Commodities Corner: Coffee Futures Approaching Key Area of Supply

October 14, 2014

In some of our recent posts regarding commodities we’ve noted the large declines the majority of this asset class has seen in recent months.   Some of the hardest hit sectors have been the energies, grains, and precious metals just to name a few.   However, in further examining this universe it’s important to note there have been certain commodities showing pockets of strength when compared to the rest of asset class in general.   We noted this in a previous post regarding live cattle, which recently made a new all time high.   We will continue with our theme of identifying commodities which have been outperforming their peers.    One primary reason for doing so is reaffirm that having access to a number of investment products during times of increased market volatility can allow investors to remain tactical and continue to find strong performing markets.  At Dorsey Wright Money Management, we have a number of products that allow investors to gain access to alternative asset classes such as commodities and currencies should their relative strength ranking be high enough to become part of the portfolio.

Coffee Futures (Dec ’14):  Point & Figure

The below point & figure chart of the Dec 14 Coffee futures contract is displaying some interesting technical developments.   Let’s take a closer look to see what the current supply & demand of the coffee market is telling us.   Currently, coffee futures are approaching a previous area of supply located at 224 which thus far has helped form a double top.  In order for the double top break out pattern to be confirmed, price would need to advance through the 228 level.    A development such as this may be a sign the relative strength ranking of the coffee market may be poised to increase further when compared to those of other commodities.

KCZ4 300x216 Commodities Corner: Coffee Futures Approaching Key Area of Supply

RS Chart (Coffee Futures Dec ‘14 vs. DWA Continous Commodity Index)

Note below we have inserted the RS chart of Coffee futures vs. the DWA Continuous Commodities Index.   This is a great visual tool in confirming our above statement that coffee futures have been outperforming the majority of other commodities in recent months.  Exposure to a highly RS ranked commodity such as coffee has proved beneficial when compared to others such as crude oil or silver.

kc rs chart 300x267 Commodities Corner: Coffee Futures Approaching Key Area of Supply

Conclusion:

Although not the most commonly discussed asset class when it comes to investing,  commodities can offer opportunities and diversification away from traditional asset classes s when market volatility begins to increase.   As we have shown above, coffee futures are a great example of a market building a rather large base and possibly on the verge of a substantial move higher.   This could help lead to an even higher RS ranking for coffee futures when compared to its other commodity peers.

***The relative strength strategy is not a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  The information found on Dorsey, Wright & Associates’ Web Pages has been prepared without regard to any particular investor’s investment objectives, financial situation, and needs. Accordingly, investors should not act on any recommendation (express or implied) or information in this report without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions. Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources, believed to be reliable. However, such information has not been verified by Dorsey, Wright and Associates, LLC (DWA) or the information provider and DWA and the information providers make no representations or warranties or take any responsibility as to the accuracy or completeness of any recommendation or information contained herein.

Neither the information nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities or commodities mentioned herein. This report or chart does not purport to be a complete description of the securities or commodities, market or developments to which reference is made. There may be instances when fundamental, technical, and quantitative opinions may not be in concert.

Each investor should carefully consider the investment objectives, risks and expenses of any Exchange-Traded Fund (“ETF”) prior to investing. Before investing in an ETF investors should obtain and carefully read the relevant prospectus and documents the issuer has filed with the SEC.  To obtain more complete information about the product the documents are publicly available for free via EDGAR on the SEC website (http://www.sec.gov).     

A list of all holdings for the past 12 months is available upon request.

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Analyzing the VIX Index: Volatility On The Rise

October 10, 2014

One of the best parts about using point and figure charts to analyze the markets is that it allows us to apply the concept of supply and demand to just about anything.   Whether it be the stock price for AAPL, the price of Coffee futures, or even the strength of the US Dollar.   In taking our analysis a step further, we wanted to discuss some recent developments on the VIX.   This is a measure of expected 30 day stock market volatility and is calculated by the Chicago Board Options Exchange.   As we stated in our post about TLT yesterday, during times of heightened volatility markets are often approaching key levels of supply and demand.   This can be seen across various asset classes whether it be equities, commodities, or fixed income.

CBOE Volatility Index :  (Point & Figure)

vix 300x156 Analyzing the VIX Index: Volatility On The Rise

The point and figure chart of the VIX displays a massive base which had been forming for an extended period of time.   In other words, supply and demand for volatility had been in a state of equilibrium for the most part during this time frame.  This scenario changed on Wednesday when the VIX Index traded through 18 and confirmed a spread triple top break out.  The overhead supply which had been containing the VIX Index below 18.00 during the period of consolidation finally gave way.  The measured move target for this break out is 28.50.

Conclusion:

A brief technical update on the VIX index displays volatility may continue to rise in the near term.   The overhead supply which had been keeping the VIX in check was broken to the upside earlier this week.  Having a consistent game plan toward risk management throughout turbulent market environments is vital in order to help limit losses.  At Dorsey Wright Money Management, we achieve this by following our systematic relative strength based investing models which allow us to eliminate the human emotion during periods of heightened volatility.

***The relative strength strategy is not a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  The information found on Dorsey, Wright & Associates’ Web Pages has been prepared without regard to any particular investor’s investment objectives, financial situation, and needs. Accordingly, investors should not act on any recommendation (express or implied) or information in this report without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions. Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources, believed to be reliable. However, such information has not been verified by Dorsey, Wright and Associates, LLC (DWA) or the information provider and DWA and the information providers make no representations or warranties or take any responsibility as to the accuracy or completeness of any recommendation or information contained herein.

Neither the information nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities or commodities mentioned herein. This report or chart does not purport to be a complete description of the securities or commodities, market or developments to which reference is made. There may be instances when fundamental, technical, and quantitative opinions may not be in concert.

Each investor should carefully consider the investment objectives, risks and expenses of any Exchange-Traded Fund (“ETF”) prior to investing. Before investing in an ETF investors should obtain and carefully read the relevant prospectus and documents the issuer has filed with the SEC.  To obtain more complete information about the product the documents are publicly available for free via EDGAR on the SEC website (http://www.sec.gov).     

A list of all holdings for the past 12 months is available upon request.

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Small Cap Stocks: Keeping It Simple with Supply & Demand

October 3, 2014

It’s no secret to most that small cap stocks have been the under-performing market cap sector of US equities in 2014.  In fact, the IWM (iShares Russell Small Cap ETF)  is down 5.69% over the last 9 months,  which compares to the SPY which is up 6.70%.  Obviously this a very large difference, particularly given the fact both ETF’s are representing different baskets of the US stocks!

At Dorsey Wright Money Management we tend to try and keep things as simple as possible when analyzing the markets.   Our systematic approach to relative strength based investing is done by analyzing all of the markets across the globe and looking to gain exposure to the ones with the strongest rankings.   Obviously this strategy has been helpful in minimizing exposure to the small caps sector in recent months in many of our models.   However, there will be a time at some point where money will funnel back into the small caps.  Our trend following approach is typically not associated with trying to “find the bottom” of the market, but more so geared to gain exposure later in the move and catch the “bulk “of the trend instead of the top and/or bottom.

In this blog post we take a look at current technical set ups on the traditional point & figure charts of both the iShares Russell Small Cap ETF (IWM) and PowerShares DWA SmallCap Momentum Portfolio (DWAS).

 iShares Russell 2000 Index Fund:  (Point & Figure)

In analyzing the global markets, we view each point and figure chart as a simple concept of supply & demand.   Regardless of the many  reasons people believe markets move, supply & demand are ultimately what determine asset prices around globe.  Let’s take a quick look at the traditional point & figure chart of the IWM to see what the supply & demand factors are saying regarding the current levels of small cap stocks.

Just recently (10/1), a double bottom pattern break was confirmed which has a measured move price target of 98.00.    However, in taking a closer glance at the chart below we can also see prices are resting on a triple bottom support level which would only be broken should a move  down through 106.00 occur.  Let’s think about that in terms of supply & demand.   On the two previous attempts to break this level the market found support as willing buyers decided to step back in and overwhelm the sellers.  It will be interesting to see if these same buyers once again come back in and help give the market a firm bid as they did previously!  A move below the 106.00 level may be a sign supply is overwhelming demand this time and the small cap bulls are in retreat mode.  The potential measured move price target should the triple bottom break be confirmed is 94.00.

IWM pnf 300x260 Small Cap Stocks:  Keeping It Simple with Supply & Demand

 

PowerShares DWA Small Cap ETF (DWAS):  (Point & Figure)

Let’s take our analysis a step further and see if the PowerShares DWA Small Cap Momentum Portfolio (DWAS) has a similar technical structure at the moment.   Again, as we stated above, we are just using traditional point and figure charts to determine if there are any areas where we might expect the small cap sector to find some under-lying demand.   These areas of demand aren’t necessarily buy signals (we use our relative strength matrix for those decisions), but they may help us spot when pockets of relative strength start to develop within the small cap sector.

The  DWAS is also approaching an area where demand has shown up in the past.  A quadruple bottom pattern is setting up should price re-test the 34.50 level in the near future.  This level has held 3 times in the past and would only confirmed with a move through the 34.00 level.

dwas 300x267 Small Cap Stocks:  Keeping It Simple with Supply & Demand

 

Dorsey Wright is the index provider for DWAS

Conclusion:

This note serves as a brief update regarding the current technical structure of the small cap sector within US Equities.   In a sector that has trailed most of its peers throughout 2014, we can see that both the IWM and DWAS products are near levels where demand overwhelmed supply in recent attempts.   As we stated above, at Dorsey Wright Money Management we don’t necessarily view these levels as buy signals, but they give us a general idea of where RS rankings for such a beaten down sector may begin to improve.

***The relative strength strategy is not a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  The information found on Dorsey, Wright & Associates’ Web Pages has been prepared without regard to any particular investor’s investment objectives, financial situation, and needs. Accordingly, investors should not act on any recommendation (express or implied) or information in this report without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions. Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources, believed to be reliable. However, such information has not been verified by Dorsey, Wright and Associates, LLC (DWA) or the information provider and DWA and the information providers make no representations or warranties or take any responsibility as to the accuracy or completeness of any recommendation or information contained herein.

Neither the information nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities or commodities mentioned herein. This report or chart does not purport to be a complete description of the securities or commodities, market or developments to which reference is made. There may be instances when fundamental, technical, and quantitative opinions may not be in concert.

Each investor should carefully consider the investment objectives, risks and expenses of any Exchange-Traded Fund (“ETF”) prior to investing. Before investing in an ETF investors should obtain and carefully read the relevant prospectus and documents the issuer has filed with the SEC.  To obtain more complete information about the product the documents are publicly available for free via EDGAR on the SEC website (http://www.sec.gov).     

A list of all holdings for the past 12 months is available upon request.

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Live Cattle: Monitoring Recent Technical Developments

September 30, 2014

In monitoring the commodities universe, much has been made in recent weeks about the sharp declines seen across the board in the hard assets sector.   The price of grains (corn, soybeans, wheat) and precious metals (gold, silver, platinum) have seen some of the largest declines.   Regardless of the reason (most are chalking it up to a sharply higher US Dollar Strength), holding onto these assets over the course of the past month has been quite painful.

However, in looking at the commodities complex in more detail there have been some pockets of out-performance.   Our relative strength-based approach to investing allows us to sort through the various asset classes around the globe and then break each one down by sector to gain exposure to the strongest trending markets.   Our discussion today will be a brief technical update on the Live Cattle market.  For those of you who are not avid followers of these markets, the price of live cattle has surged to record highs this year.  This has also had an influence on the price of beef at grocery stores so it might be affecting your pocketbook more then you realize!

Point & Figure Chart:  Live Cattle (LC/)

The traditional point and figure chart of the continuous live cattle contract achieved a double top break out on Friday (9/26).  Note we chose the continuous chart instead of the front month Oct 14 contract in order to display more price historical price data.  The measured move target for double top break out pattern is $174.50.  Of course, as with any pattern nothing is guaranteed and time will tell whether or not the target is achieved.  However, in a sector that has been largely beaten up over the past month, owning Live Cattle proved to be much more beneficial then most other commodities.

2014 09 30 12 34 18 279x300 Live Cattle:  Monitoring Recent Technical Developments

Live Cattle RS Chart (vs UV/Y –Continuous Commodities Index)

In taking our analysis a step further, we have also posted a relative strength chart below which compares live cattle to the continuous commodities index.  The chart paints a very clear picture of the out-performance live cattle has had compared to other areas such as energy, grains, and precious metals.

lc RS chart 278x300 Live Cattle:  Monitoring Recent Technical Developments

Conclusion:

This brief update on the live cattle market was just to point out that although commodities in general have had a rough go of it lately, there have been pockets of strength such as the live cattle market.   An investor’s ability to be tactical and gain exposure to markets other than just the traditional asset classes of stocks and bonds can be very beneficial.  Furthermore, gaining access to these markets has never been easier as product development continues to evolve.

***The relative strength strategy is not a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  The information found on Dorsey, Wright & Associates’ Web Pages has been prepared without regard to any particular investor’s investment objectives, financial situation, and needs. Accordingly, investors should not act on any recommendation (express or implied) or information in this report without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions. Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources, believed to be reliable. However, such information has not been verified by Dorsey, Wright and Associates, LLC (DWA) or the information provider and DWA and the information providers make no representations or warranties or take any responsibility as to the accuracy or completeness of any recommendation or information contained herein.

Neither the information nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities or commodities mentioned herein. This report or chart does not purport to be a complete description of the securities or commodities, market or developments to which reference is made. There may be instances when fundamental, technical, and quantitative opinions may not be in concert.

Each investor should carefully consider the investment objectives, risks and expenses of any Exchange-Traded Fund (“ETF”) prior to investing. Before investing in an ETF investors should obtain and carefully read the relevant prospectus and documents the issuer has filed with the SEC.  To obtain more complete information about the product the documents are publicly available for free via EDGAR on the SEC website (http://www.sec.gov).     

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Dorsey Wright Internship

January 2, 2014

Picture1 Dorsey Wright Internship

Description:  Dorsey Wright Money Management Internship

Location: Pasadena, CA

Internship Job Purpose: Opportunity to learn different aspects of Dorsey Wright’s investment management business.  Role will involve supporting research initiatives, client service, operations, and sales and marketing.

Internship Duties:

  • Gain an understanding of momentum investing by reading Point & Figure Charting by Thomas J. Dorsey, and momentum white papers by John Lewis.
  • Complete several basic research projects on momentum investing using the Dr. Ken R. French Data Library
  • Develop a number of research initiatives that will be completed with the assistance of Dorsey Wright’s portfolio management team.  This research will be published on the Dorsey Wright blog
  • Make outgoing calls to financial advisors to make them aware of the availability of Dorsey Wright’s investment products
  • Help expand Dorsey Wright’s prospecting list by searching out qualified prospects
  • Provide assistance with boosting Dorsey Wright’s web presence and e-mail campaigns
  • Provide operational assistance that includes monitoring daily account contribution and withdrawal requests, creating welcome packets for new clients, and compiling quarterly client reports
  • Answering the phones and directing calls to the appropriate team member
  • Participate in networking opportunities with our business partners

Hours: Up to 20 hours a week

Qualifications: Freshman or sophomore who is pursuing a bachelor’s degree

Job Seekers: Send resumes to Andy Hyer at andy@dorseywright.com

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High RS Diffusion Index

February 20, 2013

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 2/12/13.

Capture High RS Diffusion Index

The 10-day moving average of this indicator is 92% and the one-day reading is also 92%.

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Dorsey Wright Client Sentiment Survey Results – 9/14/12

September 24, 2012

Our latest sentiment survey was open from 9/14/12 to 9/21/12.  The Dorsey, Wright Polo Shirt Raffle continues to drive advisor participation, and we greatly appreciate your support!  This round, we had 49 advisors participate in the survey. If you believe, as we do, that markets are driven by supply and demand, client behavior is important.  We’re not asking what you think of the market—since most of our blog readers are financial advisors, we’re asking instead about the behavior of your clients.  Then we’re aggregating responses exclusively for our readership.  Your privacy will not be compromised in any way.

After the first 30 or so responses, the established pattern was simply magnified, so we are fairly comfortable about the statistical validity of our sample. Some statistical uncertainty this round comes from the fact that we only had four investors say that thier clients are more afraid of missing a stock upturn than being caught in a downdraft. Most of the responses were from the U.S., but we also had multiple advisors respond from at least two other countries. Let’s get down to an analysis of the data! Note: You can click on any of the charts to enlarge them.

Question 1. Based on their behavior, are your clients currently more afraid of: a) getting caught in a stock market downdraft, or b) missing a stock market upturn?

greatestfear 57 Dorsey Wright Client Sentiment Survey Results   9/14/12

Chart 1: Greatest Fear.  From survey to survey, the S&P 500 rose by just over 3%, and none of our indicators responded as expected!   Despite a rising market, the greatest fear numbers rose from 79% to 81%.  On the flip side, the opportunity group fell from 21% to 19%.

greatestfearspread 54 Dorsey Wright Client Sentiment Survey Results   9/14/12

Chart 2: Greatest Fear Spread. Another way to look at this data is to examine the spread between the two groups.  The spread rose slightly from 58% to 61%.

Question 2. Based on their behavior, how would you rate your clients’ current appetite for risk?

avgriskapp 44 Dorsey Wright Client Sentiment Survey Results   9/14/12

Chart 3: Average Risk Appetite.  Average risk appetite fell slightly as the market rose.  Last survey round we saw a big spike in client risk appetite; we might look at this reading as a sort of “breather” after last round’s big move.  Client risk appetite went from 2.93 to 2.81.

riskappbellcurve 32 Dorsey Wright Client Sentiment Survey Results   9/14/12

Chart 4: Risk Appetite Bell Curve.  This chart uses a bell curve to break out the percentage of respondents at each risk appetite level.  This round, we had a bit of a mixed bag.  Nearly half of all respondents wanted a risk appetite of 3, and no one wanted a risk appetite of 5.

riskappgroupcurve Dorsey Wright Client Sentiment Survey Results   9/14/12

Chart 5: Risk appetite Bell Curve by Group.  The next three charts use cross-sectional data.  The chat plots the reported client risk appetite separately for the fear of downdraft and for the fear of missing upturn groups.  This chart sorts out as expected, with the downturn group wanting less risk and the upturn group looking to add risk.

avgriskappgroup 31 Dorsey Wright Client Sentiment Survey Results   9/14/12

Chart 6: Average Risk Appetite by Group.  The average risk appetite of both groups decreased this week, even as the market did well.  Both groups want to add less risk relative to the last survey.

riskappspread 45 Dorsey Wright Client Sentiment Survey Results   9/14/12

Chart 7: Risk Appetite Spread.  This is a chart constructed from the data in Chart 6, where the average risk appetite of the downdraft group is subtracted from the average risk appetite of the missing upturn group.  The spread is now back in its normal range.

The S&P 500 rallied over 3% from survey to survey, and none of our indicators performed as expected.  The overall fear numbers moved in the opposite direction, and the overall risk appetite number as fell in the face of a rising market.  We have seen this before though; unfortunately there is no crystal ball.

No one can predict the future, as we all know, so instead of prognosticating, we will sit back and enjoy the ride.  A rigorously tested, systematic investment process provides a great deal of comfort for clients during these types of fearful, highly uncertain market environments.  Until next time, good trading and thank you for participating.

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Sector and Capitalization Performance

July 27, 2012

The chart below shows performance of US sectors and capitalizations over the trailing 12, 6, and 1 month(s).  Performance updated through 7/26/2012.

SectorCapitalization72712 Sector and Capitalization Performance

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Dorsey, Wright Client Sentiment Survey – 5/25/12

May 25, 2012

Here we have the next round of the Dorsey, Wright Sentiment Survey, the first third-party sentiment poll.  Participate to learn more about our Dorsey, Wright Polo Shirt raffle! Just follow the instructions after taking the poll, and we’ll enter you in the contest.  Thanks to all our participants from last round.

As you know, when individuals self-report, they are always taller and more beautiful than when outside observers report their perceptions!  Instead of asking individual investors to self-report whether they are bullish or bearish, we’d like financial advisors to weigh in and report on the actual behavior of clients.  It’s two simple questions and will take no more than 20 seconds of your time. We’ll construct indicators from the data and report the results regularly on our blog–but we need your help to get a large statistical sample!

Click here to take Dorsey, Wright’s Client Sentiment Survey.

Contribute to the greater good!  It’s painless, we promise.

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Dorsey, Wright Client Sentiment Survey Results – 1/20/12

January 30, 2012

Our latest sentiment survey was open from 1/20/12 to 1/27/12. The Dorsey, Wright Polo Shirt Raffle continues to drive advisor participation, and we greatly appreciate your support! This round, we had 43 advisors participate in the survey. If you believe, as we do, that markets are driven by supply and demand, client behavior is important. We’re not asking what you think of the market—since most of our blog readers are financial advisors, we’re asking instead about the behavior of your clients. Then we’re aggregating responses exclusively for our readership. Your privacy will not be compromised in any way.

After the first 30 or so responses, the established pattern was simply magnified, so we are comfortable about the statistical validity of our sample. Most of the responses were from the U.S., but we also had multiple advisors respond from at least four other countries. Let’s get down to an analysis of the data! Note: You can click on any of the charts to enlarge them.

Question 1. Based on their behavior, are your clients currently more afraid of: a) getting caught in a stock market downdraft, or b) missing a stock market upturn?

greatestfear 46 Dorsey, Wright Client Sentiment Survey Results   1/20/12

Chart 1: Greatest Fear.  From survey to survey, the S&P rose by +2.9%, and the overall fear numbers nudged slightly lower.  The fear of downdraft group fell from 83% to 81%, while the upturn group rose from 17% to 19%. We’re still stuck in overwhelmingly negative territory.

fearspread Dorsey, Wright Client Sentiment Survey Results   1/20/12

Chart 2. Greatest Fear Spread.  Another way to look at this data is to examine the spread between the two groups.  The spread fell this round from 65% to 63%.

Question 2. Based on their behavior, how would you rate your clients’ current appetite for risk?

riskapp Dorsey, Wright Client Sentiment Survey Results   1/20/12

Chart 3: Average Risk Appetite.  The overall risk appetite number managed to reach the highest levels we’ve seen since May of 2011.  The overall risk number rose from 2.57 to 2.70.

bellcurvbe Dorsey, Wright Client Sentiment Survey Results   1/20/12

Chart 4: Risk Appetite Bell Curve. This chart uses a bell curve to break out the percentage of respondents at each risk appetite level.  The bell curvethis round is heavily concentrated in 3′s and 2′s, a much more lukewarm response than we’ve seen recently.  We have been used to seeing heavy concentration in the 1′s and 2′s, so this is a positive shift in client sentiment.

riskappbellcurve 30 Dorsey, Wright Client Sentiment Survey Results   1/20/12

Chart 5: Risk Appetite Bell Curve by Group. The next three charts use cross-sectional data. This chart plots the reported client risk appetite separately for the fear of downdraft and for the fear of missing upturn groups.  This chart sorts out as expected, with the upturn group wanting more risk than the downturn group.

avgriskgroup 5 Dorsey, Wright Client Sentiment Survey Results   1/20/12

Chart 6: Average Risk Appetite by Group.  Both groups’ risk appetite pushed higher this round with a rising market.  Here we see the upturn group’s risk appetite actual fall in the face of a rising market, while the downturn group’s average moves to recent highs.  This is not what we would expect to see (both should rise in a rising market).

riskappspread 39 Dorsey, Wright Client Sentiment Survey Results   1/20/12

Chart 7: Risk Appetite Spread.  This is a spread chart constructed from the data in Chart 6, where the average risk appetite of the downdraft group is subtracted from the average risk appetite of the missing upturn group.  The spread continues its recent trend of whipsawing.

This survey round, we saw the market rise a respectable +2.9% over two weeks, and most of our indicators respond as they should.  The greatest fear numbers ticked lower, and the overall risk appetite average rose to recent highs.  Clients seem to be wanting to dip their toes back into the water (risk), but it’s going to take a bigger market rally than what we’ve seen in the last few weeks before clients are ready to pile on the risk.

No one can predict the future, as we all know, so instead of prognosticating, we will sit back and enjoy the ride. A rigorously tested, systematic investment process provides a great deal of comfort for clients during these types of fearful, highly uncertain market environments. Until next time, good trading and thank you for participating.

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Dorsey, Wright Client Sentiment Survey Results – 1/6/12

January 17, 2012

Our latest sentiment survey was open from 1/6/12 to 1/13/12. The Dorsey, Wright Polo Shirt Raffle continues to drive advisor participation, and we greatly appreciate your support! This round, we had 63 advisors participate in the survey. If you believe, as we do, that markets are driven by supply and demand, client behavior is important. We’re not asking what you think of the market—since most of our blog readers are financial advisors, we’re asking instead about the behavior of your clients. Then we’re aggregating responses exclusively for our readership. Your privacy will not be compromised in any way.

After the first 30 or so responses, the established pattern was simply magnified, so we are comfortable about the statistical validity of our sample. Most of the responses were from the U.S., but we also had multiple advisors respond from at least four other countries. Let’s get down to an analysis of the data! Note: You can click on any of the charts to enlarge them.

Question 1. Based on their behavior, are your clients currently more afraid of: a) getting caught in a stock market downdraft, or b) missing a stock market upturn?

greatestfear 45 Dorsey, Wright Client Sentiment Survey Results   1/6/12

Chart 1: Greatest Fear.  From survey to survey, the S&P rose by +4.8%, and the overall fear numbers reacted as they should.  The fear group fell from 93% to 83%, while the upturn group rose from 7% to 17%.

greatestfearspread 47 Dorsey, Wright Client Sentiment Survey Results   1/6/12

Chart 2. Greatest Fear Spread.  Another way to look at this data is to examine the spread between the two groups.  The spread fell this round from 85% to 65%.  We’ve still got a long way to go until we hit par.

Question 2. Based on their behavior, how would you rate your clients’ current appetite for risk?

avgriskapp 37 Dorsey, Wright Client Sentiment Survey Results   1/6/12

Chart 3: Average Risk Appetite.  The overall risk appetite numbers continue to whipsaw for the 4th straight survey in a row.  The overall number frose from 2.19 to 2.57, the highest levels we’ve seen since mid-summer.

bellcurve 2 Dorsey, Wright Client Sentiment Survey Results   1/6/12

Chart 4: Risk Appetite Bell Curve. This chart uses a bell curve to break out the percentage of respondents at each risk appetite level.  The bell curve layout has shifted towards more risk, with more than a smattering of 4′s and 5′s this round.  If the market can continue to rally, we’ll probably see a continued shift to the right on this chart.

bellcurvegroup 4 Dorsey, Wright Client Sentiment Survey Results   1/6/12

Chart 5: Risk Appetite Bell Curve by Group. The next three charts use cross-sectional data. This chart plots the reported client risk appetite separately for the fear of downdraft and for the fear of missing upturn groups.  This bar chart sorts out as we expect, with the fear group looking for low risk and the opportunity group looking for more risk.

riskappgroup 3 Dorsey, Wright Client Sentiment Survey Results   1/6/12

Chart 6: Average Risk Appetite by Group.  Both groups’ risk appetite pushed higher this round with a rising market.  The upturn group has had a very volatile past few surveys, due to light holiday response.

riskappspread 38 Dorsey, Wright Client Sentiment Survey Results   1/6/12

Chart 7: Risk Appetite Spread.  This is a spread chart constructed from the data in Chart 6, where the average risk appetite of the downdraft group is subtracted from the average risk appetite of the missing upturn group.  The spread snapped back this round after a few whipsaws.

This survey, we saw a respectable market rally nearing +5%, and all of our sentiment indicators respond as they should.  The overall fear number pushed lower to sentiment levels we last saw at mid-summer.  The overall risk appetite indicator also pushed higher with a rising market, towards mid-summer levels.  If the market can keep up this momentum out of the gate into the new year, hopefully we’ll see some strong improvement in overall client sentiment.

No one can predict the future, as we all know, so instead of prognosticating, we will sit back and enjoy the ride. A rigorously tested, systematic investment process provides a great deal of comfort for clients during these types of fearful, highly uncertain market environments. Until next time, good trading and thank you for participating.

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Dorsey, Wright Polo Shirt Winner

December 2, 2011

Thanks to all the advisors who participated for the last few months in the bi-weekly Dorsey, Wright Client Sentiment Surveys.  Today, we’d like to announce this quarter’s winner of the polo shirt – Mr. Wayne Kimbell. Here’s what Mr. Kimbell had to say about Dorsey, Wright and how he implements the research and money management we offer.

We have been using Dorsey Wright research for more than twenty years. I personally chart more than 200 stocks per day by hand.  Relative strength investing makes perfect sense to us.

Again, we appreciate everyone who participated in the surveys, especially those who keep coming back week after week.  We are approaching our two-year anniversary since starting the surveys, so look for some more detailed posts in the coming months.

Thanks again!

Click here to view the results from the last survey.

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Weekly RS Recap

August 1, 2011

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.

ranks080111 Weekly RS Recap

There was very little difference in performance between the different relative strength quartiles last week — all were down sharply.

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Slouching Towards Debt-lehem…

July 29, 2011

Markets are undergoing a lot of changes in traditional relationships right now.  For example, Barron’s reports that corporates are the new Treasurys:

U.S. government debt is priced in the credit-default swap (CDS) market as having a higher-default risk than 22% of investment-grade corporate bonds. This means the CDS market, which influences the prices of corporate bonds, stocks, and the implied volatility of equity options, perceives Treasuries to be riskier than bonds issued by companies including Coca-Cola (ticker: KO), Oracle (ORCL) and Texas Instruments (TXN).

“This suggests corporates are the new sovereigns,” Thomas Lee, J.P. Morgan’s equity strategist, advised clients in a research note late last week, referring to corporate debt.

The phenomenon is also evident in Europe. J.P. Morgan’s Lee notes that 100% of corporate-debt issuers in Spain, Greece, and Portugal trade inside their government CDS spreads, while 60% of Italian corporate bonds trade inside that government’s spreads.

Historically, sovereign debt –bonds issued by governments – were considered low risk because governments can raise taxes or print money to pay their bills. During the credit crisis of 2007, governments all over the world printed money, and slashed interest rates to rescue the financial system, and are now saddled with massive debts. Now, some corporations might be financially healthier than governments.

There are also sharp changes in historical relationships going on in the commodity world, according to Reuters:

According to fund flows research company EPFR Global, commodity sector funds that invest in physical products, futures or the equities of commodity companies such as miners, attracted $1.465 billion in net inflows globally in the first two weeks of July.

The push into commodities in July reverses a trend in the second quarter, when investors pulled a net $3.9 billion out of commodities, according to Barclays Capital.

The move explains a divergence of stocks and commodities, with correlation dropping from more than 80 percent positive to around 40 percent negative over the past two weeks.

“Commodities could be seen in some ways as the least-worst option, given what is happening with other markets,” said Amrita Sen, an oil analyst at Barclays Capital who looks closely at fund allocations into commodities. “Some investors have not liquidated positions in commodities, while they have exited some other asset classes such as equities.”

All of the machinations with the debt ceiling and the associated market dislocations have posed a number of important questions for investors.

Q1) What happens to traditional asset allocations when traditional relationships break down?

Q2) How can we tell if the dislocations are a result of temporary factors or represent a permanent paradigm shift?

No one has all of the answers, least of all me, but a couple of things occur to me. 

A1) The same thing that always happens when these ephemeral relationships change—your allocation doesn’t behave anything like you thought it would.  Although the current uncertainties have highlighted the issues above, this kind of thing happens all the time.  In the current investment hierarchy, debt is seen as safer than equity because it is higher up in the capital structure—but that’s only true for a corporate balance sheet.  Sovereign debt always depends on the willingness of the sovereign to repay it.  Anyone who is old enough to be familiar with the term “Brady Bonds” knows what I am talking about.  If 100% of the corporate debt issuers in Spain trade inside the government debt spread, it’s not inconceivable for the same thing to happen in the US.  In other words, there’s no a priori reason for government debt to be safer than other debt.

What about commodities then?  Strategic asset allocation usually treats them like poor cousins, giving them a small seat at the children’s table.  What if they really are the “least worst option” and deserve a major slice of the portfolio due to their performance?  After all, commodities are at least tangible and do not rely on the willingness of a sovereign to be worth something.  What if the correct safety hierarchy is a) high-grade corporate debt, b) equity in companies with growing revenues, earnings, and dividends, c) commodities, and d) sovereign debt, especially in countries with a ton of obligations and a sketchy political process?

A2) We can’t.  That’s one of the issues with a paradigm shift—at the beginning, you can’t tell if it is temporary or permanent.  Around 1900, it looked like the US might supplant the UK as the world’s industrial power.  That turned out to be lasting.  Around 1990, it looked like Japan might supplant the US as the world’s industrial power.  That turned out to be temporary.  Around 2010, it looked like China might supplant the US as the world’s industrial power—and we have no idea right now if that is a temporary conceit or will become a permanent feature of the landscape.

Constantly changing relationships along with an inability to distinguish between a temporary and a permanent state of affairs, to me, argues strongly in favor of tactical asset allocation.  It simply makes sense to go where the returns are (or where the values exist, depending on your orientation).  Money always goes where it is treated best, and if you wish to win the battle for investment survival, you would be well-advised to do the same thing.

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Small Cap & NASDAQ Technical Leaders Update

July 1, 2011

At the end of March we began tracking two new indexes based on our Technical Leaders methodology.  The two new indexes follow Small Capitalization stocks and stocks traded on the NASDAQ exchange.  We use our Technical Leaders methodology for three other indexes: Domestic Equities, Developed Markets Foreign Equities, and Emerging Markets Equities.  These three indexes are licensed by PowerShares and you can purchase ETF’s based on the (tickers: PDP, PIZ, and PIE respectively).

These two new indexes aren’t licensed by an ETF provider so you can’t directly invest in them.  We like the concept for both indexes because history shows that relative strength works very well with small cap stocks.  The NASDAQ Technical Leaders is also very intriguing because there are many companies in that universe with very dynamic business models, and those are the type of companies that relative strength is very good at identifying and capitalizing on.

The constituents for both indexes are below:

Small Cap:

2011Q3TLSmallClip Small Cap & NASDAQ Technical Leaders Update

NASDAQ:

2011Q3TLNASDAQClip Small Cap & NASDAQ Technical Leaders Update

The performance for the second quarter was so-so.  Both indexes had a huge first quarter (as did most RS strategies) so they remain well ahead of their benchmarks for the year.

TableTL Small Cap & NASDAQ Technical Leaders Update

If you have any questions about the indexes please post them in the comments section.

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Dorsey, Wright Client Sentiment Survey – 6/3/11

June 3, 2011

Here we have the next round of the Dorsey, Wright Sentiment Survey, the first third-party sentiment poll. And today starts a new Dorsey, Wright Polo Shirt raffle! Just follow the instructions after taking the poll, and we’ll enter you in the contest.  Thanks to all our participants from last round.

As you know, when individuals self-report, they are always taller and more beautiful than when outside observers report their perceptions!  Instead of asking individual investors to self-report whether they are bullish or bearish, we’d like financial advisors to weigh in and report on the actual behavior of clients.  It’s two simple questions and will take no more than 20 seconds of your time. We’ll construct indicators from the data and report the results regularly on our blog–but we need your help to get a large statistical sample!

Click here to take Dorsey, Wright’s Client Sentiment Survey.

Contribute to the greater good!  It’s painless, we promise.

 

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The Upside of Mental Accounting

April 7, 2011

Theorists in behavioral finance often discuss mental accounting, the phenomenon in which individuals treat different pools of money differently, as a cognitive bias.  In truth, it can be a problem.  The client who discusses the great return on their stock portfolio last year often neglects to mentally combine it with the rest of their portfolio—which might be 80% in municipal bonds that performed terribly.  Mental accounting allows the client to be thrilled with their return, although the actual return on the whole portfolio may have been negative!

Mental accounting is a natural function, however, and advisors can also use it to a client’s advantage.  One situation in which this is very clear is for retirement distribution portfolios.  During the capital accumulation stage, the client is ideally invested for growth.  During the distribution phase, however, client psychology often changes.  Understandably, they become much more protective of their capital.  After all, they have typically spent a lifetime accumulating it and they won’t be generating any more of it.  The problem, from an investment point of view, is that they often become so risk averse that it is difficult for their capital to earn a return sufficient for them to retire on!

Jeff Benjamin, writing in Investment News, discusses bucket strategies, which are often extremely appealing for retirees:

Using bucket strategies to manage clients’ retirement income has become more popular in recent years and the reason is pretty simple: Dividing a client’s portfolio into separate pools, or buckets, each with varying investment objectives, works.

 The Upside of Mental Accounting

Source: www.rustytin.com

The basic idea is to separate money for liquidity from money oriented to growth.  Whether the capital is divided into two buckets or six is immaterial.  As an advisor, you are simply harnessing the mental accounting that the client is going to do anyway–and using it for their benefit.

“There’s a psychological appeal of separating a portfolio into buckets, and that’s why people like it,” said Mike Henkel, managing director at Envestnet Inc., a technology platform that helps advisers construct bucket models for their clients.

Although one could argue that the use of buckets is merely behavioral-finance sleight of hand, he and others think that “mental accounting” has real benefits both for advisers and their clients.

The real benefit is that the buckets allow the client to mentally segment their capital, which can allow different levels of investment risk to be tolerated much more easily.  If the client knows their liquidity needs are covered for the next two years, it becomes much easier to resist selling out of equities during a downturn.  The growth bucket, at least in the client’s mind, is a separate entity.

Some advisors prefer simplicity and just use two buckets, one for liquidity and one for growth.  (I have found that clients often find it psychologically helpful to have a buffer, so I’ve tended to use three buckets:  one for liquidity, one for a balanced account approach, and one for growth.)  As the more growth-oriented buckets appreciate over time, small amounts can be peeled off periodically to fund the liquidity bucket.  It can often allow the overall portfolio to continue to grow, while the client is mollified that the liquidity bucket is not rapidly disappearing.

Keep in mind that the point of mental accounting is simply to allow the client to shoulder a more appropriate level of investment risk.  A bucket approach will not save you if the client’s savings are inadequate to begin with.  There is nothing magic about a bucket approach that will cause the capital to grow any faster!  Portfolio growth will be functionally equivalent to whatever the overall asset allocation is without the buckets being considered.  The advisor is not changing the portfolio—they are just changing the way the client thinks about it.

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New Technical Leaders Indexes

March 31, 2011

The Technical Leaders Indexes are indexes created by Dorsey Wright Money Management and are constituted with high relative strength securities from a given universe.  We currently run three indexes:  Domestic mid to large cap equity, Foreign Developed Markets Equity, and Emerging Markets Equity.  These three indexes are licensed by PowerShares and can be purchased in an ETF format (Tickers: PDP, PIZ, PIE).

We are expanding the number of indexes we create.  We are adding two more indexes to the Technical Leaders family.  (Please note that these indexes are not licensed by any ETF sponsor so there is no vehicle to purchase them directly.)

One of the new Technical Leaders indexes will cover the Domestic Small Cap space.  All of our other indexes are constituted with 100 securities, but the Small Cap Technical Leaders Index will have 200.  This will still allow us to select the top decile from a small cap index like the Russell 2000, while keeping liquidity constraints in mind.  To see a list of the current constituents you can click here:

TLSmallCap New Technical Leaders Indexes(Click To Enlarge)

The second index we are beginning to publish tracks 100 high RS securities traded on the NASDAQ exchange.  As you can imagine, the selection process will pull out a lot of emerging growth companies so we think this index will be very interesting to follow.  For a list of the current constituents you can click here:

TLNASDAQ New Technical Leaders Indexes(Click To Enlarge)

Over the next couple of days I’ll post some more information about what is in the indexes.  If you have any questions feel free to post them in the comments section and I’ll try to respond to them.

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Dorsey, Wright Client Sentiment Survey – 12/31/10

December 31, 2010

Here we have the next round (and final of the year!) of the Dorsey, Wright Sentiment Survey, the first third-party sentiment poll.

As you know, when individuals self-report, they are always taller and more beautiful than when outside observers report their perceptions!  Instead of asking individual investors to self-report whether they are bullish or bearish, we’d like financial advisors to weigh in and report on the actual behavior of clients.  It’s two simple questions and will take no more than 20 seconds of your time. We’ll construct indicators from the data and report the results regularly on our blog–but we need your help to get a large statistical sample!

Click here to take Dorsey, Wright’s Client Sentiment Survey.

Contribute to the greater good!  It’s painless, we promise.

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Dorsey Wright Polo Shirts Through November

September 22, 2010

As we head into the final months of the year, we want to thank all of our clients for their business.  2010 has so far been a very good year for our portfolios and we think it could well be the beginning of a strong multi-year move for relative strength strategies.

As a way of thanking you for your business, we will be offering a polo shirt, embroidered with the Dorsey Wright XO logo, for advisors who open new separately managed accounts with us from now until the end of November.

nike3 Dorsey Wright Polo Shirts Through Novemberwww.companycasuals.com

To receive the brochure on our Systematic Relative Strength portfolios, please click the image below.

cover Dorsey Wright Polo Shirts Through November

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DWA 25,000

September 28, 2009

No, this isn’t the price level on some new-fangled unweighted index.  It’s the number of views we’ve had of our blog over the past few months.  We appreciate that you and hundreds of other investors have made www.systematicrelativestrength into one of your financial sites of choice and one of the thought leaders in relative strength investing.  We will try to continue to provide you with original content, articles and news pertaining to relative strength and global trends,  and to continue to give you our unique spin on the relative strength style of investing.

We hope there will be even more value for you down the road.  We are exploring ways to package audiovisual presentations for you and/or your clients, so that may be the next frontier.  In everything we do, our intent is to inform, entertain, and provoke thought and discussion.  We hope we are succeeding, but if you have feedback–positive or negative–we’d love to hear from you.  Success is never final and we’re always looking for ways to improve.

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Technical Analysis Becoming More Popular, Sort Of

June 2, 2009

An interesting article about the growing popularity of technical analysis.   This is a good sign for traditionally technical areas like Tactical Asset Allocation.   I’m happy to see that it is becoming more accepted, especially by some progressive members of the CFA community.  On the other hand, I can see why some technical analysts feel like King Leonidas and his 300 Spartans when you look at the disparity in the numbers of people taking the exams to become chartered.  This year, 128,600 people are taking the Chartered Financial Analyst exams versus only 700 taking the Chartered Market Technician exams!

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