Relative Strength Spread

August 12, 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 8/11/14:

spread 08.12.14 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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Systematic RS Int’l: Risk-Adjusted Returns

August 11, 2014

Are you getting paid for the risk that you are taking?  There are a number of statistics that are designed to help an investor make that evaluation for any given strategy.  Sharpe ratio, which measures unit of return per unit of standard deviation can be helpful in this regard.   In the case of our Systematic RS International portfolio (available as a separately managed account), evaluating the Sharpe ratio, in addition to standard deviation and annualized returns can be helpful.  Looking at the statistics below one can see that the Systematic RS International (Net) has outperformed the MSCI EAFE Index by 5.58% annually since its inception date of March 31, 2006.  However, one would also note that the standard deviation (volatility) of the Systematic RS International portfolio has been 4.42% higher than the MSCI EAFE.  Do those excess returns justify the higher volatility?

intl stats1 Systematic RS Intl: Risk Adjusted Returns

Source: Dorsey Wright.  Click here for disclosures.

Add to those statistics the fact that the Sharpe ratio for the Systematic RS International portfolio has been nearly double that of the MSCI EAFE since March 31, 2006 and I would suggest that the answer is yes to the question of whether or not an investor is getting adequately compensated for the risk taken in this portfolio.

sharpe ratio1 Systematic RS Intl: Risk Adjusted Returns

The statistics above are based on total price returns, inclusive of dividends and transaction costs.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

Performance since inception is shown below:

perf intl Systematic RS Intl: Risk Adjusted Returns

E-mail andyh@dorseywright.com or call 626-535-0630 to receive a fact sheet for this portfolio.

Historical Performance Of the Dorsey, Wright Systematic Relative Strength International Strategy The performance represented in this brochure is based on monthly performance of the Systematic Relative Strength International Model. Net performance shown is total return net of management fees for all Dorsey, Wright & Associates managed accounts, managed for each complete quarter for each objective, regardless of levels of fixed income and cash in each account. The advisory fees are described in Part II of the adviser’s Form ADV. The starting values on 3/31/2006 are assigned an arbitrary value of 100 and statement portfolios are revalued on a trade date basis on the last day of each quarter. All returns since inception of actual Accounts are compared against the MSCI EAFE Total Return Index. The MSCI EAFE Total Return Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the United States and Canada and is maintained by MSCI Barra. A list of all holdings over the past 12 months is available upon request. The performance information is based on data supplied by the Manager or from statistical services, reports, or other sources which the Manager believes are reliable. Definition of statistical terms: Performance: Net annualized performance. Volatility: Annualized standard deviation. Standard deviation shows how much variation or dispersion exists from the average value. Beta: A measure of systematic or market-related risk. Alpha: A measure of non-market return associated with the portfolio. See Modern Portfolio Theory for more information. Correlation: Compresses covariance into a range of +/- 1. A negative correlation indicates an inverse relationship whereas a positive correlation is indicative of a direct relationship. Annual turnover: An annualized measure of the percentage of the portfolio that was traded. There are risks inherent in international investments, which may make such investments unsuitable for certain clients. These include, for example, economic, political, currency exchange, rate fluctuations, and limited availability of information on international securities. Past performance does not guarantee future results. In all securities trading, there is a potential for loss as well as profit. It should not be assumed that recommendations made in the future will be profitable or will equal the performance as shown. Investors should have long-term financial objectives when working with Dorsey, Wright & Associates.

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Diversification by Style Box or by Risk Factor?

August 11, 2014

Andrew Ang, in his new book Asset Management: A Systematic Approach to Factor Investing, identifies a key obstacle for many wealthy investors–specifically business owners—who liquidate and then look to invest those assets in the financial markets:

It can be counterintuitive for rich individuals to realize that preserving wealth involves holding well-diversified portfolios that have exposure to different factor risk premiums.  They created their wealth by doing just the opposite: holding highly concentrated positions in a single business.

We’ve probably all heard someone make the case against diversification by saying something along the lines of, “My plan has been to put all my eggs in one basket and to watch that basket very closely!”  However, at some point most people have a desire to diversify their risks.

Two of the most rigorously tested risk factors are momentum and low volatility.  Compelling research suggests that both factors have demonstrated the ability to outperform over time and these two factors have the added benefit of having a relatively low correlation to one another.  For example, consider the correlation of the PowerShares DWA Momentum ETF (PDP) and the PowerShares S&P 500 Low Volatility ETF (SPLV) since 2011, the inception for SPLV.

correlations1 Diversification by Style Box or by Risk Factor?

Source: Yahoo! Finance and iShares.  The correlations above are based on monthly total returns, inclusive of dividends, but not inclusive of transaction costs.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  

While much of the industry is still focused on seeking diversification between style boxes, I believe investors would be better served to start focusing on diversification between risk factors, like momentum and low volatility.   As you can see, there has been much lower correlation between PDP and SPLV than there has been between Growth and Value over this time.

Dorsey Wright & Associates is the index provider for the PowerShares DWA Momentum ETF (PDP).

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Weekly RS Recap

August 11, 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 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 (8/4/14 – 8/8/14) is as follows:

avg perf 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

August 8, 2014

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 8/7/2014.

sector 08.08.14 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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July Arrow DWA Funds Review

August 8, 2014

7/31/2014

The Arrow DWA Balanced Fund (DWAFX)

At the end of July, the fund had approximately 40% in U.S. equities, 27% in Fixed Income, 22% in International equities, and 11% in Alternatives.

We had one change in July—replaced a position in Netherlands with Taiwan.  The addition of Taiwan is the first signs of Emerging markets starting to come back into the fund.  Developed international markets have been stronger than Emerging markets for quite some time, but that is showing some signs potentially changing.  For the month, our best performing holdings were Technology, Real Estate, and Healthcare, while much of our exposure to Europe was a drag.  If we continue to see weakness in our International equity holdings, this could be an area where we see more changes in the coming weeks.

DWAFX lost 2.46% in July, and is up 0.27% YTD through 7/31/14.

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

dwafx July Arrow DWA Funds Review

The Arrow DWA Tactical Fund (DWTFX)

At the end of July, the fund had approximately 89% in U.S. equities and 9% in Real Estate.

We had a couple of trades in July—sold two of our European equity positions and Agricultural Commodities and bought Large Cap Growth, a Dividend fund, and Real Estate.  The declining relative strength of U.S. Small Caps has been one of the key changes in the fund so far this year.  We came into 2014 with 30 percent exposure to U.S. Small Caps, but now have zero.  The purchases this month reflect the continued relative strength improvement of  U.S. Large Caps.  In July, our Healthcare position and a couple of our other Large Cap  positions held up relatively well, while some of our Mid Cap and European equity positions were a drag on the portfolio.

DWTFX lost 3.12% in July, and is down 0.68% YTD through 7/31/14.

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

dwtfx July Arrow DWA Funds Review

A list of all holdings for the trailing 12 months is available upon request.  Past performance is no guarantee of future returns.  These relative strength strategies are NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  See www.arrowfunds.com for a prospectus.

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Bullish Sentiment Dissipates–Again

August 7, 2014

From Bespoke Investments Group comes a reminder of the continuing skittishness of investors:

One thing that investors have been able to count on during this bull market is that whenever equities run into trouble bulls scatter and bears come out of the woodwork.  Given the recent market weakness, that has once again been the case this week.  Following the worst week for equities in over two years, bullish sentiment on the part of individual investors dropped and bearish sentiment spiked.  According to the weekly survey of investor sentiment from the American Association of Individual Investors (AAII), bullish sentiment dropped from 31.12% down to 30.89%.  While that was just a marginal decline, as you can see in the chart, it is still down sharply from where it was in early July.

a Bullish Sentiment Dissipates  Again

Meanwhile, the magnitude of the move in bearish sentiment was much greater.  Compared to last week’s reading of 31.12%, bearish sentiment rose over 7 percentage points this week to 38.23%.  That is the highest level of bearish sentiment in nearly a year (8/22/13).  With bullish sentiment now exceeding bullish sentiment by 7.34 percentage points, this is only the second time this year that bears have outnumbered bulls.

b Bullish Sentiment Dissipates  Again

It seems that every time the market drops a few percent, bullish sentiment dissipates.  In a secular bull market, which we may very well be in, that type of knee-jerk reaction can be costly.

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Fund Flows

August 7, 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 08.07.14 Fund Flows

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

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Systematic RS Growth

August 6, 2014

“How do you manage risk?”    Not surprisingly, this continues to be one of the first questions out of investors mouths as they consider any strategy.  Even with the last five years providing one of the strongest bull markets in history, investors vividly remember the pain of the last two bear markets.

How we manage risk depends on the strategy.  For some of our portfolios, rotating out of equities and into fixed income, currencies, or even inverse equities is an option.  However, for our Systematic RS Growth portfolio, risk management is handled, in part, by employing an exposure overlay that, when activated, causes sales to go to cash and not be reinvested until indicated.  This portfolio invests in up to 25 U.S. Mid and Large Cap equities demonstrating, what we believe to be, favorable relative strength characteristics.  The strategy will hold up to 50% cash if necessary.  Our exposure to cash in this portfolio is shown below:

cash Systematic RS Growth

Source: Dorsey Wright.  Estimate based on monthly cash values of a sample Growth portfolio.

Using cash as a way to seek to mitigate market losses has real appeal to investors who want to invest in equities, but also want to know that that there is a plan for risk management.  Over time, the results have been very good as shown below.  While the portfolio has still had periods where it has lost money, the cash overlay has indeed helped to buffer some of the downside risk.

growth net Systematic RS Growth

growth annual Systematic RS Growth

growth perf Systematic RS Growth

As of 7/31/14

Click here for a fact sheet or contact Andy at 626-535-0630 or andyh@dorseywright.com with questions.  Click here for a list of platforms where our separately managed accounts are available.

Historical Performance Of the Dorsey, Wright Systematic Relative Strength Growth Strategy: The performance represented in this brochure is based on monthly performance of the Systematic Relative Strength Growth Model. Net performance shown is total return net of management fees for all Dorsey, Wright & Associates managed accounts, managed for each complete quarter for each objective, regardless of levels of fixed income and cash in each account. The advisory fees are described in Part II of the adviser’s Form ADV. The starting values on 12/31/2006 are assigned an arbitrary value of 100 and statement portfolios are revalued on a trade date basis on the last day of each quarter. All returns since inception of actual Accounts are compared against the S&P 500 Index. The S&P 500 is a stock market index based on the market capitalizations of 500 leading companies publicly traded in the U.S. stock market, as defined by Standard & Poor’s. A list of all holdings over the past 12 months is available upon request. The performance information is based on data supplied by the Manager or from statistical services, reports, or other sources which the Manager believes are reliable.  Past performance does not guarantee future results. In all securities trading, there is a potential for loss as well as profit. It should not be assumed that recommendations made in the future will be profitable or will equal the performance as shown. Investors should have long-term financial objectives when working with Dorsey, Wright & Associates.  The inception for this strategy was 12/31/1994. However, the strategy underwent a material change that was complete on 12/31/2006. The material changes included adding an exposure overlay and a systematic stock selection process.

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Quote of the Week

August 6, 2014

Via Michael Covel, an excerpt from James O’Shaughnessy’s book What Works on Wall Street:

Models beat the human forecasters because they reliably and consistently apply the same criteria time after time. In almost every instance, it is the total reliability of application of the model that accounts for its superior performance. Models never vary. They are always consistent. They are never moody, never fight with their spouse, are never hung over from a night on the town, and never get bored. They don’t favor vivid, interesting stories over reams of statistical data. They never take anything personally. They don’t have egos. They’re not out to prove anything. If they were people, they’d be the death of any party.

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High RS Diffusion Index

August 6, 2014

The chart below measures the percentage of high relative strength stocks that are trading above their 50-day moving average (universe of mid and large cap stocks.)  As of 8/5/14.

diffusion 08.06.14 High RS Diffusion Index

The 10-day moving average of this indicator is 55% and the one-day reading is 34%.  Dips in this index have often provided good opportunities to add to relative strength strategies.

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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DWA ETFs

August 5, 2014

Shown below are Point & Figure charts of the 16 ETFs for which Dorsey Wright & Associates is the index provider (as of 8/5/14):

pdp DWA ETFs

dwas DWA ETFs

dwaq DWA ETFs

piz DWA ETFs

pie DWA ETFs

pez DWA ETFs

pfi DWA ETFs

prn chart DWA ETFs

psl DWA ETFs

ptf DWA ETFs

pth DWA ETFs

pui DWA ETFs

pxi DWA ETFs

pyz DWA ETFs

fv DWA ETFs

ifv 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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Relative Strength Spread

August 5, 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 8/4/14:

spread 08.05.14 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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Risk Aversion in Squirrels (And Humans)

August 4, 2014

Who knew we had so much in common with squirrels!  Bob Seawright has a fun summary of a study of squirrels that tried to find out what causes a squirrel to flee.  After all, we’ve all had the experience of walking right by a squirrel and they don’ t seem to be the least bit bothered.  However, make eye contact with a squirrel and off they go.  Read his whole article for the methods of the study, but the key conclusion are as follows:

The key point is that it makes a big difference whether or not people are looking at the squirrels, although staying on the footpaths also keeps them calmer. In truly dreadful scientific prose that tries desperately to sound authoritative, the researchers conclude as follows:

“We have identified cues that are likely to be important for risk perception by an urban animal species monitoring its environment. Together with direction of attention of people, urban squirrels were more reactive to pedestrians that showed a divergence from ‘usual’ behaviour (e.g. pedestrians entering areas which are usually human-free), even when not associated with closer approach or changes in speed. In addition to being arboreal (which can include use of anthropogenic structures), which minimizes vulnerability to diurnal terrestrial ‘predators’ (see Herr, Schley & Roper, 2009), general trophic and social flexibility (Baumgartner, 1943; Don, 1983; Koprowski, 2005) may help explain why eastern grey squirrels are successful urban adapters.”

What they mean is that squirrels pay attention to unusual human behavior and eye contact. When they see them, they bolt.

Seawright then skilfully makes the connection to investor behavior:

These squirrels are a pretty good metaphor for us, but perhaps not in the way we might expect. Squirrels, like humans, are highly risk averse. We humans feel a loss two to two-and-a-half times more strongly than we feel a comparable gain. In the wild, that makes perfect sense. If the squirrels run away too readily, they may lose a nut or two, but little else. But if the varmint sticks around too long, it can get eaten by a predator. That’s a loss that is permanent and unrecoverable.

We are remarkably like squirrels. If markets are behaving as we expect, we’re fine. When they deviate from what we expect, we get concerned and pay special attention, ready to flee. And when we spend too much time looking head-on at what’s going on (as when the squirrels’ and the observers’ eyes meet in sweet communion)—perhaps checking our accounts online every day or, heaven forbid, watching one of the “business” channels, we tend to trade (read “bail”) far too often.

The research bears this tendency out. And, sadly, the professionals tend to flee as readily as their clients. The metaphor is a bit mixed, but if we have a good plan in place (a crucial “if”) and when the markets are wild, we’d be wise to “avert our eyes” and stay calm.

In the investment world, being too skittish—bailing out of the markets too readily—is generally much more dangerous to our success than holding on too long, especially when the applicable time horizon is a relatively long one. Staying the course through tough times requires that we deal with immediate pain for far-off gain, which is always very difficult for us. That makes this sort of situation that much tougher.

“Averting our eyes” only makes sense if we have a good plan in place.  That is the value of consulting with a competent financial advisor.  But, if that is in place, behaving like a squirrel is likely to end in disappointment.

squirrel Risk Aversion in Squirrels (And Humans)

Source: ThinkAdvisor.com

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Saving Earlier

August 4, 2014

More great research from the Center for Retirement Research at Boston College.  Click here for their latest piece How Much Should People Save?  One of the more interesting parts of the research to me was the massive benefits of saving earlier and retiring later.  Common sense, but the table below makes it clear how much easier retirement planning becomes when one starts early.

Table 5. Saving Earlier

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Weekly RS Recap

August 4, 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 (7/28/14 – 8/1/14) is as follows:

ranks 08.04.14 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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Power 4 Model Holdings

August 1, 2014

Current holdings of the DWA PowerShares Sector 4 Model are shown below:

power 42 Power 4 Model Holdings

Click here for model details.

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. 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. 

The PowerShares DWA Sector Portfolios are calculated by NYSE Euronext or its affiliates (NYSE Euronext). The PowerShares DWA Sector Momentum ETFs, which are based on Dorsey Wright indexes, are not issued, endorsed, sold, or promoted by NYSE Euronext, and NYSE Euronext makes no representation regarding the advisability of investing in such product.

NYSE EURONEXT MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE DORSEY WRIGHT INDEXES OR ANY DATA INCLUDED THEREIN. IN NO EVENT SHALL NYSE EURONEXT HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.

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Sector Performance

August 1, 2014

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 7/31/14.

sector 08.01.14 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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Fund Flows

July 31, 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 08.01.14 Fund Flows

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

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High RS Diffusion Index

July 30, 2014

The chart below measures the percentage of high relative strength stocks that are trading above their 50-day moving average (universe of mid and large cap stocks.)  As of 7/29/14.

diffusion 07.30.14 High RS Diffusion Index

The 10-day moving average of this indicator is 74% and the one-day reading is 62%.

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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A Wise Old Owl

July 29, 2014

The essence of relative strength:

A wise old owl lived in an oak.  The more he saw the less he spoke.  The less he spoke the more he heard.  Why can’t we all be like that wise old bird?

HT: Patrick O’Shaughnessy

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Relative Strength Spread

July 29, 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 7/28/14:

spread 07.29.14 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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Reality Check for Forecasting

July 28, 2014

I’d say this is a pretty compelling argument for trend following.  As shown below, the average strategist forecast for the S&P 500 is routinely way off.

forecasts Reality Check for Forecasting

Source: WSJ

Rather than even attempt to forecast the unknowable, trend followers simply stay with the trend, until it is time to move on.  See here, here, and here.

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Weekly RS Recap

July 28, 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 (7/21/14 – 7/25/14) is as follows:

ranks 07.28.14 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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Point and Figure Relative Strength Box Sizes

July 25, 2014

In June, we released Point and Figure Relative Strength Signals, by John Lewis, CMT.  This white paper provided important insights into using PnF relative strength signals.  The study included research covering the period 1990-2013.

Securities on a buy signal and in a column of X’s have the best intermediate and long term relative strength characteristics so that is the basket of securities we would expect to perform the best over time. That is certainly the case over time. Maintaining a portfolio of stocks on relative strength point and figure buy signals and in columns of X’s dramatically outperformed the other three point and figure relative strength states.

John has now written a follow-up white paper that analyzes a different aspect of PnF relative strength signals: Box Sizes.  Click here to access Point and Figure Relative Strength Box Sizes.  This paper addresses the frequently asked question, “What box size should I use?” and will help answer the question of why 6.50% box size is the default box size on the Dorsey Wright research database.  This white paper also studies the period of 1990-2013.  A summary table of the results is shown below:

box sizes Point and Figure Relative Strength Box Sizes

The data in Table 1 helps us determine what the equivalent of an intermediate term horizon is in terms of point and figure box sizes. Much like the time-based methods, the returns suffer when the box size is too small or too large. In the case of the former, the system picks up too much of the short term trading noise. In the case of the latter, too much has to happen in order for the point and figure chart to register a change. The sweet spot is in the 6.5% to 7.5% box size range. Using a 6.5% box size means that a security has to underperform the broad market by 19.5% in order to change columns and be shifted out of the group that qualifies as having the best relative strength. The large percentage reversal required may surprise many people, but relative price moves in the 20% to 25% range exhibit the best long term performance. The magnitude of these moves indicates how important it is to stick with a strong stock during the dynamic part of its price appreciation cycle. We have noticed over the years that stocks with strong momentum characteristics are often volatile and are prone to sharp pullbacks before continuing to new highs. Trying to “get out in front” of the trend change by using a smaller box size will certainly be a better method when the trend change happens, but the data indicates this is hard to predict .

Stay tuned for part three of this series of white papers which will likely be released next month.

A 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 no guarantee of future returns.

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