Nasdaq Dorsey Wright Indexes
Indexes

Relative Strength Investing Trends: September 2018

What's Hot ... and Not. This monthly Nasdaq Dorsey Wright update is devoted to information and portfolio strategies for the high relative strength asset class.

What's Hot ... and Not

How different investments have done over the past 12 months, 6 months, and 1 month. As of 9/14/18:

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 9/14/18:

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 9/14/18:

Both the 10-day moving average and the one-day reading are 82%. This index has been above 50% the vast majority of the last several years as we have generally seen positive trends in the U.S. equity markets.

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 9/14/18:

After falling below its 50 day moving average in early June, the RS Spread has consolidated and is now back above its 50 day moving average----a potentially positive sign for relative strength strategies.

See disclosures in Appendix A.

Momentum: Why Doesn’t Everyone Do It?

“If momentum is really so great then why doesn’t everyone do it?”

I love this question. It usually is posed by someone who a) doesn’t think the historical testing on momentum is legit or b) doesn’t think that real live investors can “stomach” a momentum strategy.

As for the first concern, I’ll just defer to the larger body of work by academic and practitioners on the topic. John Lewis has published some 8 different white papers on momentum investing if you do want to read our own work. See below for an excerpt from a recent article written by Wesley Gray at Alpha Architect. The chart below shows the growth of a momentum, value, S&P 500, and Treasury Bond strategy from 1927-2017. The annualized return of momentum was 16.69%, value was 11.99%, S&P 500 was 10.00%, and Treasury Bonds were 5.30%.

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

Gray’s article goes on to point out that this momentum strategy outperformed the S&P 500 in 90% of 5-year stretches (Value outperformed in 65% of 5-year stretches).

I’ve read hundreds of these types of articles on momentum and the conclusion is usually about the same: over long periods of time momentum has shown the ability to generate outperformance.

What I find most interesting about the article, however, is not the content, but it is the title: “Academic Factor Portfolios are Extremely Painful. Unless you are an Alien.

Given the underlying data that is readily available on momentum investing I am genuinely surprised every time I see people come to the conclusion that yes, momentum is great, but it is just too painful to implement in the real world. Keep in mind that it was the same author who included in his article that momentum outperformed in 90% of 5 year periods in his own study.

My experience with real clients is quite the opposite. We have many clients who have been invested in our momentum strategies for over a decade…some for over two decades. We have had plenty of periods of outperformance and plenty of periods of underperformance, but “stomaching” a momentum strategy is much less scary than people often try to make it out to be. Ultimately, I guess it comes down to expectations. If someone employs a momentum strategy and expects that it will outperform all the time then yes, I guess I can understand why they are disappointed. There will always be clients who buy when a strategy is hot and then liquidate during the first signs of underperformance---that is human nature and it frankly doesn’t surprise me at all. However, there are many clients who come in with the right expectations and who decide that they are going to make momentum a meaningful portion of their overall allocation and then they invest patiently for the long-run. My own experience with our clients is that clients who come in with that type of mindset tend to make the most money over time.

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

Media Center

Powershares DWA Momentum ETFs

Arrow DWA Funds and ETFs

First Trust DWA UITs and ETFs

AdvisorShares

ALPS

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.


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