High RS Diffusion Index

May 11, 2016

The chart below measures the percentage of high relative strength stocks (top quartile of our ranks) that are trading above their 50-day moving average (universe of mid and large cap stocks.)  As of 5/10/16.

diffusion

The 10-day moving average of this indicator is 73% and the one-day reading is 82%.

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Investors cannot invest directly in an index.  Indexes have no fees.  Past performance is no guarantee of future returns.  Potential for profits is accompanied by possibility of loss.

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Relative Strength Spread

May 10, 2016

The chart below is the spread between the relative strength leaders and relative strength laggards (top quartile of stocks in our ranks divided by the bottom quartile of stocks in our ranks; universe of U.S. mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.    As of 5/9/16:

spread

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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Curiosity Conversations

May 9, 2016

Brian Grazer is the producer of A Beautiful Mind, Apollo 13, Splash, Arrested Development, 24, 8 Mile Empire, and J. Edgar, among others.  His films and TV shows have been nominated for forty-three Academy Awards and 149 Emmys.  In 2007, he was named one of Time‘s 100 Most Influential People in the World.

He also has a habit of constantly seeking out “curiosity conversations” and has interviewed the likes of Andy Warhol, Barack Obama, Princess Diana, Michael Jackson, Norman Mailer and many more.  From his book, A Curious Mind:

I started having what I called curiosity conversations.  At first, they were just inside the business.  For a long time, I had a rule for myself:  I had to meet one new person in the entertainment business every day.  But pretty quickly I realized that I could actually reach out and talk to anyone, in any business that I was curious about.  It’s not just showbiz people who are willing to talk about themselves and their work–everyone is.

For thirty-five years, I’ve been tracking down people about whom I was curious and asking if I could sit down with them for an hour.  I’ve had as few as a dozen curiosity conversations in a year, but sometimes I’ve done them as often as once a week.  My goal was always at least one every two weeks.  Once I started doing the curiosity conversations as a practice, my only rule for myself was that the people had to be from outside the world of movies and TV…

…I have meetings and phone calls and conversations all day long.  For me, every one of those is in fact a curiosity conversation.  I don’t just use curiosity to get to meet famous people, or to find good scripts.  I use curiosity to make sure movies get made—on budget, on time, and with the most powerful storytelling possible.  I’ve discovered that even when you’re in charge, you are often much more effective asking questions than giving orders…

…I use curiosity as a management tool.  I use it to help me be outgoing.  I use curiosity to power my self-confidence.  I use it to avoid getting into a rut, and I use it to manage my own worries…

You’re born curious, and no matter how much battering your curiosity has taken, it’s standing by, ready to be awakened

…Curiosity itself is essential to survival.  But the power of human development comes from being able to share what we learn, and to accumulate it.  And that’s what stories are: shared knowledge

…I want the opportunity to be different.  Where do I get the confidence to be different?  A lot of it comes from curiosity….

…That’s what curiosity has done for me, and what I think it can do for almost anyone.  It can give you the courage to be adventurous and ambitious.

My emphasis added.  I could go on, but hopefully the excepts that I have shared give you a flavor of the role that curiosity conversations have played in defining and shaping Brian Grazer’s life.  I found his book to be fascinating.

And I couldn’t help but think of its implications to our business.  What is the difference between those who succeed in financial services and those who struggle along or fail?  Surely, connections, storytelling ability, confidence, persistence, and wisdom are among the defining characteristics of those who succeed.  And what better way to develop those attributes that to constantly seek out opportunities to learn from people of all walks of life.  Perhaps, you are saying to yourself, “Yea, but if I reach out to someone and ask for an hour of their time to learn from them, they will surely perceive a hidden agenda of simply trying to turn them into a client.”  There is no doubt that this will be a major obstacle.  Brian Grazer’s book was filled with all the opposition he received from people about sitting down with him for an interview.  But, he persisted.  Furthermore, as Grazer points out, people generally like talking about themselves and many people will be flattered by your request.

Financial services is nothing if not a people business.  A more organized and concerted effort to engage in these types of conversations could very well enrich our lives in many ways beyond the monetary.

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Weekly RS Recap

May 9, 2016

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 (5/2/16 – 5/6/16) is as follows:

ranks

This example is presented for illustrative purposes only and does not represent a past or present recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  The performance above is based on pure price returns, not inclusive of dividends, fees, or other expenses.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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Sector Performance

May 6, 2016

The table below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 5/5/2016.

sector

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

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High RS Diffusion Index

May 4, 2016

The chart below measures the percentage of high relative strength stocks (top quartile of our ranks) that are trading above their 50-day moving average (universe of mid and large cap stocks.)  As of 5/3/16.

diffusion

The 10-day moving average of this indicator is 69% and the one-day reading is 70%.

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Investors cannot invest directly in an index.  Indexes have no fees.  Past performance is no guarantee of future returns.  Potential for profits is accompanied by possibility of loss.

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Relative Strength Spread

May 4, 2016

The chart below is the spread between the relative strength leaders and relative strength laggards (top quartile of stocks in our ranks divided by the bottom quartile of stocks in our ranks; universe of U.S. mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.    As of 5/3/16:

spread

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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Combining Momentum & Low Volatility for Enhanced Alpha

May 2, 2016

Most market participants would agree that four of the most popular factor based investment methods used today are often considered to be momentum, value, growth, and low volatility.   At Dorsey Wright, we are often asked the best way to combine Dorsey Wright strategies (momentum/relative strength) with these other commonly used factor strategies.      Proponents of any smart beta strategy will often support all of these strategies, even admitting that there are pros and cons to each factor.  Momentum, for example, is the idea of investing in securities or asset classes using a previous time period that has performed well, most commonly a 12 month trailing return.  This type of strategy tends to do well during periods of sustained trends, but lags others such as value and low volatility during choppy markets.

During the 1st quarter of 2015, the majority of momentum/relative strength based strategies tended to fare better than the other factor based strategies mentioned above.  One of the largest contributing factors to this alpha generation during Q1 of 2015 was the dispersion which existed amongst US equities.   For example, the energy sector saw a sharp decline while sectors such as healthcare, biotech, and consumer discretionary fared much better.    Fast forward to the Q1 of 2016 and we have a different story on our hands.   Momentum strategies have struggled due to a lack of sustained sector leadership, while investment themes such as low volatility and value have performed much better.

Given the recent changes in sector leadership, we thought it would be interesting to go back and take a look how a few of these factor methods have compared to each other in terms of performance, volatility, etc.  The table below is a simple study complied over the last 18 years comparing PDP (Momentum), SPLV (low volatility), and SPY (benchmark).   Although momentum (PDP) outperforms both SPLV (low volatility) and SPY (benchmark), the added alpha generation came with a few drawbacks (mainly the potential for elevated volatility).   While periods such as these can be difficult, there are certainly ways to minimize the downside when they do come about in the market.   For example, using a systematic process can be a huge advantage, as it helps remove the human emotion which often times is magnified during periods of heightened market volatility.   Let’s take a look at the table below and see what type of results each of these portfolios (momentum, low volatility, and the equity index) generated over the allotted time period.

pdp

PDP inception date: March 1, 2007 – data prior to inception is based on a back-test of the underlying index.

SPLV inception date: May 5, 2011 – data prior to inception is based on a back-test of the underlying index.

When we take a closer look at the returns, we can see just how much the momentum and low volatility factors  differ in terms of performance at various cycles in the market (note 1999, 2003, and 2008 just to name a few).   The idea of implementing both momentum and low volatility into a portfolio would then sure seem logical to most money managers.   After all, any type of low volatility factor investing can typically be thought of as a reversion to the mean type of trade, which most would agree is the exact opposite goal of momentum investing (i.e.  looking for “fat tail” trades that deviate from the mean).    More simply stated, combining two different factor allocations in a portfolio which tend to do well during different market cycles would certainly seem to be an added benefit for any portfolio manager looking to reduce volatility and continue to generate alpha.

pdpsplv

The graphic above does a good job of displaying the differences returns year in and year out.  In fact, the correlation of excess returns between momentum and low volatility ends up at roughly-.70.    We plan to further visit this topic in our next blog post in order to give readers an a better idea on the type of results seen when combining these two factors in both a static and flexible allocations.   For now, the important thing to keep in mind is that in today’s investment world market participants should take full advantage of the full suite of products out there in order to help achieve alpha for their clients.    Using momentum and low volatility is just one way this can be done.   More detailed performance and risk analysis to follow in our next post on this topic.

Performance data for SPLV prior to 05/05/2011 and PDP prior to 3/01/2007 is the result of backtested underlying index data.  Investors cannot invest directly in an index.  Indexes have no fees.  The returns of the ETFs above do not include dividends, or all transaction costs.  Back-tested performance is hypothetical (it does not reflect trading in actual accounts) and is provided for informational purposes to illustrate the effects of the strategy during a specific period.  Back-tested performance results have certain limitations. Back-testing performance differs from actual performance because it is achieved through retroactive application of an investment methodology designed with the benefit of hindsight. Back-tested performance does not represent the impact of material economic and market factors might have on an investment advisor’s decision making process if the advisor were actually managing client money. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.

Neither the information within this post, nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities  This article does not purport to be complete description of the securities to which reference is made.

DWA provides the underlying index for the PDP, discussed above, and receives licensing fees from PowerShares.

           

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Weekly RS Recap

May 2, 2016

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 (4/25/16 – 4/29/16) is as follows:

ranks

This example is presented for illustrative purposes only and does not represent a past or present recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  The performance above is based on pure price returns, not inclusive of dividends, fees, or other expenses.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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Sector Performance

April 28, 2016

The table below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 4/27/16.

gics

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

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High RS Diffusion Index

April 27, 2016

The chart below measures the percentage of high relative strength stocks (top quartile of our ranks) that are trading above their 50-day moving average (universe of mid and large cap stocks.)  As of 4/26/16.

diffusion

The 10-day moving average of this indicator is 79% and the one-day reading is 66%.

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Investors cannot invest directly in an index.  Indexes have no fees.  Past performance is no guarantee of future returns.  Potential for profits is accompanied by possibility of loss.

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Relative Strength Spread

April 27, 2016

The chart below is the spread between the relative strength leaders and relative strength laggards (top quartile of stocks in our ranks divided by the bottom quartile of stocks in our ranks; universe of U.S. mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.    As of 4/26/16:

spread

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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Performance Within Context of Expectations

April 25, 2016

Just how baffling can the stock market be to investors?  So often the market just does not behave the way investors think it should.   Morgan Housel of The Motley Fool provides some data points that can make investor’s heads explode:

Coca-Cola is fighting 12 consecutive years of soda consumption decline. Its stock is at an all-time high.

Tesla is changing the world, and orders for its new car are off the charts. Its stock is lower than it was 18 months ago.

Cigarette consumption has dropped 44% since 1981. Altria stock is up 71,000% since 1981.

WalMart net income has tripled since 2000. Its stock has lost 1.5% since 2000.

Apple has earned almost a quarter trillion dollars of profit since 2012. Its stock has barely budged.

Amazon’s profits round to zero since 2012. Its stock has tripled.

2009 was one of the worst years for the economy in a century. The market rose 27%.

2015 was a good year for the economy. The market rose 1%.

Brazil’s economy is a disaster. Its stock market is flat over the last two years.

America is enjoying the longest streak of low unemployment claims in four decades. Its stock market is also flat over the last two years.

And so on.

Housel sums up the problem:

Outcomes are determined by performance within the context of expectations, with importance heavily weighted toward the latter. And if predicting future performance is hard, calibrating them against expectations is close to sorcery…

…In a world where analysts focus most of their time analyzing performance – what earnings will do, or what the economy will do – and it’s no wonder we struggle to predict outcomes.

This is where many investors simply throw up their hands and give up on finding a logical, organized way to analyze the market.  It is also where investors who are introduced to the Point and Figure method of technical analysis “see the light” in the sense that the market gets boiled down to understanding that price is the intersection between supply and demand.  The motivation for buying and selling activity may remain elusive, but the imbalance between supply and demand can be seen in the chart.  Momentum of the trend of the security can be identified and derived by looking at the relative strength of the security compared to all other securities in the investment universe.  With that information, investors can invest in the market as it really is and not as they wish it to be.

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Weekly RS Recap

April 25, 2016

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 (4/18/16 – 4/22/16) is as follows:

ranks

This example is presented for illustrative purposes only and does not represent a past or present recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  The performance above is based on pure price returns, not inclusive of dividends, fees, or other expenses.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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Relative Strength Spread

April 19, 2016

The chart below is the spread between the relative strength leaders and relative strength laggards (top quartile of stocks in our ranks divided by the bottom quartile of stocks in our ranks; universe of U.S. mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.    As of 4/18/16:

spread

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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Finding an Edge

April 18, 2016

For NBA fans, watching the Golden State Warriors this season has been nothing short of spectacular.  With a record of 73-9, the Warriors are now officially the greatest regular-season NBA basketball team in history.  It’s easy to watch Stephen Curry, Klay Thompson and crew in action and chalk it up to sheer talent.  Sure, there is plenty of talent to be found on this team (as there is on many of the other NBA teams).  However, as Ben Cohen of the WSJ reports, this team and this strategy have been years in the making.  Two excerpts shed some light on their strategy:

The data dive yielded many insights, but the Warriors eventually zeroed in on the 3-point line. NBA players made roughly the same percentage of shots from 23 feet as they did from 24. But because the 3-point line ran between them, the values of those two shots were radically different. Shot attempts from 23 feet had an average value of 0.76 points, while 24-footers were worth 1.09…

…The team realized that any possession that ended with a 3-point attempt by Mr. Curry was worthwhile—and that they would never discourage him from taking one. In this, the season of Mr. Curry’s unleashing, the Warriors are shooting 17% more threes than a season ago. Mr. Curry is attempting more than 11 a game. No NBA team had ever had a player attempt more than nine. Last season he hit 286 threes. This season he is on pace for about 400.

Shooting voluminous amounts of 3-point shots can seem impractical.  When a shooter goes through a shooting slump, continuing to shoot from long distance can seem foolish.  Yet, apparently, the Warriors “never discourage” Curry from shooting from 3-point land.

What is the lesson?  If you find a unique edge, relentlessly exploit it!

This is not dissimilar to the findings of John Lewis’ February 2016 white paper Point and Figure Relative Strength Signals.  What PnF relative strength configuration leads to the best results over time?  To answer this question, the paper ran a test from 1990-2015 in which a universe of 1,000 securities was evaluated based on PnF relative strength signal and categorized into one of four portfolios on a monthly basis.  As shown below, the portfolio made up of stocks that were on a Point and Figure buy signal and in a column of X’s generated far better returns than the other portfolios over time.  These are the stocks that had the best intermediate and longer term relative strength versus the broad market.

RS Group

annualized

Critics of relative strength  may say it is impractical or even foolish to buy stocks simply because they have stronger momentum than the market.  However, we have found an edge and we are seeking to relentlessly exploit it.

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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Weekly RS Recap

April 18, 2016

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 (4/11/16 – 4/15/16) is as follows:

ranks

This example is presented for illustrative purposes only and does not represent a past or present recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  The performance above is based on pure price returns, not inclusive of dividends, fees, or other expenses.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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Sector Performance

April 15, 2016

The table below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 4/14/16.

sector

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

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Q1 Manager Insights

April 15, 2016

The year got off to a rocky start.  After the holidays ended and everyone returned to work, the stock market had a sharp selloff that left it in negative territory for January.  The market would eventually bottom out in mid-February and continue to recover through the end of the quarter.  Despite the early selloff, the S&P 500 actually finished up 1.3% for the quarter.  Small cap and International stocks didn’t fare as well as both of those categories finished in negative territory for the first three months of the year.  Fixed Income and interest rate sensitive securities were some of the best performing areas during the first quarter with broad bond market indexes finishing up about 3%.  Commodities also finished the quarter in negative territory, but did stop the relentless slide they had been on since last year.

Looking at the summary numbers for the first quarter might lead you to believe it was a ho-hum first three months of the year, but that was certainly not the case.  We saw a tremendous amount of rotation under the surface that had a big impact on all of our strategies.  In this piece, we normally like to update you on some big picture items that are affecting the markets and economy, but we felt it was more appropriate to go into greater detail about the specifics of the rotation we saw and how it affected our strategies.

The overarching theme for our investing style was that the laggards finally had their day in the sun.  Simply put, the stocks and asset classes that had been leading the market lower since last summer finally stopped going down and actually went up a lot from the lows.  This is known as a laggard rally, and is never a time when we perform well.  These laggard rallies come along every so often so we are used to them by now.  Everyone realizes the leaders can’t lead forever so we view these periods as an opportunity to refresh the portfolios and find new leadership.  More importantly, they don’t cause a change in our strategy, but they do cause trading activity to pick up as the old leadership is removed from the portfolios and our process tries to find the emerging leadership.  So, if you have noticed a lot more trading in your account recently, that is the reason why.

The changes we have made in the portfolios really changed the characteristics of some of the strategies.  One example of this was the weakening U.S. Dollar.  The Dollar had been strong for quite some time, and finally exhibited enough weakness that we needed to remove it from the portfolios.  We saw a weak dollar asset, Gold, added to many of the strategies.  The strong Dollar had caused quite a headwind for assets such as international equities and commodities, which generally do better in a weak dollar environment.  If the dollar continues to weaken, we expect to see more of these types of assets come into the strategies.  That would actually be a welcome change as it would allow our strategies to do what they do best: find bull markets anywhere around the globe (and in places many people are overlooking).

On the individual equity side, it was much the same as the asset class side.  The so-called FANGs (Facebook, Amazon, Netflix, and Google) were stellar performers last year, but had a difficult start to the year.  What really performed well were the things like energy and basic materials that had such dreadful performance last year.  In some of our other writing we touched on these issues during the quarter.  One example of this is when we look at the S&P 500 industry groups.  The worst relative strength groups outperformed the best performing group by more than 12% during the first quarter!  That was completely opposite from last year when just avoiding the worst groups was the key to outperformance.  Whether these groups can continue to perform is anyone’s guess, but often times they have a large rally off the bottom and then settle in as average performers while they work out their issues.

We are 100% sure (which you almost never hear in this business!) that some of the changes we made to the portfolios won’t work out and we will have to continue to search for leadership.  That is totally normal, and we expect that to be the case over the coming months.  If you have any questions, please don’t hesitate to call us.

Performance numbers provided are the performance of indexes that are not available for direct investment and do not include dividends or transaction costs. Past performance is not indicative of future results and there is no assurance that any forecasts mentioned in this report will be attained.  Stocks offer growth potential but are subject to market fluctuations. Dividends are not guaranteed; companies can reduce or eliminate their dividend at any time. There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions.  Technical analysis is just one form of analysis. You may also want to consider quantitative and fundamental analysis before making any investment decisions.  The information contained herein 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 material 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 (“information providers”).  However, such information has not been verified by Dorsey, Wright & 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.  DWA and the information provider accept no liability to the recipient whatsoever whether in contract, in tort, for negligence, or otherwise for any direct, indirect, consequential, or special loss of any kind arising out of the use of this document or its contents or of the recipient relying on any such recommendation or information (except insofar as any statutory liability cannot be excluded).  Any statements nonfactual in nature constitute only current opinions, which are subject to change without notice.  Neither the information nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities, commodities or exchange traded products.  This document does not purport to be complete description of the securities or commodities, markets or developments to which reference is made. Potential for profits is accompanied by possibility of loss.    You should consider this strategy’s investment objectives, risks, charges and expenses before investing.  The examples and information presented do not take into consideration commissions, tax implications, or other transaction costs.  The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy.

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High RS Diffusion Index

April 14, 2016

The chart below measures the percentage of high relative strength stocks (top quartile of our ranks) that are trading above their 50-day moving average (universe of mid and large cap stocks.)  As of 4/13/16.

diffusion

The 10-day moving average of this indicator is 95% and the one-day reading is 93%.

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Investors cannot invest directly in an index.  Indexes have no fees.  Past performance is no guarantee of future returns.  Potential for profits is accompanied by possibility of loss.

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Relative Strength Spread

April 12, 2016

The chart below is the spread between the relative strength leaders and relative strength laggards (top quartile of stocks in our ranks divided by the bottom quartile of stocks in our ranks; universe of U.S. mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.    As of 4/11/16:

spread

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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The Market is a Zoo and March was a Lion!

April 11, 2016

By: Efram Slen, Global Index Product Development Manager, Nasdaq

March certainly roared like a lion this year following two difficult months at the start of 2016. Major U.S. indexes gained more than 6% each during the month of March:

Nasdaq-100 |+6.7%

S&P 500 |+6.6%

Dow Jones Industrial Average |+7.0%

During the month, Federal Reserve Chair, Janet Yellen, said the central bank will move cautiously as it weighs interest rate hikes in light of a weak global economy and stubbornly low inflation, raising questions about whether policymakers will make a rate move this spring.

Perhaps one of the more interesting stories of the month was the resilient comeback of Emerging Markets. Monetary easing by major central banks, as well as a firming of oil prices and other commodities during much of the quarter, powered emerging market stocks higher.

Nasdaq Emerging Markets Index | +12.7%

Figure A

 

Commodities also witnessed a surge:

Nasdaq Commodity Crude Oil ER Index |+8.2%

The Federal Reserve’s cautious stance on future tightening has dampened the U.S. Dollar, aiding a boost to broader commodities.

The Nasdaq Dividend and Income Family were also beneficiaries as yields on 10-Year U.S. Treasuries dropped sharply since mid-March, pushing investors to look elsewhere for yield.

 

Index BBG Ticker Name 1-Month Performance
DVG DVG NASDAQ US Dividend Achievers Select 6.0%
DAA DAAX NASDAQ US Broad Dividend Achievers 6.2%
DAY DAY NASDAQ US Dividend Achievers 50 7.9%
DAT DAT NASDAQ International Dividend Achievers 9.8%
NQMAUS NQMAUS NASDAQ US Multi-Asset Diversified Income 5.7%
NQ96DIVUS NQ96DVU NASDAQ Technology Dividend 9.4%

 

For more information, please click here and a member of our team will contact you directly.

Nasdaq has consolidated performance data for our top 50 most-watched indexes. View the full report here.

 

 

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Weekly RS Recap

April 11, 2016

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 (4/4/16 – 4/8/16) is as follows:

ranks

This example is presented for illustrative purposes only and does not represent a past or present recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  The performance above is based on pure price returns, not inclusive of dividends, fees, or other expenses.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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Most investing is simple, but we complicate it.

April 6, 2016

Morgan Housel, in a 2014 WSJ article, shared some wise words to help demystify the stock market.

Companies earn a profit.  When investors are in a good mood, they pay up for that profit.  When they are in a bad mood, they pay less.  Future stock returns will equal profit growth, plus or minus the change in investor attitudes.

That really is all that is going on in the stock market.  But we complicate it, scrutinizing every market detail for evidence of what is coming next.

At their core, market forecasts are an attempt to predict investor’s emotions—say, how happy people will be in 2024.  An there is just no reliable way to do that.

A sensible way to invest is to assume companies will earn a profit, and assume the amount investors will be willing to pay for that profit will fluctuate sporadically.  Those emotional swings will balance out over time, and over the long run the profits companies earned will accrue to investor’s pockets.

Everything else—what stocks might do next quarter, or when the next crash might come—can be needlessly complicating.  Investors should learn to take the simple route.

Housel’s description of how the stock market works is spot on.  However, investors still have to decide what to do with this information.  Perhaps, they will choose buy and hold index investments.  Perhaps, they will choose to employ active investment strategies in an attempt to improve the risk/return profile of a passive investment.  If they choose the latter, even for a portion of their overall allocation, they would be well served to choose active investment strategies that take into account the reality that stock prices are determined by a combination of factors that include corporate profits AND investor emotions.

Key to the rationale for momentum investing is that one never knows, nor does one necessarily care, the exact motivation of buyers and sellers in the marketplace.  For momentum investors, it is enough to see the net effect of all buying and selling pressure for stocks and then to rank a universe of securities by their momentum, buying the securities with the strongest momentum and holding them for as long as they remain strong.

What should investors avoid?  As Housel points out, forecasting is an exercise in futility.  Furthermore, expecting the stock market to be a simple math problem related to corporate profits is another way for investors to set themselves up for disappointment.

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  

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High RS Diffusion Index

April 6, 2016

The chart below measures the percentage of high relative strength stocks (top quartile of our ranks) that are trading above their 50-day moving average (universe of mid and large cap stocks.)  As of 4/5/16.

diffusion

The 10-day moving average of this indicator is 96% and the one-day reading is also 96%.

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Investors cannot invest directly in an index.  Indexes have no fees.  Past performance is no guarantee of future returns.  Potential for profits is accompanied by possibility of loss.

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