Tactical Portfolio Management Using Relative Strength and Trend Analysis

Transcription

1 Tactical Portfolio Management Using Relative Strength and Trend Analysis A Disciplined, Risk Managed Approach The Company fundamentals look great. All the analysts love it. So why is the stock going down? Dorsey, Wright &Associates, Inc. is an independent organization and is not affiliated with Raymond James & Associates. Raymond James & Associates, Inc., Member New York Stock Exchange/SIPC

2 Fundamental Analysis vs. Technical Analysis What is Fundamental Analysis? 1. What to Buy 2. Company Management 3. Earnings Quality 4. Price/Earnings Ratio 5. Product Acceptance What is Technical Analysis? 1. When to Buy 2. Trend Analysis 3. Relative Strength 4. Momentum 5. When to Sell Relative Strength is a measure of price trend that indicates how a stock is performing relative to other stocks in its industry. Price Earnings Ratio (P/E) is the price of the stock divided by its earnings per share. Technical Analysis is a method of evaluating securities by analyzing statics generated by market activity, such as past prices and volume. Technical Analysts do not attempt to measure a security s intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.

3 Point & Figure Analysis History Charles Dow created the Point & Figure in the late 1800 s. Charles Dow was a fundamentalist at heart, but he appreciated the need for understanding the supply and demand relationship of any stock he was going to own. Point & figure technical analysis is based on the simplest, most basic law of economics... Supply and Demand Point & Figure charting illustrates the movement of a security of index. The vertical axis of the chart represents the value of the security or index and the horizontal axis of the chart represents time. The letter X indicates the security or index is rising in value, while the letter O indicates the security or index is declining in value. The numbers in the chart represent the month of the year. For example, the number 3 represents March while the number 9 represents September. October, November and December are represented by A, B, and C respectively.

4 Supply and Demand We all understand the basic forces of supply and demand. The same forces that affect prices in the supermarket also affect prices in the stock market. Stocks, sectors, and asset classes move in and out of favor just like produce in the supermarket.

5 Did the fundamental analysts learn from the Technology Bubble? The following is a quote from the February 9th New York Times article, Why Analysts Keep Telling Investors to Buy At the top of the market, they urged investors to buy or hold onto stocks about 95 percent of the time. When stocks stumbled, they stayed optimistic. Even in November, when credit froze, the economy stalled and financial markets tumbled to their lowest levels in a decade, analysts as a group rarely said sell. And last month, as the Dow and S&P 500- stock index suffered their worst January ever, analysts put a sell rating on a mere 5.9 percent of stocks, according to Bloomberg data. Citigroup (C) This information is general in nature, is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security.

6 Tactical Tilt Methodology 3 Step Portfolio Construction Process Tactical Tile Methodology uses a ranking process for each major asset class and each major investment sector within them. These rankings are then used to construct and manage multi-asset class portfolios, tilting towards the stronger asset classes. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

7 Relative Strength What it is A means for identifying market leadership An adaptive, tactical risk management tool Based upon objective inputs (i.e. price, supply & demand) Designed to participate in longterm themes of strength What it is NOT A market forecasting black box A static, strategic indexing strategy Reliant upon subjective inputs (i.e. gut feel or manipulated valuations) Designed to target exact tops or bottoms in securities

8 The Teams Relative Strength Process The Games The Rankings

9 Why Top-Down?

10 Dynamic Asset Level Investing (D.A.L.I.) The Dynamic Asset Level Investing (D.A.L.I.) evaluates the supply and demand forces of asset classes, and ranks them from strongest to weakest based on their relative strength score. US Equities Int l Equities Step One: Create Inventory Step Two: Relative Strength Analysis Commodities Fixed Income Step Three: Rank Each Asset Class Foreign Currencies Cash Step Four: Check Against Cash Proxy International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Commodities are generally considered speculative because of the significant potential for investment loss. Commodities are volatile investments and should only form a small part of a diversified portfolio. There may be sharp price fluctuations even during periods when prices overall are rising.

11 Behind the Curtain on DALI: Good Inventory Management Does Matter Growth Value Large Cap US Equities Mid Cap Small Cap ETF / Index Name Symbol % Change NASDAQ Composite NASD SPDR S&P 500 ETF Trust SPY Vanguard Mega Cap 300 MGC Rydex S&P 500 Equal Weight ETF RSP SPDR S&P Midcap 400 ETF Trust MDY ishares S&P SmallCap 600 Index IJR Differential Returns 12/31/1999 9/30/2014 Cap Weight Equal Weight The performance numbers above are pure price returns, not inclusive of dividends, all fees, or other expenses. Past performance not indicative of future results. Potential for profits accompanied by possibility of loss This information is general in nature, is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security.

12 Domestic Equities: Back at the Top Percent of Time Asset Class Was Ranked in the #1 Spot of D.A.L.I. Domestic Equity Intl. Equity Commodity Fixed Income Currency Cash 1990s 76% 16% 2% 2% 4% 0% 2000s 4% 51% 33% 4% 6% 3% % 10% 5% 0% 0% 0% This information is general in nature, is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security.

13 Five Technical Attributes Point & Figure Mini Lesson: Technical Attributes Trend: Positive or Negative Market RS Signal Buy or Sell Market RS Column Xs or Os Peer RS Signal Buy or Sell Peer RS Column Xs or Os Strong Technical Attribute Stocks = 3 or better Weak Technical Attribute Stocks = 2 or lower

14 Technical Attribute Study Strong Attribute Dow Jones Industrial Stocks Symbol Company Name Start Date End Date Number of Days Stock Gain / (Loss) Index Gain / (Loss) Performance +/- SPXEWI DIS The Walt Disney Company 8/24/2009 9/30/ % % 99.21% UNH UnitedHealth Group Incorporated 12/16/2009 9/30/ % 94.30% 73.56% AXP American Express Company 1/19/2010 9/30/ % 85.73% 18.04% V Visa Inc. 8/29/2011 9/30/ % 68.27% 78.17% HD Home Depot, Inc. 9/21/2011 9/30/ % 76.38% 94.88% NKE Nike Inc. 6/29/2012 9/30/ % 53.11% 50.13% JPM J.P. Morgan Chase & Co. 10/17/2012 9/30/ % 42.44% -3.38% XOM Exxon Mobil Corporation 11/18/2013 9/30/ % 9.82% % MMM 3M Company 11/25/2013 9/30/ % 9.47% -1.51% INTC Intel Corporation 7/16/2014 9/30/ % -1.39% 1.88% MSFT Microsoft Corporation 7/17/2014 9/30/ % -0.17% 4.28% AVERAGES % This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Past performance may not be indicative of future results.

15 Technical Attribute Study Weak Attribute Dow Jones Industrial Stocks Symbol Company Name Start Date End Date Number of Days Stock Gain / (Loss) Index Gain / (Loss) Performance +/- SPXEWI JNJ Johnson & Johnson 1/8/2009 9/30/ % % % MRK Merck & Co., Inc. 4/21/2010 9/30/ % 71.63% -0.99% PG The Procter & Gamble Company 2/3/2012 9/30/ % 50.40% % CAT Caterpillar, Inc 6/4/2012 9/30/ % 63.64% % MCD McDonald's Corporation 10/22/2012 9/30/ % 44.77% % DD E.I. du Pont De Nemours and Company 10/23/2012 9/30/ % 46.54% 12.05% KO The Coca-Cola Company 1/10/2013 9/30/ % 37.56% % WMT Wal-mart Stores Inc. 2/19/2013 9/30/ % 30.28% % IBM International Business Machines 4/22/2013 9/30/ % 28.42% % CSCO Cisco Systems, Inc 5/29/2013 9/30/ % 20.91% % T AT&T Inc. 7/15/2013 9/30/ % 17.69% % VZ Verizon Communications Inc. 8/16/2013 9/30/ % 19.00% % PFE Pfizer Inc. 12/16/2013 9/30/ % 10.26% % TRV The Travelers Companies Inc. 1/23/2014 9/30/ % 7.36% 5.73% CVX Chevron Corporation 1/31/2014 9/30/ % 9.75% -2.86% UTX United Technologies Corporation 2/5/2014 9/30/ % 11.77% % GE General Electric Company 2/19/2014 9/30/ % 6.43% -5.56% GS Goldman Sachs Group Inc. 4/7/2014 9/30/ % 5.32% 10.45% BA The Boeing Company 7/24/2014 9/30/ % -1.63% 4.03% AVERAGES % This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Past performance may not be indicative of future results.

16 Sector Indicators We now apply the same relative strength tools used in determining which markets to be invested to more than 40 specific sectors contained within a particular market Just like market analysis, sector analysis tells us whether to have the offense or the defense on the field with respect to the various sectors. The sector bell curve allows us to get a visual picture of the current market & visualize risk. Most of the time the sector bell curve looks fairly normal with some sectors overbought, some sectors oversold, but most sectors in between. Every investor s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

17 Sector Impact Every investor s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

18 Sector Performance Dispersion Since 1998 the average dispersion of returns amongst sectors has been greater than 96% annually. In 2008, when all sectors posted losses for the year, or 2003, when all sectors rose, there was a material difference between the best and worst performing groups. Thus far in 2014* the difference between Biomedics/Genetics(best, 33.27%) & Steel (worst, %) is about 48.73% already. Year Best Performing DWA Sector Worst Performing Sector Difference 1998 DWA Biomedics/Genetics (DWABIOM) 51.40% DWA Oil Service (DWAOILS) % % 1999 DWA Internet (DWAINET) % DWA Electric Utilities (DWAEUTI) % % 2000 DWA Gas Utilities (DWAGUTI) 89.60% DWA Internet (DWAINET) % % 2001 DWA Protection & Safety Equip (DWAPROT) 48.10% DWA Telecom (DWATELE) % 78.70% 2002 DWA Precious Metals (DWAPREC) 49.30% DWA Semiconductor (DWASEMI) % 94.10% 2003 DWA Semiconductors (DWASEMI) % DWA Food & Beverage Sector (DWAFOOD) 10.50% 96.20% 2004 DWA Steel & Iron (DWASTEE) 90.00% DWA Semiconductor (DWASEMI) % % 2005 DWA Oil Service (DWAOILS) 51.50% DWA Auto & Auto Parts (DWAAUTO) % 73.30% 2006 DWA Steel & Iron (DWASTEE) 43.00% DWA Building Sector (DWABUIL) -0.26% 43.26% 2007 DWA Steel & Iron (DWASTEE) 63.10% DWA Savings & Loan (DWASAVI) % % 2008 DWA Drug (DWADRUG) % DWA Gaming (DWAGAME) % 60.20% 2009 DWA Retail (DWARETA) % DWA Savings & Loan (DWASAVI) % % 2010 DWA Auto Index (DWAAUTO) 53.85% DWA Wall Street Index (DWAWALL) 1.70% 52.15% 2011 DWA Drug Index (DWADRUG) 20.81% DWA Metals Non-Ferrous (DWAMETA) % 54.38% 2012 DWA Building Sector (DWABUIL) 38.15% DWA Steel & Iron (DWASTEE) % 50.78% 2013 DWA Aerospace (DWAAERO) 79.05% DWA Precious Metals (DWAPREC) % % 2014* DWA Biomedics/Genetics (DWABIOM) 33.27% DWA Steel (DWASTEE) % 48.73% Average: 96.38% The performance numbers above are pure price returns, based on the applicable non-investable index not inclusive of dividends or fees. Past performance not indicative of future results. Potential for profits accompanied by possibility of loss

19 S&P 500 Index (SPX) Winners Losers Index Performance (%) Index Performance (%) DWA DJ Home Construction Index DWA DJ Saving and Loan Index DWA Trucking Index SPX: % DWA Computer Index DWA Fixed Line Index DWA Wireless Index Returns from 12/31/1999 thru 12/31/2002 The performance numbers above are pure price returns of non-investable indexes,not inclusive of dividends or fees Past performance not indicative of future results. Potential for profits accompanied by possibility of loss

20 S&P 500 Index (SPX) Winners Losers Index Performance (%) Index Performance (%) DWA DJ Steel Index DWA DJ Mining Index DWA DJ Heavy Machinery Index DWA DJ Oil Secondary Index DWA DJ Airlines Index DWA DJ Diversified Financial Index SPX: % Returns from 12/31/1999 thru 12/31/2002 The performance numbers above are pure price returns of non-investable indexes, not inclusive of dividends or fees. Past performance not indicative of future results. Potential for profits accompanied by possibility of loss

21 S&P 500 Index (SPX) Winners SPX: % Losers Index Performance (%) DWA DJ Factory Equipment Index 40.0 DWA DJ Precious Metals Index 28.5 DWA DJ Consumer Services Index 25.7 DWA DJ Software Index 22.6 Index Performance (%) DWA DJ Investment Services Index DWA DJ Casino Index DWA DJ Marine Transp. Index DWA DJ Full Line Insurance Index DWA DJ Saving and Loan Index Returns from 12/31/2007 thru 12/31/2009 The performance numbers above are pure price returns of non-investable indexes, not inclusive of dividends or fees. Past performance not indicative of future results. Potential for profits accompanied by possibility of loss

22 * S&P 500 Index (SPX) Winners Losers Index Performance (%) DWA DJ Tire Index DWA DJ Diversified Financials Index DWA DJ Footwear Index DWA DJ Retail Drug Index SPX: % Index Performance (%) DWA Mining Index DWA Marine Transportation Index DWA Coal Index *Returns from 12/31/2009 thru 10/22/2014, chart above thru 2013 The performance numbers above are pure price returns of non-investable indexes, not inclusive of dividends or fees. Past performance not indicative of future results. Potential for profits accompanied by

23 When Do Corrections Become Bear Markets? Narrowing of leadership from individual sectors Trend Charts of major indices turning negative and important support areas violated Percent Positive Trend Indicators Below 50% Lower Tops in the Bullish Percents Higher Risk of Severe Equity Decline Defensive Asset Classes giving relative strength buy signals over offensive asset classes

24 Frequency and Timing of Significant Corrections 10% Corrections in S&P Performance data quoted represents past performance and does not guarantee future results.

25 10 Percent S&P 500 Correction Stats: Since 1928 (86 years), S&P 500 has corrected 10% 93 times. So, on average, 1.1 times per year. 41% of the 10% corrections came from 1928 through Since 1940 (74 years) the S&P 500 has correction 10% 55 times, or 0.74 times per year. Longest stretch between 10% correction was about 7 years from August 1990 to October /3 rd (34%) of 10% correction have led to 20%, or more, before seeing the S&P 500 hit its low. The last 10% correction ended in October 2011 with a peak to trough move of %. Performance data quoted represents past performance and does not guarantee future results.

26 Our Game Plan The Point & Figure Methodology Trend Analysis Measuring Direction of Movement The DWA Evaluation Process Supply & Demand Relative Strength Measuring Magnitude of Movement Views expressed in this presentation are the current opinion of the author, and not necessarily those of Raymond James & Associates or your financial advisor. The author s opinions are subject to change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Past performance is not indicative of future results. Investing always involves risk and you may incur a profit or a loss. No investment strategy can guarantee success.

27 Theresa DeBello Branch Operations Manager Toll-Free: Tracy Germano Client Service Associate Toll-Free: Holly Kramer Client Service Associate Toll-Free: Nancy Zehr Peavler Registered Client Service Associate Toll-Free: