DWA ETFs

August 6, 2015

Shown below are Point & Figure charts of the 17 ETFs for which Dorsey Wright & Associates is the index provider (as of 8/5/15):

pdp DWA ETFs

dwas DWA ETFs

dwaq DWA ETFs

piz DWA ETFs

pie DWA ETFs

pez DWA ETFs

pfi DWA ETFs

industrials 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

dwat1 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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Checking in on Sector Momentum

August 5, 2015

So far this year, 7 of our 9 PowerShares DWA Momentum Sectors are outperforming their cap-weighted peers.  In some cases (Healthcare, Technology, and Consumer Staples) the outperformance of momentum is quite large.

sector momentum Checking in on Sector Momentum

Source: Dorsey Wright, Updated through 8/4/15, Performance is price only, not inclusive of dividends or all transaction costs

The PowerShares DWA Momentum Sector ETFs are constructed as follows:

  • Invest in 30-75 Small, Mid, and Large Cap Stocks
  • Stocks are selected for the index based on demonstrating favorable, in our view, momentum characteristics
  • Rebalanced on a quarterly basis

Dorsey Wright is the index provider for this suite of momentum ETFs at PowerShares.  See www.powershares.com for more information.  The 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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Normal Doesn’t Exist

August 5, 2015

Michael Batnick on “waiting for normal:”

These are not normal times investors are living in. The Fed has held short-term interest rates at zero for six years now, a policy experiment never seen before. This has many investors eager to see what happens if and when this returns to “normal.”

One of the biggest psychological challenges of investing is that there is always something out of the norm. Take a look at the table below which highlights different times investors had to live through and the extreme performances that accompanied them. I wonder at what point would somebody would have described the times as normal.

returns decade1 Normal Doesnt Exist

Next, have a look at the chart below, which shows the S&P 500 return by decade. You’ll notice absolutely no pattern.

returns decade Normal Doesnt Exist

Understanding how different it always is should be a great reminder why no strategy will work in all market environments. Knowing the limitations to what you are doing- whatever you’re doing- is critical. The ability to stick with your plan during the bad times will determine if you’ll be around for the good ones.

So what is an investor to do?  I see a couple options:

  1. Employ some form of static asset allocation and hope for the best.  25% fixed income, 25% US Equity, 25% International Equity, and 25% Alternatives and rebalance annually.
  2. Employ some type of forecasting to try to be opportunistic in asset class exposure
  3. Employ some form of trend-following tactical approach to asset allocation

The static allocation approach may ultimately perform okay over long periods of time, but will investors have the risk tolerance to continue with long stretches of an asset class being out of favor / going through severe drawdowns?  Maybe.  Maybe not.  Chances are the forecasting approach will end very badly, as forecasting usually does.  The third option makes much more sense to me.  Simply systematically deal with trends as they unfold.  This is the approach we use with our Global Macro separately managed account, which happens to be our most popular SMA strategy.  Thank goodness we gave ourselves as much flexibility as we did with the way that this portfolio is constructed because this decade has been entirely different than the last decade.  As one example, consider how well commodities performed in the last decade compared to the trainwreck that they have been so far this decade.

Normal doesn’t exist.  A disciplined way to be flexible is the key to successfully navigating the ever-changing financial landscape.

The 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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High RS Diffusion Index

August 5, 2015

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 8/4/2015.

diffusion High RS Diffusion Index

The 10-day moving average of this indicator is 63% and the one-day reading is 68%.

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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Relative Strength Spread

August 4, 2015

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 8/3/2015:

spread 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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Weekly RS Recap

August 3, 2015

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 (7/27/15 – 7/31/15) is as follows:

ranks 08.03.15 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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SMA Performance Update

August 1, 2015

2015 has been a year with significant dispersion in returns between stocks—meaning that there has been a large difference in performance between the relative strength leaders and the relative strength laggards.  Our domestic equity-focused portfolios (Growth, Aggressive, and Core) have been able to capitalize on this dispersion and have been able to generate large outperformance for the year.  Detailed performance is shown below.

net SMA Performance Update

To receive the brochure for these portfolios, please e-mail andy@dorseywright.com or call 626-535-0630. Click here to see the list of platforms where these separately managed accounts are currently available.

Total account 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. Information is from sources believed to be reliable, but no guarantee is made to its accuracy. This should not be considered a solicitation to buy or sell any security. Past performance should not be considered indicative of future results.

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. The Barclays Aggregate Bond Index is a broad base index, maintained by Barclays Capital, and is used to represent investment grade bonds being traded in the United States. The 60/40 benchmark is 60% S&P 500 Total Return Index and 40% Barclays Aggregate Bond 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. The Dow Jones Moderate Portfolio Index is a global asset allocation benchmark. 60% of the benchmark is represented equally with nine Dow Jones equity indexes. 40% of the benchmark is represented with five Barclays Capital fixed income indexes.

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. ETFs may result in the layering of fees as ETFs impose their own advisory and other fees. 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)

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.

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RS Charts of the Week

July 31, 2015

SPYVSAGG zpsy6t4dbjx RS Charts of the Week

SPYVSIYR zpslyhalaky RS Charts of the Week

SPYVSGCC zpslv9gne2f RS Charts of the Week

SPYVSEEM zps5cn3nci1 RS Charts of the Week

SPYVSEFA zpsh1nga0h5 RS Charts of the Week

Point and Figure RS Charts are calculated by dividing one security by another and plotting the ratio on a PnF chart.  When the ratio is rising, it is plotted in a column of X’s and reflects the numerator outperforming the denominator.  Likewise, when the relative strength ratio is declining, it is plotted in a column of O’s and reflects the outperformance of the denominator.

Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  This example is presented for illustrative purposes only and does not represent a past recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security.  This post does not attempt to examine all the facts and circumstances which may be relevant to any product 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

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Moving Beyond the Style Box

July 24, 2015

One of the unfortunate effects of this industry’s adoption of style-box investing has been “the homogenization of fund managers.”  Samuel Lee of Morningstar explains:

A more insidious consequence of the rise of the style box is the homogenization of fund managers. Since they’ve been forced to be much more conscious of their style benchmarks and peers, many diversify away their active bets and effectively hug their benchmarks. So while fund fees have come down over the past decade, active bets have arguably gone down just as fast–if not faster. Finance researcher Antti Petajisto documents that closet indexing rose markedly in the late 1990s and has stayed there since.

This is bad; more-selective managers tend to outperform. Petajisto found that stock-picking managers who deviated from their benchmarks subsequently tended to outperform closet indexers, before and after fees. Finance professor Russ Wermers found that managers who picked stocks as if they were unconcerned with style drift tended to have superior future stock-picking performance.

This has certainly been true in the case of our Systematic RS International portfolio.  This portfolio which holds 30-40 ADRs is the definition of style drift!  We simply start with a broad universe of ADRs that includes all capitalizations and all styles.  We place no constraints on how the portfolio can be allocated from a style-box perspective.  We include ADRs from both developed and emerging international markets.  All stocks in the investment universe are ranked daily from a relative strength perspective.  We buy stocks out of the top quartile of our ranks and sell them when they fall out of the top half of our ranks.  Simple trend following.

As shown below, our capitalization exposure changes over time.

cap Moving Beyond the Style Box

Source: Dorsey Wright, FactSet.

We are singularly focused on whether or not the stock has strong relative strength.  All of the other ways to classify a stock are meaningless for the purposes of this portfolio.

The results of this unconstrained approach to investing speak for themselves:

intl Moving Beyond the Style Box

As of 6/30/15.  Portfolio inception 3/31/06.

It’s time for investors to be unshackled from the constraints of the style box.

To receive the fact sheet for this portfolio, please e-mail andy@dorseywright.com or call 626-535-0630.

Performance 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 performance information is based on data supplied by the Manager or from statistical services, reports, or other sources which the Manager believes are reliable.  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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Sector Performance

July 24, 2015

The chart below shows performance of US sectors over the trailing 12, 6, and 1 month(s).  Performance updated through 7/23/15.

sector 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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RS Charts of The Week

July 24, 2015

SPYvsAGG zpsqs8hhsrs RS Charts of The Week

SPYVSIYR zpseyq1jwj4 RS Charts of The Week

SPYVSGCC zps4496omgh RS Charts of The Week

SPYVSEEM zps2degwxvt RS Charts of The Week

SPYVSEFA zpsiljjarcr RS Charts of The Week

Point and Figure RS Charts are calculated by dividing one security by another and plotting the ratio on a PnF chart.  When the ratio is rising, it is plotted in a column of X’s and reflects the numerator outperforming the denominator.  Likewise, when the relative strength ratio is declining, it is plotted in a column of O’s and reflects the outperformance of the denominator.

Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  This example is presented for illustrative purposes only and does not represent a past recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security.  This post does not attempt to examine all the facts and circumstances which may be relevant to any product 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.

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Getting Behavioral Coaching Right

July 23, 2015

Interesting analysis by Vanguard estimating that a good financial advisor has the potential to add 3% annually (net) to their client’s portfolios.  See below for the breakdown of their estimate:

Vanguard Study Getting Behavioral Coaching Right

By their estimation, the area where a financial advisor has the most potential to add value for their clients is in Behavioral Coaching.  I would agree that “providing support to stay the course in times of market stress” is among the areas of greatest opportunities for advisors to add value.  I am sure we all know clients that made drastic asset allocation changes towards equities in the late 1990′s, arriving just in time for a bear market, or away from equities following the 2008-2009 financial crisis, and have been very slow to return.  Such changes can cripple the financial health of an individual and family.

There are all kinds of ways that an advisor could attempt to help their clients stay the course in times of market stress.  They could show their clients the data on historical returns of the stock market.  They could show their client data with the percentage of rolling 3, 5, and 10 year periods where the stock and bond markets have produced positive returns.  They could give reasons why they personally believe that it makes sense to be bullish over the coming year.  They could cite the views of a well-known “expert” who believes that the market is going to rise from here.  They could share behavioral finance research with the client to try to persuade them that they are being irrational.

Some of the above approaches may have their time and place, but ultimately, I believe they are insufficient to keep clients from making the big mistakes—the types of mistakes that alter their standard of living in retirement.

In my view, an absolutely critical component to helping clients stay the course in times of market stress is to have an asset allocation that can adapt to different, even scary, market environments.  Most strategic asset allocations won’t cut it.  They are too static and too dependent upon bull markets in the stock and bond markets.  I will be the first to admit that being a perma-bear has been a losing proposition over time.  However, there must be some portion of a client’s allocation invested in a tactical strategy that can play defense.   Take the following as a sample allocation:

  • 25% in fully-invested global equities
  • 25% in fixed income
  • 50% in a Global Tactical Allocation strategy driven by relative strength

What if that 50% in Global Tactical Allocation had the ability to be heavily focused on equities in favorable equity markets.  Then, the majority of the time the client is going to have a moderately aggressive allocation in order to participate in good markets.  However, the client has the peace of mind that a meaningful portion of their overall allocation can deal with major bear markets.  This peace of mind will minimize the chance that they will demand wholesale changes to their overall asset allocation at exactly the wrong time (because a portion of their asset allocation is already shifting as dictated by relative strength) .  The last two bear markets are always going to be top of mind for this generation of investors.  Permanently defensive strategies (like a constant allocation to gold) are not the answer.  Strategic asset allocation falls short.  However, a relative strength-driven global asset allocation strategy does a much better job at providing a robust long-term solution for clients.

The 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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Weekly RS Recap

July 20, 2015

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 (7/13/15 – 7/7/15) is as follows:

ranks2 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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RS Charts of The Week

July 17, 2015

SPYVSAGG zps6wq1b2li RS Charts of The Week

SPYVSIYR zpsn6sijbru RS Charts of The Week

SPYVSGCC zpsaodjvepm RS Charts of The Week

SPYVSEEM zpss7nhx4ut RS Charts of The Week

SPYVSEFA zpsulqn7drx RS Charts of The Week

Point and Figure RS Charts are calculated by dividing one security by another and plotting the ratio on a PnF chart.  When the ratio is rising, it is plotted in a column of X’s and reflects the numerator outperforming the denominator.  Likewise, when the relative strength ratio is declining, it is plotted in a column of O’s and reflects the outperformance of the denominator.

Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  This example is presented for illustrative purposes only and does not represent a past recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security.  This post does not attempt to examine all the facts and circumstances which may be relevant to any product 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.

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A Decade of the RS Spread

July 17, 2015

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 7/16/2015:

spread A Decade of the RS Spread

What a decade…  Some observations:

  • RS leaders performed much better than RS laggards leading up to and through much of the financial crisis
  • As the market bottomed in March 2009 we experienced one of the biggest laggard rallies in history
  • The RS Spread was flat for years after 2009.  I am not exactly sure why this is, but one guess is the higher correlations between all stocks as the market seemed to respond in unison to macro events (often Fed-driven events)
  • The RS Spread is above 3.5 on this chart for the first time in years and RS leaders have been more stable that we have seen in a long time

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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Be Water My Friend

July 17, 2015

Trend Following wisdom from Bruce Lee:

HT: Michael Covel

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Quote of the Week

July 16, 2015

Leda Braga at Delivering Alpha (Institutionalinvestor.com):

The business of investment management is the business of data management.  The algorithmic approach is the best way to do that.

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Letting Winners Run

July 15, 2015

Great interview with Tammy DeRosier in IBD:

Tammy DeRosier enjoys baking peach cobblers and biscuits with her young daughter. As president of Dorsey Wright & Associates (DWA), she cooks up strategies to empower investors.

The firm’s specialty is technical analysis based on relative price strength — a method of evaluating the performance of investment choices against one another. It underlies both the “momentum” ETF suite from PowerShares and a best-performing ETF in 2015, a First Trust fund of funds.

DeRosier, 45, recently talked to IBD about Dorsey Wright’s philosophy and pipeline, as well as its recent acquisition by Nasdaq.

IBD: How is the DWA investment philosophy translated in the PowerShares DWA Momentum ETFs?

Tammy DeRosier: The wonderful thing about momentum, or relative strength investing, is that it is a systematic and rules-based system that fits perfectly in the ETF structure.

Every quarter, a universe of approximately 1,000 stocks is ranked from strongest to weakest, and the PowerShares DWA Momentum Portfolio’s (ARCA:PDP) underlying index is reconstituted to include the strongest 100. This allows strong stocks like Apple (NASDAQ:AAPL) to get into the portfolio, and more importantly, forces it to stay in as long as it is strong, so you can enjoy the ride.

At the same time, if a stock cannot perform, the strategy will rotate it out of the portfolio. In other words, we let the winners run and sell the laggards, which is oftentimes psychologically hard to do. So putting that strategy into an ETF forces an investor to stay within the rule set.

IBD: Do momentum-based strategies underperform in volatile or bear markets? When do they lag?

DeRosier: It’s always important for investors to know what a strategy’s Achilles heel is; and every strategy has one. For relative strength or momentum investing, the two periods when you can experience a lag in performance is during a choppy or trendless market or during leadership changes.

Think about your car — if you want to shift from first to second gear, you have to let off the gas (and) push in the clutch, and you actually lose some speed just before you shift into that next gear. Relative strength is much the same, as the new leadership is rotating into the portfolio and old leadership is falling out.

These times don’t necessarily come during volatile or bear markets, though. Sometimes you could be having a bear market in a couple of sectors and a bull market in other sectors, and a relative strength or momentum portfolio will excel during that period.

This year is a perfect example of how the energy space in general has struggled, while the health care and technology sectors have done well.

IBD: Isn’t capturing momentum tricky — part of the moves may be beyond grasp by the time they are identified?

DeRosier: We never try and catch the exact bottom of any market, sector or stock trend. Instead, we aim to let that stock hit the bottom and begin to move up. That shows some potential sustainability to the trend. If we can capture the majority of the up move, that is all you need in order to produce positive portfolio performance.

What’s actually most interesting about PDP is the fact that it provides a vehicle for investors to hold the “high fliers” as a portfolio. On its own, any one of these stocks might be too volatile, but as a portfolio, it can work very well. The systematic approach forces investors to stay with the winners and sell the losers.

IBD: You believe the relative strength methodology can beat the market. Yet PDP has performed roughly in line with the Russell Mid-Cap Growth benchmark over one-, three- and five-year periods. Why?

DeRosier: On a five-year trailing total return basis, PDP ranks in the top 1% — or, said another way, PDP has outperformed 99% of the funds in its category according to Morningstar, so we are quite proud of how the ETF has performed. High relative strength stocks have moved higher in fits and starts over the last five years or so. We are currently slightly ahead of the Mid-Cap Growth Index over the periods you mentioned, and we have a bigger spread over the much broader S&P 500 Index.

Conditions for momentum stocks have been much more favorable recently, so we are very happy with where we are sitting. The performance spread between leading and lagging stocks has started to move upward again after a long period of sideways movement. Whenever the spread moves higher, our strategies have greater potential to outperform.

If this trend can continue, we would expect our strategies to continue to perform well vs. the broad market.

IBD: How can smart beta ETFs be combined in a portfolio?

DeRosier: Investors can mix and match philosophies together by actually looking at the basis of the strategy. For instance, momentum and low volatility, or value, pair together well. Typically when one is zigging, the other is zagging. That gives the overall portfolio a smoother ride.

IBD: First Trust Dorsey Wright Focus 5 (NASDAQ:FV) has racked up assets of $3.96 billion in under two years. Why did Focus 5 resonate with ETF investors? What’s unique about how the DWA relative strength ranking system is applied in FV?

DeRosier: The relative strength rules are the same for all the indices we construct, including the index that underlies FV. The index or model includes the strongest from the inventory, and the weakest from the inventory sit on the bench. Much like a pitcher in baseball, if he starts to walk some batters or they get hits off him, the manager will go to the bullpen and call in another pitcher. Our rules work the same way. A member of the index can have a walk or two, but a consistent pattern of weakness means the next strongest will come in while that sector or stock goes to the bench.

I think the appeal of FV, much like all of the ETFs following DWA indexes, is the transparency of the rules and the underlying strategy being based in the irrefutable laws of supply and demand.

(Editor’s note: FV tracks an index that analyzes the relative price strength of all First Trust sector- and industry-based ETFs, and selects the top five with the highest price momentum.)

IBD: What does the acquisition by Nasdaq mean for your company?

DeRosier: Nasdaq offers us the resources to grow our business into a truly global platform that goes far beyond the core businesses we have developed in the last 25 years.

IBD: What’s in the pipeline for ETFs and mutual funds?

DeRosier: We always have interesting strategies that we publish on our research website. One that we have incubating is a combination of factors such as low volatility and the strongest relative strength of those names.

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Global Macro: The Role of a “Go Anywhere” Strategy

July 15, 2015

Global macro is among the least restricted of all the major investment styles and is often referred to as a ‘go anywhere’ strategy which can potentially create positive investment returns in a wide range of economic environments.  As shown in the diagram below, there is a rules-based process that we follow to manage our Global Macro portfolio (available on the Masters and DMA platforms at Wells Fargo Advisors and other SMA platforms, as a mutual fund (DWTFX), and as an ETF (DWAT).

Investment Process

We start with a broad investment universe of ETFs from the following asset classes: U.S. Equities, International Equities, Inverse Equities, Currencies, Commodities, Real Estate, and Fixed Income.  That broad universe of ETFs is categorized into ETF Baskets, allowing us to rank the baskets by their relative strength.  That top-down Basket Ranking part of the model seeks to guide the model to the strongest asset classes and to avoid the weakest asset classes.  There is no forecasting in any part of this model—it is purely a trend-following strategy.

There is also a bottom-up ranking of all of the ETFs in the investment universe.  That ranking allows us to score each ETF to determine exactly what we buy and when a position is sold.  10 ETF are held in the Global Macro portfolio and the positions will stay in the portfolio as long as they retain strong relative strength.  We’ve had some positions stay in the portfolio for years at a time and other positions that have been quickly removed.  Any position stays in the portfolio only as long as it retains is favorable relative strength.

process Global Macro: The Role of a Go Anywhere Strategy

Why Global Macro?

Asset classes go through bull and bear markets.  That goes for all asset classes.  It is easy for someone to look at any 30 year period of time in history and use that period to suggest that all that is needed for any investor is a buy and hold approach to asset allocation using a narrow universe of asset classes.  In one 30-year period, a 70% allocation to U.S. equities and a 30% allocation to U.S. fixed income would do the trick.  However, take a different 30 year stretch and it may make more sense to include a healthy allocation to Real Estate or International Equities or Commodities.  The ideal or optimal passive allocation for any 30 year stretch is only evident with the benefit of hindsight.

Real investors have no idea what the future will hold.  Rather than guess what asset mix might work best as they manage their retirement nest egg, a relative strength-driven Global Macro strategy relies on a strict trend-following approach to adapt to current markets.

Investors may like to think that if they guess right and select the right passive asset allocation then their investment experience will be similar to the guy on the bike below (top of the image)…smoothly accumulating and compounding their retirement nest egg as they glide towards their retirement years.  However, reality in the financial markets is anything but a smooth ride.  Without an adaptive investment strategy as part of their asset allocation many investors will guess wrong and pick the wrong passive asset allocation.  Furthermore, investor behavior being what it is, many investors will panic at the wrong times (and unwisely tinker with their asset allocations).  Global Macro has the potential to play a soothing role for an investor and has the potential to help investors stay the course with their overall asset allocation.

plan thinkingip1 Global Macro: The Role of a Go Anywhere Strategy

Source: @ThinkingIP

Current Holdings

As of 6/30/15, current holdings in our Global Macro portfolio were as follows:

gm 06.30.15 Global Macro: The Role of a Go Anywhere Strategy

Performance

We are very proud of the fact that Global Macro has performed well compared to its peer group over time.  As shown below, The Arrow DWA Tactical Fund (DWTFX) has outperformed 95% of its peers in the Morningstar Tactical Allocation category over the past 3 and 5 years; outperformed 92% over the past year, and has outperformed 68% of its peers YTD.

morningstar Global Macro: The Role of a Go Anywhere Strategy

Fact Sheet

Click here for a fact sheet on our Global Macro portfolio.

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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DWA Q3 2015 Update Webinar Replay

July 15, 2015

On Tuesday, we conducted a webinar to discuss the current state of the market through the lens of DWA. We like to hold these calls at the beginning of each quarter, as that is when we reconstitute and rebalance our Technical Leaders Indexes, which are tracked by the 14 PowerShares ETFs. Tom Dorsey, Founder of DWA, Paul Keeton, Vice President, and John Lewis, Vice President and Portfolio Manager, hosted the discussion, which is now available through the link below.

Follow this link to access a replay of this webinar.

Follow this link to access a PDF of the presentation slides used in this webinar.

Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any se­curity. This email and included links do 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. Dorsey, Wright & Associates, its officers, directors, partners and/or other associated persons may own, hold options, rights or warrants to purchase some of the securities or assets mentioned in this email, or close equivalents. Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss. 

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From the Summer Intern

July 15, 2015

This summer I had the opportunity to intern for Dorsey Wright in the Money Management office. Coming into the internship, I knew next to nothing about finance and had never worked in an office setting. Now, after 8 weeks in the office, I have learned enough to understand the Money Management field, and the projects I have worked on have shown me what a future career in finance might be like.

During my internship, I learned the basics of this industry: what an ETF is, the advantages of relative strength, and how to read a PnF chart. I was also given projects aimed to teach me about asset allocation and investment strategies, and I became familiar with models and matrices. I was able to listen in on calls and webinars so to fully understand what was happening at Dorsey Wright and on the stock market.

One of the biggest take-aways from this internship was gaining real-world experience in a branch of finance. To an outsider, finance can seem like a foreign language. With unfamiliar acronyms, charting methods and verbiage, it can be hard to learn and even harder to understand. My time at Dorsey Wright helped me explore this industry and it will give me a good background in future business classes, because I understand investing tactics and how the stock market works at a deeper level than before. Another big take-away was being able to work in an office and gain professional experience. I learned important skills like how to collaborate with others and manage tasks (and also how to answer the phone). These last 7 weeks have helped me explore a career path I hadn’t always considered and taught me things that will undoubtedly stick with me. I’m thankful that Dorsey Wright  Money Management gave me this opportunity.

—Ally has been a fantastic intern and we wish her the best of luck as she continues her education at Tulane!

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Weekly RS Recap

July 13, 2015

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 (7/6/15 – 7/10/15) is as follows:

ranks1 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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NYSE High-Low Index Below 30

July 10, 2015

The NYSE High-Low Index is a short term indicator calculated by dividing the number of stocks making new 52-week highs by the stocks achieving new highs and new lows. The daily NYSE HILO reading is based upon a 10-day moving average of the aforementioned calculation, which smooths out the movement over time.  It doesn’t speak often, but when it does we have found it to be meaningful.

nysehilo NYSE High Low Index Below 30

The last 5 times the NYSEHILO has reversed to a column of X’s from below 30% are shown below (and the change in the S&P 500 90 days later):

sp NYSE High Low Index Below 30

 Source: Yahoo! Finance.  Price return only, not inclusive of dividends.

A more in depth study of the NYSE High-Low Index can be found here (Harold Parker’s 1996 paper published in the MTA Journal).

It is worth noting that this index has not yet reversed to a column of X’s.  However, it may be time to start thinking about putting new money to work.

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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RS Charts of The Week

July 10, 2015

SPYVSAGG zpsceb1pebs RS Charts of The Week

SPYVSGCC2 zps7pt0xhbf RS Charts of The Week

SPYVSIYR zpsiwirs1w9 RS Charts of The Week

SPYVSEEM zpsooslac1f RS Charts of The Week

SPYVSEFA zpswhu65app RS Charts of The Week

Point and Figure RS Charts are calculated by dividing one security by another and plotting the ratio on a PnF chart.  When the ratio is rising, it is plotted in a column of X’s and reflects the numerator outperforming the denominator.  Likewise, when the relative strength ratio is declining, it is plotted in a column of O’s and reflects the outperformance of the denominator.

Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  This example is presented for illustrative purposes only and does not represent a past recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security.  This post does not attempt to examine all the facts and circumstances which may be relevant to any product 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.

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The Disposition to be a Successful Investor

July 9, 2015

Words of wisdom from Morgan Housel:

One summer in college I interned at an investment bank. It was the worst job I ever had.

A co-worker and I survived our days by bonding over a mutual interest in the stock market.

My co-worker was brilliant. Scary brilliant. The kind of guy you feel bad hanging out with because he makes you realize how dumb you are. He could dissect a company’s balance sheet and analyze business strategies like no one else I knew or have known since. He was the smartest investor I ever met.

He went to an Ivy League school, and after college he landed a high-paying gig at an investment firm. He went on to produce some of the worst investment results you can imagine, with an uncanny ability to pile into whatever asset was about to lose half its value.

This guy is a genius on paper. But he didn’t have the disposition to be a successful investor. He had a gambling mentality and couldn’t grasp that his book intelligence didn’t translate into investing intelligence, which made him wildly overconfident. His textbook investing brilliance didn’t matter. His emotional faults led him to be a terrible investor.

He’s a great example of a powerful investing truth: You can be brilliant on one hand but still fail miserably because of what you lack on the other.

There is a hierarchy of investor needs, in other words. Some investing skills have to be mastered before any other skills matter at all.

Here’s a pyramid I made to show what I mean. The most important investing topic is at the bottom. Each topic has to be mastered before the one above it matters:

hierarchy large The Disposition to be a Successful Investor

Every one of these topics is incredibly important. None should be belittled.

But you can be the best stock-picker in the world, yet if you buy high and sell low – the epitome of bad investing behavior – none of it will matter. You will fail as an investor.

Investor Behavior trumps all other factors.  Our solution to this challenge was to embrace a systematic–or rules-based–investment process that seeks to capitalize on a proven investment factor (momentum) while keeping our emotions from messing things up.  Some may try to develop the right disposition to be a successful investor on their own.  I am skeptical of how much progress can actually be made on that front without the aid of a systematic model, but it is certainly a worthy endeavor.

The 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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