short answer is that the market is pretty oversold at this point!  The chart below of the S&P 500 highlights other times over this period where the BPAVG has been as oversold (or more oversold).

spx

Those months and years where the BPAVG has been this oversold (or more) since 1997 are highlighted in yellow: August-October 1998, January 2008, October-December 2008, February-March 2009, October 2011, and now January 2016.

A couple observations:

  • Some of those times when the Sector Bell Curve (BPAVG) was this oversold preceded tremendous moves higher in the broad market (1998, 2009, 2011)
  • Some of those oversold conditions preceded even greater losses in the broad market (2008)

The search goes on for the perfect indicator of a market bottom!  Actually, I’m not holding my breath.  Markets just aren’t that predictable.  With that in mind, I have a couple thoughts on how to proceed:

  1. Diversify.  A mix that appeals to me is 1/3 fully-invested momentum and value strategies, 1/3 Tactical Allocation, 1/3 Fixed Income.
  2. Add money to your investments when you get oversold conditions.  There is no guarantee that this type of oversold condition won’t get more oversold, but these types of conditions have often created great buying opportunities.
  3. Add other money to your investments on a regular basis no matter what the market is doing.  Is this at odds with suggestion #2?  No.  One of the biggest mistakes investors can make is to not save enough and waiting for “the perfect” opportunity to get in at the bottom can cost an investor a substantial amount of money over time.  Sure, for those inclined, use oversold opportunities to take advantage of what may be a great opportunity, but saving on a regular basis is essential to building wealth over time.

NOTHING CONTAINED WITHIN THE SITE SHOULD BE CONSTRUED AS AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY. THIS POST DOES NOT ATTEMPT TO EXAMINE ALL THE FACTS AND CIRCUMSTANCES WHICH MAY BE RELEVANT TO ANY COMPANY, INDUSTRY OR SECURITY MENTIONED HEREIN. THIS POST IS FOR GENERAL INFORMATION AND EDUCATIONAL PURPOSES. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. POTENTIAL FOR PROFITS IS ACCOMPANIED BY POSSIBILITY OF LOSS. 

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Sector Performance

January 20, 2016

The table below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 1/19/16.

sector

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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Markets

January 19, 2016

Via Morgan Housel:

housel

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What To Do With A Correction

January 14, 2016

Wise words from Jim O’Shaughnessy (from an article written August 28, 2014):

In the past, the United States has endured far more perilous times than those we currently face, and I believe that you will never make money betting against the United States over the long-term. We have come through far greater challenges to emerge stronger, more vibrant and ready to face the future. And today, we find ourselves at inflation-adjusted highs for the S&P 500. Does this mean that stocks will continue to rise? Absolutely not. I’m sure that at some point we will get a 10 to 20 percent correction in the market. But when we do, remind yourself of this simple fact—the U.S. stock market has come back from every setback and gone on to make new highs. Hundreds of years of data back this up. When the next correction comes—and it will come—remind yourself of this simple fact, and BUY.

Past performance is no guarantee of future returns.

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Q4 Manager Insights

January 7, 2016

Despite a decent fourth quarter, global equity markets had a volatile year in 2015.  U.S. and global equities both finished the quarter with solid gains.  After the summer correction in the S&P 500, U.S. stocks snapped back quickly.  This was a surprise to many investors who were looking for the end of one of the longest bull markets on record.  After the snapback, equities treaded water and moved in a very tight trading range to close out the year.  Fixed Income (measured by the Barclay’s Aggregate Index) finished the fourth quarter down slightly, but held on to scrape a 0.55% gain for the year.  Commodities, led by oil, continued their sell off and were the worst performing class of the year.  The trouble in commodities also affected emerging markets, which finished the year down over -14%.

If you were left scratching your head and wondering why it was so difficult to make money in 2015 you are not alone!  According to data from Societe Generale, 2015 was the hardest year to make money in 78 years.  U.S. equities (measured by the S&P 500 Total Return Index) were the best performing major asset class, but only managed to squeak out a gain of 1.38% for the year.  That paltry gain was more than bonds, international equities, and short-term T-bills.  Way back in 1937 (despite what my kids say I was not around to witness that market!) short term treasuries were the best performing major asset class with a gain of only 0.3%.  Even in 2008, bonds were up over 20% so there was somewhere to make money.  This year’s environment was very difficult for hedge funds and for strategies that try to capitalize on major global trends.

Momentum and Relative Strength was a bright spot for the year.  We noticed that more focused (i.e., focused on one specific market) and concentrated (i.e., fewer holdings) strategies performed better.  For example, a concentrated U.S. equity momentum strategy did much better than a strategy with a large number of holdings or a strategy that was invested in multiple asset classes.  It was also advantageous to have a momentum overlay combined with other factors.  Value strategies didn’t fare well in 2015, but value stocks that also had good momentum did very well.  A lot of the momentum outperformance this year came from what momentum strategies avoided rather than what they held.  When we looked at the performance of the S&P 500 industry groups and broke them into quintiles (based on a monthly rebalance), the top four quintiles all had similar performance for the year.  The performance of the bottom quintile, however, was dreadful.  That quintile was made up mainly of Energy and Basic Materials groups.  It is rare to see one group underperform the other four groups by such a large margin (over -13%) for the year.

The Federal Reserve finally took action and raised interest rates by 0.25% during the fourth quarter.  The move was long anticipated, but had been put off due to market volatility and concerns about the health of the global economy.  It is important to keep in mind that even with the hike, rates are still historically low.  We have seen some studies recently that show equities are not as affected as you might think until rates get up around 5%, and we are a long way from that now.  This may be more of a problem for the fixed income markets than equities, but only time will tell.

As the current bull market continues to age we expect a few things to happen we believe will be positive for our strategies.  First, you will begin to hear more cries that the market is “expensive.”  That usually affects valuation based strategies more than relative strength based processes.  Second, the market will continue to narrow.  That is natural and totally expected as the bull market matures.  A narrow market is very positive for our strategies because we can overweight the small pockets of strength that are performing well and avoid the areas that are weak.  As a result, we are encouraging people to take a look at their portfolios and overweight momentum relative to value.  If you have any questions about your allocations or the best way to get exposure to momentum strategies please call us at any time.

Information is from sources believed to be reliable, but no guarantee is made to its accuracy.  This should not be considered a solicitation to buy or sell any security.  Past performance should not be considered indicative of future results. Potential for profits is accompanied by possibility of loss.

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In Search of Sustained Success

December 22, 2015

How do you rate an NBA team across a decade of play?  One method is “Elo,” a simple measure of strength calculated by game-by-game results (Source: Nate Silver’s FiveThirtyEight).  A description of Elo is below:

Elo ratings have a simple formula; the only inputs are the final score of each game, and where and when it was played. Teams always gain Elo points for winning. But they get more credit for upset victories and for winning by larger margins. Elo ratings are zero-sum, however. When the Houston Rockets gained 49 Elo points by winning the final three games of their Western Conference semifinal during this year’s playoffs, that meant the Los Angeles Clippers lost 49 Elo points.

A rating of 1500 is approximately average, although the league average can be slightly higher or lower depending on how recently the league has expanded. (Expansion teams begin with a 1300 rating.)

As Nate Silver recently tweeted: “Last time the Spurs were a below-average team was in Jan. 1998, right about when the Lewinsky scandal was breaking.”

spurs

Impressive, is it not?  Talk about an organization that figured out a formula for sustained success.  On the opposite end of the spectrum, consider the Elo of the Clippers as shown below:

clippers

Yes, they have become an above average team in recent years, but man did they stink for the better part of the last several decades!

What stands out to me in flipping through the Elo of the different NBA teams is the outliers.  Yes, there are a lot of teams that hover around average, but there are some stark standouts.

How true this is in the financial markets as well.  In fact, this reminded me of a study completed by BlackStar Funds a couple years ago when they looked at the lifetime total returns of individual stocks relative to the corresponding return for the Russell 3000.  Again, what stands out to me is the outliers.  6.1% of all stocks outperformed the Russell 300 by at least 500% during their lifetime.  Likewise, 3.9% of all stocks lagged the Russell 3000 by at least 500%.

BlackStar

Outliers are what makes this business fun and ultimately where the most money can be made.  Just like with certain NBA franchises, there are multi-year winners and multi-year losers in the financial markets.  Relative strength, much like Elo, can help you stay on the right side of those trends.

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.

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Remember When

December 18, 2015

Ben Carlson prepares you for how to handle all those 2016 forecasts:

Remember when the Fed was never going to raise interest rates?

Remember when QE was going to cause hyperinflation?

Remember when the dollar was going to collapse?

Remember when the Baltic Dry Index was the economic tell of the entire global economy?

Remember when we were going to see a repeat of the 1929 crash because of a chart?

Remember when the end of QE was going to cause an enormous market crash?

Remember when the U.S. credit rating downgrade was going to cause interest rates to skyrocket?

Remember when the fiscal cliff was going to take down the markets?

Remember when we were supposed to be in a recession in 2011?

Remember when Greece was going to cause a global economic collapse in 2010? And 2011, 2012, 2013, 2014 and 2015?

Remember when oil was going to $250/barrel?

Remember when gold was going to $5,000/oz.?

Remember when the Dow was going to fall to 1,000 (or rise to 30,000)?

Remember when Internet stocks during the dot-com bubble era didn’t need earnings because of the new economy?

Remember when stocks couldn’t possibly get cut in half twice in one decade?

Remember when there was no chance the market was going to bounce back after the 2007-2009 crisis?

Remember when interest rates couldn’t possible go any lower in 2010 (and 2011 and 2012…)?

Remember when Cyprus banking issues were the canary in the coal mine of the entire financial world?

Remember when the BRIC countries were the hottest investment trend in the industry because of “growth.”

Remember these types of predictions the next time you hear a market prognosticator tell you they know what’s going to happen in the future. They don’t.

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Sector Performance

December 16, 2015

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

sector

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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Weekly RS Recap

November 16, 2015

The table below shows the performance of a universe of mid and large cap U.S. equities, broken down by relative strength decile and quartile and then compared to the universe return.  Those at the top of the ranks are those stocks which have the best intermediate-term relative strength.  Relative strength strategies buy securities that have strong intermediate-term relative strength and hold them as long as they remain strong.

Last week’s performance (11/9/15 – 11/13/15) is as follows:

ranks

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

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Sector Performance

November 6, 2015

The table below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 11/5/15.

sector

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

October 30, 2015

The table below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 10/29/15.

sector

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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Weekly RS Recap

October 26, 2015

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 (10/19/15 – 10/23/15) is as follows:

avg perf

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

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Sector Performance

October 23, 2015

The table below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 10/22/15.

sector

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

October 16, 2015

The table below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 10/15/15.

sector

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

October 9, 2015

The table below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 10/8/15.

sector

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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RS Charts of The Week

October 2, 2015

 photo SPYVSAGG_zpsrimmuxz8.png

 photo spyvsiyr_zpsfqgysswb.png

 photo spyvsgcc_zpsusirdyyn.png

 photo spyvseem_zps22lzuioy.png

 photo SPYVSEFA_zps9s7axjg6.png

Point and Figure RS Charts are calculated by dividing one security by another and plotting the ratio on a PnF chart.  When the ratio is rising, it is plotted in a column of X’s and reflects the numerator outperforming the denominator.  Likewise, when the relative strength ratio is declining, it is plotted in a column of O’s and reflects the outperformance of the denominator.

Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  This example is presented for illustrative purposes only and does not represent a past recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security.  This post does not attempt to examine all the facts and circumstances which may be relevant to any product 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.

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Weekly RS Recap

September 28, 2015

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 (9/21/15 – 9/25/15) is as follows:

ranks

The sector performance from last week is shown below:

sector ranks

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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Quote of the Week

September 21, 2015

Aaron Brown, Red Blooded Risk (2011):

Taking less risk than is optimal is not safer; it just locks in a worse outcome.

Taking more risk than is optimal also results in a worse outcome, and often leads to complete disaster.

HT: Newfound Research

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RS Charts of The Week

September 18, 2015

 photo spyvsagg_zpspayjdtsm.png

 photo SPY vs IYR_zps0imqhgk7.png

 photo SPYVSGCC2_zpsibls6vys.png

 photo SPY VS EEM_zpsmdyssykb.png

 photo SPY VS EFA_zpscie5x9fh.png

Point and Figure RS Charts are calculated by dividing one security by another and plotting the ratio on a PnF chart.  When the ratio is rising, it is plotted in a column of X’s and reflects the numerator outperforming the denominator.  Likewise, when the relative strength ratio is declining, it is plotted in a column of O’s and reflects the outperformance of the denominator.

Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  This example is presented for illustrative purposes only and does not represent a past recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security.  This post does not attempt to examine all the facts and circumstances which may be relevant to any product 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.

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Sector Performance

September 18, 2015

The table below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 9/17/15.

sector

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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Weekly RS Recap

September 14, 2015

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 (9/7/15 – 9/11/15) is as follows:

avg

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 11, 2015

The table below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 9/10/15.

sector

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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RS Charts of The Week

September 11, 2015

 photo SPYVSAGG75_zpsvddpewrd.png

 photo spyiyr75_zpshy42rlun.png

 photo SPYVSGCC_zpssgiynodl.png

 photo SPYVSEEM75_zpsscoe6ldq.png

 photo SPYEFA125_zpsq2zsd50k.png

Point and Figure RS Charts are calculated by dividing one security by another and plotting the ratio on a PnF chart.  When the ratio is rising, it is plotted in a column of X’s and reflects the numerator outperforming the denominator.  Likewise, when the relative strength ratio is declining, it is plotted in a column of O’s and reflects the outperformance of the denominator.

Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  This example is presented for illustrative purposes only and does not represent a past recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security.  This post does not attempt to examine all the facts and circumstances which may be relevant to any product 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.

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