Systematic Relative Strength

The chart below shows performance of US sectors and capitalizations over the trailing 12, 6, and 1 month(s). Performance updated through 11/21/2013.

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

Tom Dorsey sits down with IndexUniverse to explain why we are in a structural bull market.

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.

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 11/19/13.

The 10-day moving average of this indicator is 85% and the one-day reading is 82%.

Upcoming Webinar: What’s Next for Relative Strength

Thursday, December 5th, 2013 at 12:00 PM EST

Dorsey, Wright and Associates has teamed up with Elkhorn Investments to bring to market two strategies in the form of structured products. In this upcoming webinar, you will have a chance to hear from Tom Dorsey, Co-founder and President of Dorsey Wright, and Ben Fulton, CEO of Elkhorn Invesments, on applying momentum strategies to structured products and managed accounts.

Listen as these two innovators weigh in on each of the following topics:

• The 2014 market outlook
• Tectonic shifts now underways in the ETF industry
• Accessing relative strength through managed accounts and structured products
• Applying the relative strength process to the MLP sector

Click here to register for the webinar today!

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 11/18/2013:

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 (11/11/13 – 11/15/13) is as follows:

It was generally a good week for high relative strength stocks—especially the top decile of our ranks.

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.

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 11/12/13.

The 10-day moving average of this indicator is 85% and the one-day reading is 83%.

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 11/11/2013:

The RS Spread is in a healthy rising trend, reflecting an environment that tends to be favorable for relative strength strategies.

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 (11/4/13 – 11/8/13) is as follows:

10/31/2013

The Arrow DWA Balanced Fund (DWAFX)

At the end of October, the fund had approximately 47% in U.S. Equities, 25% in Fixed Income, 17% in International Equities, and 11% in Alternatives.

We had strong gains from our equity positions in October. For the month of October, Germany was up 5.54%, our Consumer Cyclical position was up 5.04%, Netherlands was up 4.95%, and our Mid-Cap Value position was up 4.65%. Our fixed income and currency positions were fairly flat for the month.

In U.S. equities, Small and Mid-Caps continue to have superior relative strength versus Large-Caps. Also, the composition of our international equity holdings has changed significantly over the last year. For most of 2012, the majority of our international holdings were from Emerging Markets. However, we started to see some important relative strength changes between Developed International Markets and Emerging Markets towards the middle of 2012. Currently, all five of our international holdings are from developed markets.

In the Alternative sleeve, we have exposure to MLPs and currencies. Commodities remain weak and are not represented in the fund.

DWAFX rose 2.75% in October, and is up 12.52% through 10/31/13.

We believe that a real strength of this strategy is its balance between remaining diversified, while also adapting to market leadership. When an asset class is weak its exposure will tend to be towards the lower end of the exposure constraints, and when an asset class is strong its exposure in the fund will trend toward the upper end of its exposure constraints. Relative strength provides an effective means of determining the appropriate weights of the strategy.

The Arrow DWA Tactical Fund (DWTFX)

At the end of October, the fund had approximately 90% in U.S. equities and 9% in International equities.

Some years it is helpful to remain widely diversified and other years it is better to be more concentrated. This is a year where our concentration in U.S. equities has really helped the performance of the fund as U.S. equities have generated some impressive returns. We did have a number of trades in October. We removed a Large Cap Value position, a Financial sector position, Japan, and a dividend-focused ETF. We added two Small-Cap ETFs, a European equity ETF, and an Industrials sector position. As is the nature of relative strength, if positions aren’t keeping up with other options in a rising market they can be sold even if they are rising (albeit more slowly than other positions in the universe).

DWTFX was up 3.60% in October, and has gained 19.71% through 10/31/13.

This strategy is a go-anywhere strategy with very few constraints in terms of exposure to different asset classes. The strategy can invest in domestic equities, international equities, inverse equities, currencies, commodities, real estate, and fixed income. Market history clearly shows that asset classes go through secular bull and bear markets and we believe this strategy is ideally designed to capitalize on those trends. Additionally, we believe that this strategy can provide important risk diversification for a client’s overall portfolio.

A list of all holdings for the trailing 12 months is available upon request. See www.arrowfunds.com for more information.

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 11/5/13.

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

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 11/4/2013:

Since June of this year, the RS Spread has generally been trending higher—a potentially positive sign for relative strength strategies.

IndexUniverse reports:

Investors have poured $45.93 billion into so-called “smart beta” equities ETFs so far this year, in what amounts to a 20 percent increase in total assets in the segment. The increase reflects just how strong an appetite there is for nonmarket-cap-weighted funds seeking excess returns—or outperformance—in one form or another.

Our contribution to that growth is as follows:

Source: PowerShares (click to enlarge)

With this year’s growth, the assets in our four momentum ETFs has nearly doubled.

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 (10/28/13 – 11/1/13) is as follows:

High relative strength stocks generally performed better than the universe and better than the laggards last week.

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.