Systematic Relative Strength

MarketWatch’s Chuck Jaffe:

Years of working in the media have convinced me that a large measure of market talk about “what moved the market today” is hogwash. Truthfully, if the market moves by a percentage point or two on any given day, most pundits are taking nothing more than an educated guess as to what caused the move. They know their thinking —right or wrong — will be largely forgotten the next day, when there will be another opportunity to say something that sounds smart (thereby making the investment firm sound smart, no matter how accurate the information).

Thankfully, there are better alternatives to investing based on the daily opinions of journalists.

Our PowerShares DWA Emerging Markets Technical Leaders fund (PIE) received some nice coverage from Barron’s this week.  The cover story is “Emerging Markets” and they had the following to say about PIE:

Of course, anyone looking to pare risk can buy an exchange-traded fund that tracks the MSCI index. The cheapest option is the Vanguard MSCI Emerging Markets fund. But the best-performing is PowerShares DWA Emerging Markets Technical Leaders fund, which is up 12.7% over the last 12 months and has fallen only 4.1% since Jan. 1. PowerShares owns just 100 stocks, but they are spread out across the Dorsey Wright Emerging Markets Technical Leaders Index, from Russia to Peru. That shows high conviction in markets as turbulent as these.

See www.powershares.com for more information about PIE.

Like all of Michael Covel’s prior books, Trend Commandments is well-written.  The first time through, I read it in one sitting.  However, it is quite different in style and intent from Trend Following and The Complete Turtle Trader.  Trend Following introduced an unfamiliar approach to trading, to many people for the first time.  This book is about more than the tenets and background of trend following.  Trend Commandments is an inspirational piece and exhorts the reader to stop making excuses and go out and do something about it.  This book is also about mindset and motivation.

Trend following is not complicated.  Mr. Covel points out that you need answers to only five questions: 1) what market do you buy or sell at any time? 2) how much of a market do you buy or sell at any time? 3) when do you buy or sell a market? 4) when do you get out of a losing position? and 5) when do you get out of a winning position?

The tough part of trend following is in the doing.  Mr. Covel discusses the discipline required and the psychological mindset needed in a very entertaining and systematic way.  In approximately 60 short chapters, he hits on nearly every trend following topic imaginable—from many different angles.  There’s tremendous throughness here, which may bother some readers, but it’s mostly because so many parts of the trend following mindset are interrelated.  When you see something and you think to yourself  ”didn’t he just say that a couple of chapters ago?” you’ll find that it wasn’t quite the same and that he is simply exploring a closely related topic from another angle.

When I say it is both thorough and entertaining, you still might not have the right idea.  The bibliography ranges from Bill James to Seth Godin to Ludwig von Mises.  There are citations ranging from the movie The Matrix to the Greek philosopher Epictetus to the Smashing Pumpkins—and that’s just in the first two chapters.  That might give you a better flavor for how much fun this book is to read.

Beyond just a discussion of risk and reward and the tenets behind trend following, Covel’s argument is essentially a moral one about initiative, self-reliance, and accountability—things that are sorely lacking in our culture today.  Without a strong moral core, you’re not going to succeed in anything, least of all investing.

In short, the book covers the waterfront on trend following and Covel makes his points well.  If you don’t understand trend following as an investment approach after reading this book, well, maybe the light is never going to come on for you.

In a world awash in fundamental forecasts, self-appointed gurus, false prophets, efficient marketeers, modern portfolio theorists, high-volume gong-ringing market commentators, and a public (along with much of the investment industry) striving for safety in the middle of the herd, going it alone as a trend follower is certainly the road less taken.  And that may make all the difference.

Business Insider takes a “Closer Look At Quant-Based ETFs”,  including our own PDP:

There are dozens of ETFs that use quant-based methodologies in an attempt to generate alpha relative to broad-based market capitalization-weighted indexes. PowerShares and First Trust are perhaps the best known providers of these products, as each issuer offers a number of market cap-specific and sector-specific ETFs linked to “enhanced” or “intelligent” indexes. There are more than a dozen ETFs in the Quant Methodology ETFdb Category, including several that have accumulated significant assets. Below, we profile three of the more popular options:

PowerShares DWA Technical Leaders (PDP)

This ETF, which has more than $400 million in assets, seeks to replicate the Dorsey Wright Technical Leaders Index. That benchmark is comprised of U.S. stocks that exhibit powerful relative strength metrics, or have a recent history of relative outperformance. The methodology behind the underlying index includes evaluating the 3,000 largest U.S.-listed companies relative to a benchmark index, as well as determining the relative strength of performance for various sectors and sub-sectors.

Given the nature of the underlying index, the sector weightings and individual holdings of PDP can change on a regular basis; since relative strength depends on recent performance, reversals of trends can lead to a shift in “scores” of the underlying companies. Currently, the fund is heavy in the consumer discretionary and industrials sectors, which combine to account for about 50% of holdings. Not surprisingly, red hot AAPL is among the largest individual allocations.

(Click to Enlarge)

See www.powershares.com for more information about PDP.

We are pleased to announce that Crescendo Business Services and Los Angeles Magazine have recently selected Dorsey Wright Money Management as a FIVE STAR Wealth Manager.

Program Overview

Crescendo Business Services contracts a third party research firm, QMI Research, to conduct the FIVE STAR Wealth Manager research methodology using objective market research methods.  The research objective is to develop a list of wealth managers in a given market who score highest in overall satisfaction, based on an objective market research methodology that takes into account client evalutions in nine categories, with adjustments to reflect inputs from peers, regulatory compliance reviews, and Blue Ribbon Panel review.  In each geographic market the Program is conducted, QMI Research administers a survey, by mail and phone, to approximately 1 in 4 high-net-worth households and identified FINRA registered representatives.  Respondents are asked to name and evaluate up to three wealth managers.

Less than 7%, but no more than 1,000, of the wealth managers in a market are included on the final published list.  The full list of those wealth mangers awarded FIVE STAR Wealth Managers will be published in the January 2011 issue of the Los Angeles Magazine.

More information about the award can be found here.

At Dorsey, Wright our clients are held in great esteem, putting them first and foremost in all that we do.  We appreciate this recognition and we look forward to many more decades of service to our clients.

Minyanville profiles 4 ETFs today, including our own PIE, as a way to get exposure to some of the best performing emerging markets this year– Indonesia and Thailand:

Editor’s Note: This content was originally published on Benzinga.com by The ETF Professor.

Unless you’ve been living in a cave, you know that the iShares MSCI Thailand Investable Market Index Fund (THD) and the Market Vectors Indonesia ETF (IDX) have sizzled in 2010. And with good reason. After all, those two markets are the only Asian markets officially in bull-market territory.

But what’s an investor who may want exposure to both markets or several other emerging markets along with Indonesia and Thailand in a single ETF to do?

Given how well Indonesia and Thailand have performed and how many emerging marketsETFs represent plays on multiple markets, there aren’t a ton of options capturing Indonesia and Thailand in a single fund, but there are few.

Here’s a quartet of ETFs that offer exposure to both Indonesia and Thailand.

1. SPDR S&P Emerging Asia Pacific ETF (GMF):
Don’t get too excited if you’re hunting for Indonesia or Thailand exposure here because GMF allocates more than 35% of its weight to China. Indonesia checks in at 4.45% and Thailand gets almost 3.6% of this fund’s weight.

2. SPDR S&P Emerging Markets Small Cap ETF (EWX):
Same goes for EWX, which is a great fund, but its weights to Indonesia and Thailand disappoint at 3.05% and 2.75%, respectively. Taiwan represents almost one-third of EWX’s weight.

3. PowerShares DWA Emerging Markets Technical Leaders ETF (PIE):
Alright, now we’re getting somewhere. Indonesia and Thailand combine for almost 21% of PIE’s weight. The fund is a solid performer in its own right, though it hasn’t grabbed many headlines this year.

See also, Time to Grab a Piece of This PIE ETF?

4. WisdomTree Emerging Markets SmallCap Dividend ETF (DGS):
While short on Indonesia exposure (just about 2.6%), DGS does allocate almost 10.5% of its weight to Thailand, making it an interesting option for the investor that’s long IDX, but doesn’t have any Thai exposure in his portfolio.

See www.powershares.com for more information.

ETF Channel profiled PIE on 10/1/10:

The DWA Emerging Markets Technical Leaders Portfolio (PIE) has been soaring. This ETF has had a total return of almost 25% over the last three months, and over 28% in the trailing twelve months. One of the ETF’s holdings, Vivo Participacoes S/A Ads (VIV), is up nearly 5% in the last three months, and 16% in the last year. Another holding, Creditcorp(BAP) is up over 25% in the last three months, and nearly 52% in the last year. And Wimm-Bill-Dann Foods OJSC (WBD) is higher by 27% in three months, and 35.5% in the last year.

The Fund will normally invest at least 80% of its total assets in securities of emerging economies within Dorsey Wright & Associates’ classification definition, excluding companies listed on a U.S. stock exchange.

The underlying index includes approximately 100 companies that possess powerful relative strength characteristics and are domiciled in emerging market countries including, but not limited to Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand and Turkey.

See www.powershares.com for more information.

Benzinga takes a closer look at PIE today:

For all the fanfare that emerging markets ETFs get, there are still a few that fly under the radar. One such example is an interesting play, the PowerShares DWA Emerging Markets Technical Leaders ETF (NYSE: PIE).

Nearly three years old, PIE tracks the Dorsey Wright Emerging Markets Technical Leaders Index, which follows about 100 stocks.

About half of PIE’s allocation is to large-caps and mid-caps gets about 40% of the ETF’s weight with the rest going to small-caps.

Explaining why PIE doesn’t grab a lot of press is difficult. After all, the volume (over 241,000 shares per day average) and the assets under management (almost $144 million) are sufficient and certainly don’t put the ETF in danger of disappearing.

The ETF is a fine idea for the investor that can’t decided on a country-specific ETF because PIE devotes double-digit allocations to Malaysia, South Korea and Indonesia and will give you decent exposure to China and Mexico, among others.

At over 18%, financials lead the way in terms of sector allocation, followed by consumer staples (16.4%), industrials (14.4%) and consumer discretionary (12%).

PIE isn’t all that volatile compared to other emerging markets fare, but to be really bullish, you’ll want to see the ETF string together several closes above $16. If you’re willing to hold PIE for a year, you could rip another 20% out of it from here.

Click here for more information about the PowerShares DWA Technical Leaders ETF (PIE).

Our blog received a nice recommendation from Michael Santoli in his May 3rd Barron’s article, The Provisional Pullback:

MOST OF US, IN THIS ONLINE AGE, are hummingbirds of media consumption, flitting from flower to flower for the promise of a little nourishment, expending much energy to travel not very far. So it’s no surprise that the requests come constantly for recommendations for sites worth reading on market-relevant matters. The quick and easy answer is that everything is worth reading if one approaches it in the proper context, but time constraints require shortcuts and edited research itineraries.

An excellent gateway to the daily bounty (or burden) of economic and financial writing is www.RealClearMarkets.com. There’s a barely perceptible pessimistic bias in the arrayed daily links, but on the whole it’s a fine way to get current on the chatter animating the market.

Passionate, cogent and opinionated periodic commentary on financial and related policy matters can be found at www.StumblingOnTruth.com, a blog by Cliff Asness, who runs the quantitative asset manager AQR Capital Management. If there is a cleverer phrasemaker or clearer thinker among finance Ph.D.s than Asness, he or she is a stranger to my Web browser. Be sure to check out his latest riff on the Goldman/credit crisis inquest, “Keep the Casinos Open.”

For worthwhile color commentary on the day-to-day market action, featuring links to more eclectic research as well, close market watchers should check out http://systematicrelativestrength.com, run by the folks at the technical-analysis firm Dorsey Wright & Associates, and www.tradersnarrative.com.

Finally, the quarterly letters of Jeremy Grantham of asset manager GMO are a fun and thought-provoking read. The latest, at www.gmo.com, is noteworthy mainly for a non-consensus view of what would be the gravest long-term risk to markets and the economy. Grantham makes the case that a halting, uncertain economic recovery that would embolden the Federal Reserve to keep monetary policy hyper-easy could produce another bubble in risk assets, driving stocks toward the old highs and then ultimately collapsing, at a time when governments would lack the wherewithal to mute the effects.

For balance, note that Laszlo Birinyi of Birinyi Associates offers a dismissive take on Grantham’s thinking in his own highly readable and caustically contrary monthly newsletter (offered by subscription only, but alluded to on his firm’s blog, www.tickersense.typepad.com).

(Emphasis Added)