Sector Performance

December 19, 2014

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

ranks 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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RS Chart of The Day

December 19, 2014

 

spyvsefa zpsa4784740 RS Chart of The Day

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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From the Archives: The Not-So-Normal Bell Curve

December 18, 2014

Matt Koppenheffer nicely makes the case for holding on to your winners and cutting out your losers (exactly what relative strength is designed to do):

When it comes to investing, there’s no shortage of bad advice floating around out there. Among the worst, though, is the old saw, “You can’t go broke by taking a profit.”

The saying refers to the belief that if you have a stock that’s gone up in value, it’s hard to go wrong selling that stock and “locking in” the gains. But while the saying is technically true — it’s hard to picture a scenario where an investor is suddenly bankrupt after selling a stock at a profit — it’s a dangerous platitude for investors to follow.

There’s a name for that
The practice of selling winning stocks and hanging on to losing ones is a practice that’s familiar to behavioral-finance experts. It’s a behavioral bias known as the disposition effect and has been revealed to be quite harmful for investors. A number of academic papers have shed light on the subject, including Berkeley professor Terrance Odean’s 1998 study that concluded that individual investors’ “preference for selling winners and holding losers … leads, in fact, to lower returns.”

A possible explanation
If the long-term returns from stocks were distributed normally — that is, they formed the familiar bell-shaped curve and most stocks’ returns clustered around the average — selling winners and holding losers might actually work. If the returns from most individual stocks were likely to be right around the average for all stocks, then a big winner would be more likely to stall out after its winning streak than continue climbing. At the other end, it wouldn’t be unreasonable to expect a stock that’s been a big loser to climb back closer to the average.

But that’s not how it works.

I was reminded of this by a recent report by Shankar Vedantam for NPR, called “Put Away the Bell Curve: Most of Us Aren’t Average.  Vedantam reviewed the research and work of Ernest O’Boyle Jr. and Herman Aguinis, who studied the performance of 633,263 people involved in academia, sports, politics, and entertainment.

In short, the pair’s finding was that the performance distribution in these groups wasn’t bell-shaped. Instead, many participants clustered below the mathematical average, while a group of superstars produced results far above the average and pulled the overall average up.

Stock returns have a similar distaste for fitting to a bell curve. Over the past 10 years, 63% of the S&P 500 companies underperformed the average. Meanwhile, a large group of significant outperformers delivered returns that were well above the average.

DontSellWinners From the Archives: The Not So Normal Bell Curve

As compared with the bell curve in the background, the data plotted here is a mess. And it should be. Stock returns are not normally distributed — which is what produces that nice bell-shaped curve. And though stats-stars who are much smarter than me often try to describe stock returns as “lognormal” — a mathematical transformation of the returns that gets them to more closely fit a bell curve — they’re not that, either. Stocks are typified by “fat tails” on either end — that is, more seriously outperforming and underperforming stocks than is easily captured by streamlined mathematical models.

So no matter how you look at stock returns, a surprising number of stocks end up returning far more and far less than the average. Practically, this means that the practice of “locking in gains” and hanging on to losers is a good way to miss out on the market’s huge outperformers, stay stuck with poor performers, and earn lackluster overall returns.

HT: iShares

This first appeared on our blog in May of 2012.  Recent trends in Energy (down) and Healthcare (up) brought this to mind.  Fat tails are a market reality–invest accordingly.

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RS Chart of The Day

December 18, 2014

spyvseem zpse3a9d0de RS Chart of The Day

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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RS Chart of The Day

December 17, 2014

 

spyvsgcc zps9adc24d8 RS Chart of The Day

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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RS Chart of The Day

December 16, 2014

spyiyr zpsc080c2a2 RS Chart of The Day

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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RS Chart of The Day

December 15, 2014

spyvsagg zpsce980ef3 RS Chart of The Day

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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RS Chart of The Day

December 12, 2014

spyvsefa zps6665e550 RS Chart of The Day

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

December 12, 2014

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

sector Sector Performance

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

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Momentum Investing

December 11, 2014

“Perhaps the best known investment paradigm is buy low, sell high.

I believe that more money can be made buying high and selling at

even higher prices. I try to buy stocks that have already had good

price moves, that are often making new highs and that have positive

relative strength. These are stocks that are in demand by other

investors. What is the risk? Obviously, the risk is that I’m buying

near the top. But, I would much rather be invested in a stock that is

increasing in price and take the risk that it may begin to decline

than invest in a stock that is already in a decline and try to guess

when it will turn around.”

Richard Driehaus – Driehaus Capital Management

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RS Chart of The Day

December 11, 2014

spyvseem zps87ab9c9c RS Chart of The Day

 

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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RS Chart of The Day

December 10, 2014

spyvsgcc zpsbe16b276 RS Chart of The Day

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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The Presidential Cycle

December 10, 2014

Piper Jaffray’s Informed Investor report summarizes the historical returns in the 3rd year of a U.S. president’s term:

Historically, the third year of a U.S. president’s term has been the strongest year. Therefore, we believe history supports our belief that 2015 will be another positive year for equities.

a The Presidential Cycle

As shown above, the 3rd year of the presidential cycle has historically posted market returns that more than doubled the prior year.  Something to consider as we move into 2015.

Past performance is no guarantee of future results.

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Falling Correlations, Rising Fortunes of Active Managers?

December 9, 2014

Some important developments for active stock pickers, from the WSJ’s Paul Vigna:

The Fed’s grip on the equities market is loosening, and that’s a good thing for stock pickers.

There’s a concept in trading called correlations, the tendency for companies that may not be alike, say, energy drillers and sneaker makers, to trade in lockstep, the stocks driven by forces beyond their control. For the past five years, with the Federal Reserve pumping trillions of fresh dollars into asset markets, correlations have been high. It was the proverbial “risk on, risk off” trade.

But with the Fed having closed down its most recent stimulus program, the bond-buying spree known as QE3, correlations among stocks have been falling away. This means that individual stocks have been trading more in line with their own fundamentals and less with the big macro trends. This offers traders, investors, and portfolio managers a chance to once again put their skills and intuitions to work, with a chance to beat the market.

“U.S. stocks are finally untethering their fortunes from the ballast supplied by the Federal Reserve over the last five years,” Nicholas Colas, the chief market strategist at New York brokerage firm Convergex, wrote in a research note Monday. The firm has been following this trend closely since the recession’s end, and found correlations hit a post-recession low in November. “The average correlation for each of the 10 industry sectors in the S&P 500 is down to 58.4% over the last month,” Nicholas Colas,  ”This is by far the lowest observation we’ve seen in the last five-plus years.”

convergex2 Falling Correlations, Rising Fortunes of Active Managers?

Source: Convergex

Falling correlations is music to the ears of managers employing relative strength.  Lower correlations lead to greater dispersion among a given universe of stocks and potentially increases the opportunities for outperformance.

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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RS Chart of The Day

December 9, 2014

spyvsiyr zpsf261e6c0 RS Chart of The Day

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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RS Chart of The Day

December 5, 2014

spyvseem zps934754d0 RS Chart of The Day

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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A Tale of Two Markets

December 5, 2014

From the Leuthold December Green Book:

Twice in the last 20 years, the S&P 500 has tripled in about five years’ time. The first episode (1995-2000) led to mass public participation and produced a host of equity fund rock stars. The second stock market “triple” (2009-2014) sucked in almost none of the public, while the preeminent mutual fund superstar of the era would turn out to be an expert on another asset class who was forced to slink out the door to avoid dismissal from the firm he founded.

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Fund Flows

December 4, 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 Fund Flows

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

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RS Chart of The Day

December 4, 2014

spyvsgcc zps543adf92 RS Chart of The Day

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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RS Chart of The Day

December 3, 2014

spyiyr2 zps593f0ae0 RS Chart of The Day

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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RS Chart of The Day

December 2, 2014

pic zpscc06a2dd RS Chart of The Day

a/o 12/1/14

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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U.S. vs. International Equities

November 24, 2014

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

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

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

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

tumblr inline nfelnnhnLq1sba62w U.S. vs. International Equities

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

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

RS U.S. vs. International Equities

(click to enlarge)

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

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

HT: Abnormal Returns

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Weekly RS Recap

November 17, 2014

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

Last week’s performance (11/10/14 – 11/14/14) is as follows:

ranks1 Weekly RS Recap

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

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Sector Performance

November 14, 2014

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

sector Sector Performance

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

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

November 14, 2014

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Conclusion:

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

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