Systematic Relative Strength

While most sector ETFs are capitalization-weighted, the PowerShares DWA Momentum Sectors are, as the name suggests, weighted by momentum. The nine momentum sectors are shown below:

To highlight the attributes of one of these momentum sector ETFs, The PowerShares DWA Consumer Cyclicals Momentum ETF (PEZ), consider the following:

1. PEZ has 40 holdings while many cap-weighted Consumer Cyclical sector ETFs have 2-4 times that many holdings. The number of holdings in each of our momentum sector ETFs can range from approximately 30-75.
2. The average technical attributes of the stocks currently in PEZ is 4.70. (Dorsey Wright’s research database assigns all stocks a technical attribute rating of 0-5, 5 being the strongest and 0 being the weakest)
3. PEZ has exposure to large, mid, and small cap Consumer Cyclical stocks, while, by definition, capitalization-weighted sector ETFs focus on large caps. PEZ’s capitalization exposure is shown below:
4. Those investors interested in a sector rotation model using these momentum sector ETFs can click here.

This example is presented for illustrative purposes only and does not represent a past recommendation. A relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. Dorsey Wright is the index provider for the suite of PowerShares DWA Momentum ETFs. See www.powershares.com for more information.

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 7/7/2014:

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.

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 (6/30/14 - 7/3/14) is as follows:

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.

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 7/2/14.

The 10-day moving average of this indicator is 89% and the one-day reading is 88%.

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.

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

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.

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 7/1/2014:

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.

The PowerShares DWA Momentum Indexes are reconstituted on a quarterly basis. These indexes are designed to evaluate their respective investment universes and build an index of stocks with superior relative strength characteristics. This quarter’s allocations are shown below.

PDP: PowerShares DWA Momentum ETF

DWAS: PowerShares DWA Small Cap Momentum ETF

DWAQ: PowerShares DWA NASDAQ Momentum ETF

PIZ: PowerShares DWA Developed Markets Momentum ETF

PIE: PowerShares DWA Emerging Markets Momentum ETF

Source: Dorsey Wright, MSCI, Standard & Poor’s, and NASDAQ, Allocations subject to change

We also apply this momentum-indexing methodology on a sector level:

See www.powershares.com for more information.

The Dorsey Wright SmallCap Momentum Index is calculated by Dow Jones, the marketing name and a licensed trademark of CME Group Index Services LLC (“CME Indexes”). “Dow Jones Indexes” is a service mark of Dow Jones Trademark Holdings LLC (“Dow Jones”). Products based on the Dorsey Wright SmallCap Momentum IndexSM, are not sponsored, endorsed, sold or promoted by CME Indexes, Dow Jones and their respective affiliates make no representation regarding the advisability of investing in such product(s). A list of all holding for the trailing 12 months is available upon request. This example is presented for illustrative purposes only and does not represent a past recommendation. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.

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 6/25/14.

The 10-day moving average of this indicator is 89% and the one-day reading is 87%.

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.

Long-time critic of “Smart Beta” strategies, Richard Ferri, had the following to say at a recent Morningstar conference:

Not only is “smart beta” more expensive than traditional beta investment products, but it isn’t as safe. “There is always more risk when get away from beta,” he said. “Any other beta is additional beta, not smart beta.” The third disadvantage is there are long periods of time when these strategies underperform the market, noting that small cap value products under performed for two decades.

I won’t speak to every “Smart Beta” strategy out there, but I will address that statement as it relates to momentum. As pointed out in John Lewis’ recent white paper Point and Figure Relative Strength Signals, momentum actually tends to have relatively short periods of underperformance (this white paper studied momentum over a 24 year period from 1990 to 2013).

On a rolling 3 year basis, the Buy in X’s basket outperformed the S&P 500 Total Return Index 85% of the months, and it outperformed the equal weighted universe in 76% of the months. These numbers are right in line with what we have seen in other studies on the consistency of momentum returns.

The table below summarizes the findings of the white paper:

At least when it comes to momentum as a “Smart Beta” factor, the data makes the case that both the long-term results and the frequency of outperformance are indeed compelling.

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

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 6/16/14:

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.