What's Hot…and Not
How different investments have done over the past 12 months, 6 months, and 1 month. As of 12/11/17:
Past performance is not indicative of future results.
Never before has it been easier for investors to invest in the strongest trends wherever they might be found in the world. Relative strength offers a disciplined framework for allocating among those trends. Markets are global and your portfolio should be too.
See disclosures in Appendix A, which includes the ETFs and Indexes used for this performance table.Performance numbers include dividends but do not include 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.
High RS Asset Class
High RS stocks, as an asset class, often move independently of broad indexes. As of 12/11/17.
See disclosures in Appendix A.
Fund Flows
Total estimated inflows to long-term mutual funds and net exchange traded fund (ETF) issuance collected by The Investment Company Institute .
See disclosures in Appendix A.
Sector and Capitalization Performance
Past performance is not indicative of future results.
See disclosures in Appendix A.
High RS Diffusion Index
As of 12/11/17:
See disclosures in Appendix A.
Relative Strength Spread
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 12/11/17:
Since April of 2017, the RS Spread has generally been rising, reflecting the outperformance of RS leaders vs. RS laggards. However, the RS Spread has pulled back in recent weeks reflecting the short-term outperformance of the RS laggards.
See disclosures in Appendix A.
Momentum Demystified
It has been stated by no less than Eugene Fama, the 2014 co-recipient of the Nobel Prize in Economics that "The premier anomaly is momentum." 1 This idea that past winners tend to be future winners, while past losers tend to be future losers, has been vetted and established through hundreds of academic white papers on the topic.
Yet, momentum (aka relative strength) continues to be a misunderstood approach to investing. Why is momentum a strong investment factor that gives investors the potential to outperform over time? How exactly can momentum be exploited?
I think Tom Dorsey, Founder, Dorsey Wright & Associates, now a Nasdaq Company, explained the concept of momentum best:
If I gave you a list of the 100 best golfers worldwide and asked you to pick who you thought would be in the top 10 at the end of the next quarter, who would you pick? My guess is you would pick the current top ten to be in the top three months from now. Even if I asked you to pick the ones who would be in the top ten after one year, you would probably pick the current top ten.
At the end of the contest some would have fallen out and some would have moved up, but the majority would still be in the top ten. This is outperformance. It relates to Newton's Law of motion, which suggests that objects that are in motion tend to stay in motion until an external force acts upon them. We believe that stocks that have good fundamentals, in a market that in general is supporting higher prices, and the chart pattern clearly shows that demand is in control of the stock, tend to continue to do well. Golfers who have good fundamentals, are in good shape, and at the top of their game, tend to continue to do well.
Buy the winners.
To the Data
For a simple illustration of the power of momentum, consider the following excerpt from a study published by Alex Bryan, CFA in this Morningstar article :
Study
Momentum is pervasive. Many studies have extended this evidence to foreign stocks, commodities, currencies, and bonds. Momentum even works across individual asset classes and country stock indexes.
The tables below illustrate the momentum effect among large-cap U.S. and global stocks. Each column represents a fifth of the total number of stocks in the sample, which are ranked by their momentum. While there is not a linear relationship between the momentum quintiles, stocks with the highest momentum consistently outperform those in the lowest momentum quintile.
Source: Kenneth French Data Library
The returns above are based on the performance of indexes that are not available for direct investment. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value.
We believe that investors who seek to employ an active investment strategy that strives to generate performance above that of a passive index over time should give strong consideration to making momentum a key component of their portfolios.
Accessing Momentum through Managed Accounts
Hopefully, at this point you are starting to wonder how you can put this powerful investment factor to work for your clients. We have a suggestion: Take a look at our family of Systematic Relative Strength Portfolios, which are available on a large and growing number of separately managed account (SMA) and unified managed account (UMA) platforms .
First, a little history. Since 1987, Dorsey Wright & Associates has been an advisor to financial professionals on Wall Street and investment managers worldwide, providing technical research and investment solutions. In 2002, John Lewis joined the portfolio management team at Dorsey Wright and was instrumental in leading an extensive period of research that led to the introduction of our family of Systematic Relative Strength portfolios. These portfolios have two major objectives:
- Systematize the investment management process to remove as much of the element of human emotion as possible.
- Focus the investment strategy around the most powerful return factor we could identify: momentum (aka relative strength).
This family of accounts now consists of seven different strategies:
Where Are These Strategies Available?
These portfolios are available on over 20 different platforms , including on many major wirehouses, regionals, discount brokerages, and Turnkey Asset Management Programs (TAMPs).
How to Receive More Information
E-mail Andy Hyer at andy.hyer@nasdaq.com or call 626-535-0630.
Dorsey, Wright & Associates, a Nasdaq Company, is a registered investment advisory firm. 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 investment strategies to which reference is made. 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 the strategies discussed above prior to investing. Advice from a financial professional is strongly advised.
Media Center
Powershares DWA Momentum ETFs
Arrow DWA Balance Fund (DWAFX) and Arrow DWA Tactical Fund (DWTFX & DWAT)
First Trust DWA UITs and ETFs
AdvisorShares
ALPS
Elkhorn Investments
Virtus Investment Partners
Dorsey Wright SMAs and UMAs
Dorsey Wright White Papers
Other Relative Strength Sources
- Brush, John S. "Eight Relative Strength Models Compared." Journal of Portfolio Management (1986).
- Berger, Israel, Moskowitz. "The Case for Momentum Investing." AQR Capital Management. 2009.
- Jegadeesh and Titman. "Returns to Buying Winners and Selling Losers." Journal of Finance (1993).
- O'Shaughnessy, James P. What Works on Wall Street. McGraw Hill, 1997.
Appendix A
The information contained herein has been prepared without regard to any particular investor's investment objectives, financial situation, and needs. Accordingly, investors should not act on any recommendation (express or implied) or information in this material without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions. Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources believed to be reliable ("information providers"). However, such information has not been verified by Dorsey, Wright & Associates, LLC (DWA) or the information provider and DWA and the information providers make no representations or warranties or take any responsibility as to the accuracy or completeness of any recommendation or information contained herein. DWA and the information provider accept no liability to the recipient whatsoever whether in contract, in tort, for negligence, or otherwise for any direct, indirect, consequential, or special loss of any kind arising out of the use of this document or its contents or of the recipient relying on any such recommendation or information (except insofar as any statutory liability cannot be excluded). Any statements nonfactual in nature constitute only current opinions, which are subject to change without notice. Neither the information nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities, commodities or exchange traded products. This document does not purport to be complete description of the securities or commodities, markets or developments to which reference is made. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. You should consider this strategy's investment objectives, risks, charges and expenses before investing. The examples and information presented do not take into consideration commissions, tax implications, or other transaction costs. 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. ETF's may result in the layering of fees as ETF's 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).
The returns shown in the Sector and Capitalization Snapshot are price returns only.
1PowerShares DB Gold, 2MSCI Emerging Markets Index, 3DJ U.S. Real Estate Index, 4S&P Europe 350 Index, 5Green Haven Continuous Commodity Index, 6iBoxx High Yield Corporate Bond Fund, 7JP Morgan Emerging Markets Bond Fund, 8PowerShares DB US Dollar Index, 9iBoxx Investment Grade Corporate Bond Fund, 10PowerShares DB Oil, 11Barclays 20+ Year Treasury Bond, 12S&P 500 Index, 13PowerShares QQQ, 14Dow Jones Industrial Average
"High RS Index" is a proprietary Dorsey, Wright Index composed of stocks that meet a high level of relative strength. The volatility of this index may be different than any product managed by Dorsey, Wright. The "High RS Index" does not represent the results of actual trading. Clients may have investment results different than the results portrayed in this index. Performance for both the High RS Index and S&P 500 is price returns only.
What's Hot...and Not Disclosures
The performance above is based on total returns, but does not include transaction costs. This example is presented for illustrative purposes only and does not represent a past recommendation. 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.
High RS Asset Class Disclosures
The performance above is based on pure price returns, not inclusive of dividends or all transaction costs. This example is presented for illustrative purposes only and does not represent a past recommendation. 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.
Fund Flows Disclosures
This example is presented for illustrative purposes only and does not represent a past recommendation.
High RS Diffusion Index Disclosures
The index above is based on pure price returns, not inclusive of dividends or all transaction costs. This example is presented for illustrative purposes only and does not represent a past recommendation. 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.
Relative Strength Spread Disclosures
The index above is based on pure price returns, not inclusive of dividends or all transaction costs. This example is presented for illustrative purposes only and does not represent a past recommendation. 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 views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
