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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Relative Strength Spread

September 30, 2014

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 9/29/14:

spread 09.30.14 Relative Strength Spread

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.   Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. 

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Do You Feel Lucky?

September 29, 2014

Part of what seems to motivate investors is a desire to make money in the context of working towards their financial goals.  However, part of the motivation for many investors is the accolades that come when they get a call right.  Think about all the bragging rights when you call a stock out as overvalued!  ”Yea, I shorted XYZ stock all the way down.  The numbers just didn’t make sense to me.”  If you can pull that off a couple times, CNBC will be booking you ASAP.  However, does it really make sense to try to short “overvalued” stocks—either from a financial perspective or from an accolades perspective?

Alon Bochman, CFA, of the CFA Institute has some data that should make you think twice.

Valuation shorts have a bad reputation on Wall Street. You may be right in the long run, but you may not be able to hold the position long enough to get there. As David Einhorn puts it, “We have repeatedly noted that it is dangerous to short stocks that have disconnected from traditional valuation methods. After all, twice a silly price is not twice as silly; it’s still just silly.

Valuation shorts are a dicey proposition on intellectual grounds, too. John Hempton, who is the chief investment officer at Bronte Capital and publishes one of my favorite investment blogs, puts it this way: “In a valuation short we are working on the same information as everyone else has. This makes me uncomfortable. There is an arrogance in suggesting we can analyze the information better than anyone else. We find it harder to answer the question of what we see when others don’t and hence harder to justify the position at all.”

I was curious whether valuation shorts work as a whole, and have recently had occasion to test this question using a new research service called Activist Shorts Research. They have compiled data on more than 400 campaigns by noted short-sellers from 2002 to the present. The returns look like this:

alon1 500x445 Do You Feel Lucky?

The mean price change (not including dividends), indicated by the blue line, was −14.2% over an entire “campaign,” which can be arbitrarily long. Additionally, 65% of campaigns were “successful” in the sense that the price of the target stock dropped since the campaign was announced. In 4% of campaigns, the price dropped 99% or more. These figures sound quite good, but it is important to note the sample is biased because the service does not cover all short-sellers, only the “best” and “most public” ones. These two groups likely overlap but not completely.

Despite the biases of the overall sample, the question I was most interested in was whether valuation shorts work better than fraud shorts. For each campaign in the dataset, we have a “Primary Allegation” which is the reason the short-seller used to publicly justify the short call. The reasons provided are many and varied, but I have grouped them into the two buckets we are interested in. The results are stark:

Primary Allegation Fraud Valuation Total
Mean Return −30% 3% −14%
Campaigns 229 219 448

Short campaigns that allege a stock is overvalued are wrong as a group: the target stock rises 3% over the life of the campaign, on average. Shorts that allege fraud are much more effective: the target stock drops 30% on average. We can see this result in some more detail by comparing return distributions:

My emphasis added.  On average, shorting stocks based on valuation hasn’t worked out so well.  You might win, but the odds aren’t in your favor.  Kind of like Vegas.

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Weekly RS Recap

September 29, 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 (9/22/14 – 9/26/14) is as follows:

ranks 09.29.14 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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US Dollar Index: Monitoring Supply & Demand

September 26, 2014

In revisiting a recent blog post, we wanted to follow up on our previous analysis of the US Dollar which just this week produced another significant technical development.  At Dorsey Wright Money Management our systematic based models focus on relative strength rankings for trading signals.   However, in this post we will focus on the technical development of DXY on the traditional point and figure chart.  Remember, by doing so we are just trying to focus on the supply/demand of the market to get an idea of where new pockets of relative strength may begin to show up once we run our matrix models.

For many who don’t actively follow the currency markets, you may be asking why is this the technical structure of the US Dollar important?   For one, the strength of the US Dollar effects each and everyone of us on a daily basis whether we realize it or not.   When it comes down to buying groceries or taking vacations, exchange rates ultimately determine the cost of goods for families. Finally, major developments in macro asset classes such as the currency market can have an effect on asset allocations when it comes to heavy re-balancing periods such as quarter end.

As we mentioned above, at Dorsey Wright we view the markets as a simple equation of supply and demand.   Markets ebb and flow over the course of the year, with some markets producing strong trends while others maintain very range bound behavior.  We of course want to find the strongest performing assets classes which are exhibiting solid trends and focus on asset allocation within those pockets of strength.  The ability for investors to remain flexible through different products is synonymous with this type of strategy.

US Dollar Index  (DX/Y): Point & Figure

The below Point & Figure chart shows the DX/Y achieved a triple top spread break out earlier this week with the a move above 85.00.   The market had re-tested this level on two previous occasions but in those circumstances supply eventually overwhelmed demand.  However,  the third attempt for the greenback bulls was a success and now has the US Dollar trading at its highest level in years.   The triple top pattern break out has a potential measured move target of  97.50.

DXY 300x204 US Dollar Index:  Monitoring Supply & Demand

Conclusion:

The above paper was a quick follow up to our previous report on the technical structure of the US Dollar.  From the current technical set up, it appears the US Dollar is poised for another leg higher.  Time will tell whether the 97.50 target is reached or not.

***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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Sector Performance

September 26, 2014

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 9/25/14.

sector 09.26.14 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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Catching a Falling Knife

September 25, 2014

Investors seem naturally wired to be uncomfortable buying stocks that have already done well (even though research confirms that those are the very stocks that are most likely to do well in the future).  Ben Carlson recently weighed in on this phenomenon:

One of the most common behavioral biases when buying individual stocks is anchoring to previous levels or the purchase price of a stock. The first thing investors do when researching a stock is pull up a historical chart of past prices. The fact that a company traded for a certain price in the past gives investors a false sense of hope that it will automatically go back to that previous price point. Sometimes this works, but trying to catch a falling knife can be a dangerous strategy if you don’t know what your’re doing.

My friend Michael Batnick shared some great statistics on individual stocks a couple of weeks ago that puts this into perspective from the standpoint of the overall market:

“Using a universe of Russell 3000 companies since 1980, roughly 40% of all stocks have suffered a permanent 70%+ decline from their peak value.  Looking at the table below, we see that nearly sixty percent of Tech companies have had a catastrophic loss, which they define as “a 70% decline from peak value with minimal recovery.”

dont com back Catching a Falling Knife

Those are sobering statistics.  What goes down doesn’t always come back.  This is just another way of saying what is “a good value” often ends up staying a good value or even becoming a better value.  Investors would be well served to focus on those stocks that have the highest probability of being the future winners, even if that means buying something that has already gone up.

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

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Fund Flows

September 25, 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 09.25.14 Fund Flows

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

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Systematic RS Portfolios Podcast

September 22, 2014

Systematic RS Portfolios Podcast

Andy Hyer & Chris Moyer

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Weekly RS Recap

September 22, 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 (9/15/14 – 9/19/14) is as follows:

ranks 09.22.14 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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Quote of the Week

September 19, 2014

People want to believe the present is different than the past. Markets are now computerized, high-frequency and block traders dominate, the individual investor is gone and in his place sit a plethora of huge mutual and hedge funds to which he has given his money. Some people think these masters of money make decisions differently, and believe that looking at how a strategy performed in the 1950s or 1960s offers little insight into how it will perform in the future.

But while we humans passionately believe that our own current circumstances are somehow unique, not much has really changed since the inarguably brilliant Isaac Newton lost a fortune in the South Sea Trading Company bubble of 1720.  Newton lamented that he could “calculate the motions of heavenly bodies but not the madness of men.”  Herein lays the key to why basing investment decisions on long-term results is vital: the price of a stock is still determined by people.

  –Jim O’Shaughnessey

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PFI Point & Figure Chart: Are Financial Stocks Poised For Rotation?

September 19, 2014

Global equity markets continue to grind higher during 2014, with the S&P 500 notching a new all -time closing high yesterday at 2,011.  However, not all groups of stocks have performed well during the course of the year, with certain sectors outperforming others.  Furthermore, large caps and mid -caps have outperformed small caps.   The ability for investors to gain exposure to the strongest performing sectors of the equity market is something our relative strength models at Dorsey Wright attempt to capture on a daily basis.  We are not looking to catch the very initial leg or final leg of a trend, but more importantly the “middle” portion of the trend where the majority of the gains are found.  Having a solid game plan intact to take advantage when these moves occur is essential in helping achieve consistent returns.

PowerShares DWA Financial Momentum Portfolio  (PFI)

At Dorsey Wright, we have a number of products that allow investors to take advantage of secular market rotation.   We do so in a systematic way which allows us to eliminate human emotion and not take proper action until our relative strength rankings give confirmation.

In this piece, we want to focus on the point and figure chart of the PowerShares DWA Financial Momentum Portfolio (PFI).   The PFI Index is derived by analyzing a matrix of stocks and finding the top 30-75 financial stocks in terms of relative strength.   The reason for discussion about PFI today is a notable technical development on the point and figure chart.

Point & Figure – Technical Developments on PFI:

Range bound markets are often difficult for momentum strategies because of the whipsaw like action which can occur at the top and bottom ends of the range.   Of course, periods of price congestion during an uptrend often lead to a sub-par relative strength ranking until the market can take out the overhead supply and confirm a new buy signal.  The discipline to avoid these markets (until a proper signal is given) in search of stronger trends is something our model-based approach is designed to help do.

A quick glance at the chart below shows the sideways consolidation that PFI is in.   Consolidations in steady trends are usually considered healthy as supply and demand will tend to battle it out over a period of time before one side eventually wins and the next major leg up (or down) commences.  The PFI point and figure currently remains on a sell signal, and a buy signal will not be given till a move through 30 occurs.   The longer PFI continues to consolidate, the more likely the move out of this pattern will be substantial which will likely contribute to stronger RS ratings for the product.

PFIUPDATED 300x240 PFI Point & Figure Chart:  Are Financial Stocks Poised For Rotation?

Conclusion:

The above article gives a good example of why rules-based systematic approach to the markets can be so beneficial when investing.   As we stated above, financials as a group have struggled this year, underperforming the general market while other sectors have outperformed.  However, although the current relative strength ranking remains somewhere in the middle of the pack, the overall technical structure is worth keeping an eye on as price once again approaches the upper end of the range near $30.00.   The potential measured move target would be 34.50.

***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).     

Dorsey Wright is the index provider for PFI.  See www.powershares.com for more information.

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Sector Performance

September 19, 2014

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 9/18/14.

sector 09.19.14 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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DWA ETFs

September 17, 2014

Shown below are Point & Figure charts of the 16 ETFs for which Dorsey Wright & Associates is the index provider (as of 9/17/14):

PowerShares ETFs

pdp1 DWA ETFs

dwas1 DWA ETFs

dwaq1 DWA ETFs

piz1 DWA ETFs

pie1 DWA ETFs

pez1 DWA ETFs

pfi1 DWA ETFs

industrials DWA ETFs

psl1 DWA ETFs

ptf1 DWA ETFs

pth1 DWA ETFs

pui1 DWA ETFs

pxi1 DWA ETFs

pyz1 DWA ETFs

First Trust ETFs

fv1 DWA ETFs

ifv1 DWA ETFs

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).

PDP: Prior to the fund inception date (3/1/07), chart is created using extrapolated index data.

DWAS: Prior to the fund inception date (7/19/2012), the chart is created from extrapolated index data.

DWAQ:  Prior to fund inception date (4/30/03), chart is created using extrapolated index data (DYO), and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA NASDAQ Technical Leaders Index (TLNASDAQ)

PIZ: Prior to the fund inception date (12/28/2007), chart is created using extrapolated index data.Prior to the fund inception date (12/28/2007), chart is created using extrapolated index data.

PEZ: Prior to fund inception date (10/12/06), chart is created using extrapolated index data (EZZK), and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA Consumer Cyclicals Technical Leaders Index (TLCONCYC)

PFI: Prior to fund inception date (10/12/06), chart is created using extrapolated index data (EZFK), and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA Financial Technical Leaders Index (TLFINANCE)

PRN: Prior to fund inception date (10/12/06), chart is created using extrapolated index data (EZLK), and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA Industrials Technical Leaders Index (TLINDUST)

PSL: Prior to fund inception date (10/12/06), chart is created using extrapolated index data (EZSK), and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA Consumer Staples Technical Leaders Index (TLCONSTA)

PTF: Prior to the fund inception date (10/12/2006), chart is created using extrapolated index data. and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA Technology Technical Leaders Index (TLTECH)

PTH: Prior to fund inception date (10/12/06), chart is created using extrapolated index data (EZXK), and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA Healthcare Technical Leaders Index (TLHEALTH)

PUI: Prior to fund inception date (10/25/05), chart is created using extrapolated index data (DWU), and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA Utilities Technical Leaders Index (TLUTIL)

PXI: Prior to fund inception date (10/12/06), chart is created using extrapolated index data (EZKK), and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA Energy Technical Leaders Index (TLENERGY)

PYZ: Prior to fund inception date (10/12/06), chart is created using extrapolated index data (EZBK), and the fund tracked this index through 2/18/14. Effective 2/19/14, the fund changed the index that it tracks to DWA Basic Materials Technical Leaders Index (TLBASMAT)

FV: Prior to the fund inception date (3/6/2014), chart is created using extrapolated index data (FTRUST5)

IFV: Prior to the fund inception date (7/23/2014), chart is created using extrapolated index data.

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Tactical Fixed Income: Point & Figure Technical Developments

September 17, 2014

In keeping with our macro based theme in a blog post earlier this week, we thought it would be interesting to dive deeper into the fixed income market and take a look at a few other ETF products (other than the TLT) available for exposure within the Tactical Fixed income strategy here at Dorsey Wright.     As we stated in a recent post, due to the large size of the fixed income markets,  major technical developments in this asset class should not be overlooked  as it can have an effect on asset allocation shifts during heavy re-balancing periods such as quarter end.

Recall previously how we noted the residing strength of the US Dollar over the last 5 weeks, which in turn has seemed to help contribute to the lackluster performance in commodities   We also noted the TLT (iShares Barclays 20+ Year Treasury Bond Fund) attempting to hold a longer term uptrend line near the 113.00  level.   In diving a bit deeper into the fixed income realm, we will now take a look at the updated point and figure charts for both the iShares Barclays TIPS bond fund (TIP) and the Barclays SPDR Convertible Bond ETF (CWB) to see if any technical developments worth noting are being displayed.   Clients of Dorsey Wright can gain exposure to both of these products through the Tactical Fixed Income product, should there relative strength ratings be satisfactory for holding.

iShares Barclays TIPS Bond Fund ETF (Point & Figure)

The first product we will take a look at is the iShares Barclays TIPS Bond Fund ETF (TIP).  For those of you not familiar with this product,  TIPS stand for Treasury Inflated Protective Security.   In other words, unlike traditional fixed income products that typically lose value during periods of  rising inflation, the principal on a TIPS product will rise and fall with CPI (consumer price index) readings.

tip 300x186 Tactical Fixed Income:  Point & Figure Technical Developments

From a technical perspective, the uptrend line which was intact on the point and figure chart of TIP was recently broken to the downside.  Furthermore , a double bottom break was also confirmed which has a measured move target of $109.50.    It appears (at least for the time being) the stronger US Dollar and lower commodity prices  have seemed to tame the markets expectations of seeing higher inflation in the near future.   We thought it would be worth pointing out that the labor department released the most recent CPI reading earlier this morning which came in at -0.2%, marking the first decrease since April 2013.   Given the technical developments we discussed on the TIP point and figure chart, it appears the price action of the market had been reflecting this decline.

DORSEY Wright currently has no position in TIPS

SPDR Convertible Bond ETF (CWB)

The final product we will take a look at is the SPDR Convertible Bond ETF (CWB).  This post will not dive into the details of the convertible bond market, but for a brief introduction a convertible bond is a ‘hybrid’ product of both debt and equity.   A convertible bond is typically issued at a discount to the current stock price of a company with a specific conversion price that will allow investors to exchange it for common stock if certain conditions are met.  Once the share price climbs above the conversion price, it allows for the exchange to be done.  We can see below, the current point & figure set up of this product looks quite different from the TIPS chart we analyzed earlier.   The relative strength of this product continues to remain strong in comparison to most others  in its space. The CWB is currently a component of  the tactical fixed income strategy.

cwb 273x300 Tactical Fixed Income:  Point & Figure Technical Developments

 

Conclusion:

This note serves as a brief follow up to our previous write up about using point and figure charts to monitor market rotation.   In going into further analysis of the fixed income market, we can see how relative strength strategies have certainly served the Tactical Fixed Income fund well by staying allocated towards the CWB and minimizing exposure to TIP.  As with any other asset class, markets cycles in fixed income will change at some point.   However, investors can gain exposure to both products through Dorsey Wright in order to help diversify their fixed income holdings based on the current market environment.  Furthermore, point and figure charts can also be used to observe different metrics of the economy (in this case, inflation expectations) when being applied to ETF products such as TIPS.   The Dorsey Wright Tactical Fixed income model currently has no allocation towards this product, but does have the ability to gain exposure should inflation expectations start to rise along with the relative strength ranking of the product itself.

***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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Combining Momentum, Value and Profitability

September 16, 2014

Clifford Asness and John Liew extol the virtues of combining Smart Beta strategies in this Institutional Investor special report:

Among the various investment styles, let’s consider the efficacy of three that are well known (and admittedly chosen as near and ear to our hearts): Value, Momentum and Profitability.  Based on our analysis and a large body of academic and practitioner literature, each has produced long-run, hypothetical excess returns with low correlation to traditional markets over multiple decades, in multiple geographies and asset classes, and each is well-supported by economic theory and research.  We believe that each of these, at the proper fee, would be an attractive proposition in a single factor, simple Smart Beta format and should add value to most traditional portfolios.

Furthermore these styles’ excess returns tend to be lowly correlated with one another, with performance often coming at different times.  This can be really important.  Consider Exhibit 2, which separately shows the worst three-year hypothetical excess returns for each style along with the hypothetical performance fore the other two styles during that same period.  In each case, the worst performance for any one style is mitigated by the other two.  Diversifying across various Smart Betas can and has provided a more consistent way of beating a traditional benchmark.

exhibit 2 Combining Momentum, Value and Profitability

(click to enlarge)

That graphic says it all.  Diversification is as old as the hills.  However, for the last several decades the emphasis in this industry has been on diversifying by style box.  I believe there are benefits to looking beyond the old paradigm and embracing the idea of diversification by strategy or, more specifically, by Smart Beta strategy.

At Dorsey Wright, Momentum is our area of expertise and we now have a broad suite of ETFs, SMAs, UITs, and Mutual Funds to give investors easy access to this factor.

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

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Ignoring Volume

September 16, 2014

Some have asked why we don’t incorporate volume into our work.  This is why (via WSJ):

In the second quarter, U.S. stock-market volume averaged 6.03 billion shares a day, the lowest level for the period in seven years, according to Credit Suisse Group. Amid the trading slowdown, the S&P 500 is up 7.3% this year.

Money can be made or lost with increasing or declining volume.

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RS Spread

September 16, 2014

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 9/15/2014:

RS Spread RS Spread

Long period of consolidation.  Fingers crossed that it breaks to the upside!

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.   Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. 

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Point & Figure Charts: Analyzing patterns for market rotation

September 15, 2014

In today’s ever changing market environment, keeping a strict rules-based investment focus is essential in helping asset manages achieve favorable returns.  As stated in numerous relative strength-based white papers published by Dorsey Wright, we have found momentum  to be an effective return factor over time.  Our advantage in doing so, we believe, is allowing us to find strongly performing markets which have strong possibilities of exhibiting trending moves.  This process starts at the asset class level and then  is broken down to sectors, sub sectors, and individual equities and or commodities.

In reviewing 3 major macro-related charts this past weekend, we noticed some interesting developments in the US Dollar Index (DX/Y), Greenhaven Continuous Commodities Index ETF (GCC), and iShares 20+  Year Treasury Bond ETF (TLT).   Remember, in terms of asset allocation, shifts in major macro-related markets like these can play a major impact on money flows into different asset classes during re-balancing periods.

DXY (US Dollar Index)

The US Dollar Index (DXY) has risen sharply higher since the beginning of August.  We can see on the below Point and Figure chart the downtrend line which was broken and  produced a buy signal when price broke out above 83.00.  In terms of technical developments, price is now trading at the upper end of the range just below $85.00.  Note a move through the 85.00 level would confirm a triple  top buy signal with a potential measured  move target of 96.00.  Up until recently, the currency markets had been  primarily range bound.  However,  as we can see below it appears the USD may be on the verge of starting  a major move higher as the Federal Reserve continues to scale back is QE policies.

dxy1 Point & Figure Charts:  Analyzing patterns for market rotation

GCC (Greenhaven Continuous Commodities)

The commodities sector, of course, is the flip side to the US dollar strength.    Due to the fact most commodities are priced in US Dollars, a stronger USD effects the ability of other  countries to import them and will inhibit global demand.  After starting the months of January and February with impressive strength, the sector has suffered some steep losses across the board.  This comes as no surprise with the relative strength rankings for commodities remaining abysmal in recent months.  The GCC ETF (seen below) is now coming into a major support level at 25.50.   A move through 25.00 would confirm a double bottom break and  have a potential price target of 20.00.

gcc1 Point & Figure Charts:  Analyzing patterns for market rotation

TLT  (ishares 20+ year Treasury Bond)

The last Point & Figure chart we are going to take a look at is the TLT.  Another major macro asset class ETF which is resting on an up-trend line that has been intact for quite some time.  The potential measured move target would be 107.00.  Again, this signal has not been confirmed yet but the development should be noted due to the size of the US treasury market and its importance regarding asset allocation and interest rates in general.

tlt1 Point & Figure Charts:  Analyzing patterns for market rotation

Conclusion:

Let’s give a brief recap of what we just discussed above.   Our primary goal in this post is to use basic point and figure charts to help identify any macro related themes which may be starting to take shape.   The reason this is important is that due to size of these asset classes.  Major technical developments may influence money flows and asset allocation going forward.   Will a shift into US Dollars and out of both commodities/fixed income help contribute additional money flow into global equity markets?  Time will tell.   Furthermore, a stronger dollar, lower commodity prices, and higher interest rates all play an effect our daily lives too.

***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).     

Dorsey Wright currently has a position in TLT.

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Podcast: PnF RS Key Takeaways

September 15, 2014

Podcast: PnF RS Key Takeaways

Andy Hyer & Chris Moyer discuss key takeaways from the following white papers by John Lewis:

PnF Relative Strength Signals

PnF RS Box Sizes

Implementing PnF RS Signals

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Weekly RS Recap

September 15, 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 (9/8/14 – 9/12/14) is as follows:

ranks 09.15.14 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

September 12, 2014

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 9/11/14.

sector 09.12.14 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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Room to Run

September 10, 2014

Piper Jaffray Sr. Technical Analyst, Craig Johnson, compares today’s markets to the 1950′s in their recent Informed Investor report:

History Does Not Always Repeat, but It Does Seem to Rhyme with the Early 1950′s

As market technicians we often use history as a guide to understanding current market environments.  Two years-ago when we wrote our “SPX 2000 – The Next Great Equity Rally” report we drew comparisons with the latter stages of the 1970′s bear market and start of a new secular bull market (at that point unconfirmed as the SPX was still below its ’00 and ’07 highs).  However, while the comparison with the late 1970′s was good, we now believe a better comparison is with the early 1950′s.  First, in both periods, the U.S. economy was just starting to emerge from an extended period of weakness.  As you can see in the chart below, the broader market has been in a secular consolidation range for more than 10 years.  Second, similarly to the bear market in the 1940′s, the bear market that began in 2000 had two well-defined peaks before breaking out to new highs.  Third, interest rates in the U.S. in the 1940-1950 period were near historic lows (similar to today).  Thus, based on history, we believe the broader market has now entered the early stages of a secular bull market that we believe still has a lot of room to run.  In prior secular bull markets, investors made five times their money from 1952 through the mid-1960′s and fifteen times their money  from 1982 through 1999.

piper Room to Run

While there is no need to commit to a static allocation that counts on the parallel to the 1950′s continuing and resulting in another decade+ of strong equity returns, I do think the comparison is plausible.  At a minimum, investors should invest in strategies that give them the opportunity to participate in secular bull markets.  After all, part of risk management is managing (participating) on the upside.  Frequent conversations with financial advisors confirm to me that there are many that remain focused on mitigating losses when “the other shoe drops.”  The psychological damage inflicted on investors in the last two bear markets has left many seemingly unable to see anything but risk.

At Dorsey Wright, we are big proponents of employing strategies that can help mitigate the downside risk.  However, there are ways to do that without locking the investor into consistently conservative strategies.  Three ideas for strategies that seek to mitigate some of the downside risk (but also have the ability to “play offense”) are shown below:

  1. DWA PowerShares Sector 4 Model (has the ability to rotate into cash in poor equity markets)
  2. Global Macro SMA (available on the Masters and DMA platforms at Wells Fargo and several other platforms)
  3. Systematic RS Growth SMA (has the ability to raise up to 50 percent cash in bear markets)

As an example, although the Systematic RS Growth portfolio has the ability to get very defensive in bear markets, it can play strong offense and has actually outperformed the S&P 500 over the past 5 years.

For questions about any of these strategies, please contact Andy Hyer at 626-535-0630 or andy@dorseywright.com

Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any se­curity. This report does not attempt to examine all the facts and circumstances which may be relevant to any company, industry 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.

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Relative Strength is a measure of price momentum based on historical price activity.  Relative Strength is not predictive and there is no assurance that forecasts based on relative strength can be relied upon.

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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Parsing the Narrative

September 10, 2014

There are changes afoot in the Fast Food industry.  From USA Today:

Fast-food’s old guard is giving way to a savvy new guard that is slowing-down the process and giving a needed nod to healthier ingredients…

…”Today’s 22-year-olds don’t frequent fast-food like the generation before them,” says Robin B. DiPietro, professor of hospitality at University of South Carolina. “Fast food will have to morph into something fresher and healthier.”

Among the companies that the article suggests are the future of Fast Food: Chipotle (CMG), Panera (PNRA), and Starbucks (SBUX).

Among the companies that are labeled the has-beens: Burger King (BKW), McDonald’s (MCD), Wendy’s (WEN), and KFC (owned by YUM).

Do the technicals match the narrative?  Generally, yes.  But, not in every case.  Dorsey Wright assigns a technical attribute score to every stock, which is derived from the relative strength and the trend of the stock.  The attributes range from 0-5, with 5 being the strongest.

Fast Food of the future (per article):

new Parsing the Narrative

Fast Food of the past (per article):

old Parsing the Narrative

A technical screen allows us to employ a variation of the old adage “Trust but verify.” The story line makes sense. Some of my own experiences tend to support the narrative that there are indeed major changes taking place in Fast Food, but there are clearly exceptions to the rule.  The stocks of some of the old guard are doing just fine, while the stocks of some of those thought to be the future are in fact lagging.

As with all narratives, best to let the technicals filter through the ideas to identify those that are being validated in the marketplace.  Change is a constant and relative strength is well-suited to objectively identify when those changes take place.

This example is presented for illustrative purposes only and does not represent a past recommendation.  A list of all holdings for the trailing 12 months is available upon request.  Past performance is no guarantee of future returns.  A 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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PIE in the News

September 10, 2014

ETF Trends highlights the performance and allocations of the PowerShares DWA Emerging Markets Momentum ETF:

The resurgence of emerging markets exchange traded funds has received ample and deserving attention this year…

…With momentum returning to developing world equities, the PowerShares DWA Emerging Markets Momentum Portfolio (NYSEArca: PIE) is once again flexing its muscles with a third-quarter gain of 4.7%. Investors have responded, having poured $50.5 million in new assets into PIE over the past month, a total surpassed by only three PowerShares ETFs, according to issuer data.

Like some U.S.-focused ETFs that overtly espouse the virtues of momentum in their names, PIE’s status as a momentum ETF can lead some investors to believe the fund is something it is not. Just as some U.S.-focused momentum ETFs are not chock full of biotech, social media and other so-called momentum stocks, PIE is not always littered with the highest beta and most volatile emerging markets. [A Slice of PIE]

At the moment, PIE is actually rather light on emerging markets that fit the bill as “momentum markets” (think Indonesia and the Philippines). India is not even part of PIE right now.

What is crucial to remember with PIE is that the Dorsey Wright Emerging Markets Technical Leaders Index, PIE’s underlying index, is built on price momentum, which can apply to a plethora of countries and stocks. As PIE highlights, there is a big difference between positive price momentum, which is not confined by sector, and momentum as it applies to biotech or Internet stocks. [Some Enhanced ETFs Beat Their Benchmarks]

PIE is currently tilted away from perceived momentum emerging markets and heavily allocated to two of the developing world’s most advanced and lowest beta countries: South Korea and Taiwan. Those countries combine for 39% of the ETF’s weight, indicating a momentum ETF can also credibly sport conservative credentials.

Sometimes forgotten in the discussions of PIE’s merits is the ETF’s sector composition. This is not the run-of-the-mill emerging markets ETF dominated by the energy, financial services and materials sectors or some combination of the three. In fact, those sectors combine for just 19.4% of PIE’s weight.

PIE is more levered to the emerging markets consumer story with a combined 34.3% weight to discretionary and staples stocks as well as being more exposed to the improving exports theme with a 16.1% tech weight.

Past performance is no guarantee of future returns.  A relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  See www.powershares.com for more information.  Dorsey Wright is the index provider for the PowerShares DWA Emerging Markets Momentum ETF.

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