The natural tendency for investors in the US is to overweight US holdings. However, at times - like now, international equities are favored over the US because the asset class as a whole is performing well relative to US asset classes, as a whole.
Two popular and widely used ETFs are EFA (Europe, Far East & Asia) and EEM (Emerging Markets). The two largest holdings represented in the EFA are Japan and the United Kingdom, with a 22% and 21% weighting respectively. By contrast, the EEM's two largest country weightings are China and Brazil at 18% and 16% respectively. The relative strength relationship between EFA and EEM continues to favor EEM, telling me that emerging markets continue to outperform developed markets. However, by taking this analysis one step further, FRN (Frontier Markets) is exhibiting better strength than EEM. FRN’s largest country weighting is Chile at 31%.
It is this type of analysis which helps me to determine where to invest your funds. As I peel back the layers of the proverbial onion; international over US, emerging over developed, frontier over emerging…I am able to peer deeper into the international space and I can provide further analysis into where actual strengths may reside.
The trials and tribulations of the developed markets have been front & center in the news lately, suggesting a more defensive posture with respect to the developed and US equity markets at this time. On the other hand, we continue to see positive developments in the International equity space and superior strength still present in the Frontier and Emerging Markets.
Tuesday, August 31, 2010
Monday, August 16, 2010
Take a step back and look at the facts
After a day like Wednesday (8/11/10), which left many investors feeling a little rattled as the market exhaled, it is important to take a step back and look at the facts.
The financial headlines: "Global Fears Strike Stocks", "Market Woes", Stocks Tumble", etc. make an investor doubt their positions and convictions, for fear the sky is falling. But it's important to keep all rallies and declines in perspective.
Over the course of the past month the Dow Jones Industrial Average (DJIA) has gained roughly 1000 points, but with the Dow losing 265 points on Wednesday that rally came to an abrupt stop. To gain perspective on this decline I evaluated the longer term (100 point box) chart of the Dow. After attaining a high of 10,700 earlier this month, the Dow has pulled back to 10,400. Thus far, the pullback is a normal, and healthy, pullback within the confines of an overall positive trend for the DJIA.
There is no way to tell what the future holds however, by evaluating the underlying supply and demand relationship of tthe market we can gain some insight that might not otherwise exist, and is sorely lacking in the media reports.
The financial headlines: "Global Fears Strike Stocks", "Market Woes", Stocks Tumble", etc. make an investor doubt their positions and convictions, for fear the sky is falling. But it's important to keep all rallies and declines in perspective.
Over the course of the past month the Dow Jones Industrial Average (DJIA) has gained roughly 1000 points, but with the Dow losing 265 points on Wednesday that rally came to an abrupt stop. To gain perspective on this decline I evaluated the longer term (100 point box) chart of the Dow. After attaining a high of 10,700 earlier this month, the Dow has pulled back to 10,400. Thus far, the pullback is a normal, and healthy, pullback within the confines of an overall positive trend for the DJIA.
There is no way to tell what the future holds however, by evaluating the underlying supply and demand relationship of tthe market we can gain some insight that might not otherwise exist, and is sorely lacking in the media reports.
Tuesday, June 15, 2010
Ranking The World Cup Teams and the Market
The S&P 500 (SPX) and the Dow Jones Industrial Average (DJIA) each fell below their February correction lows during the most recent correction as did many of the broader based international equity indices. However, such as is often the case, a further look underneath the surface shows some pretty interesting developments. First, there are a number of indices that have remained above their February correction lows. Secondly, those indices that remain above their February lows are also those areas that have been exhibiting superior relative strength characteristics for some time now. They include: US Small Cap, US Mid Cap, US Equal Weighted S&P, and Growth. In other words, these indices are showing a positive divergence versus the rest of the broad equity market.
How do I know this? I will provide an example using national soccer teams:
The World Cup, one of the world's most watched sporting events, started this past weekend, 32 national soccer teams will compete in South Africa; like the Olympics, the World Cup rotates around the world every four years.
If you see the Brazilian team play, you'll notice a game of quick dance-like moves, efficient passing, and flare. However, if you see the Italian team, they play with staunch defense, but will suddenly and aggressively implement a counter-attacking strategy that often catches their opponents flat-footed. Although the two styles of play differ immensely, Brazil and Italy have won over half of the World Cups played. These two very different approaches have been tremendously successful, proving there is indeed more than one ‘right answer’ to the question of how to win a world cup. In soccer like in my business, employing a sound strategy and employing it well, leads to success over time. There is no one single investment approach that is right for the temperament of all investors, but a great many that can be ‘right’ if applied correctly. Relative Strength-based risk management using the Point and Figure methodology is my ‘style of play,’ and it works for me.
One reason I rely on relative strength is the simple fact that it gives me the objective capability to rank different assets and instruments. It does not matter if it's a stock or an ETF, I can compare it against another, and then rank them from strongest to weakest. This same concept of using rankings can be found almost everywhere in sports, including soccer. The Fédération Internationale de Football Association (FIFA) puts together the FIFA/Coca-Cola World Rankings to objectively rank the national teams from strongest to weakest - with the expectation that those at the top will most likely continue to perform better than the teams at the bottom. Does this sound familiar? The ranking tools I employ operate similarly, comparing different assets against each other and then ranking them from strongest to weakest, the assets at the top of the matrix have developed trends of outperformance, and history has demonstrated that these trends tend to sustain themselves for extended durations of time, so I look to these leaders to remain leaders until proven otherwise.
Currently, Brazil, Spain, Portugal, Netherlands, and Italy are the five strongest teams out of 202 entering the tournament. Simply put, the teams at the top have been performing better relative to the other teams. So, by having the strongest performance over the last few years, the teams at the top, have exemplary relative strength characteristics – just like what I want to own in your portfolio. The teams at the bottom of the ranking exhibit the lowest RS readings. In anticipation of the World Cup, we should expect to find Brazil and Spain making a strong push toward the finals.
In summary, by using relative strength I am able to rank the different ‘parts’ of the market. So as we go through the current market correction, we continue to hold the strongest sectors and shed those sectors dropping in rank while keeping an eye toward the future market leaders so we can add them to the portfolio when the time is right.
Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence.This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations.
How do I know this? I will provide an example using national soccer teams:
The World Cup, one of the world's most watched sporting events, started this past weekend, 32 national soccer teams will compete in South Africa; like the Olympics, the World Cup rotates around the world every four years.
If you see the Brazilian team play, you'll notice a game of quick dance-like moves, efficient passing, and flare. However, if you see the Italian team, they play with staunch defense, but will suddenly and aggressively implement a counter-attacking strategy that often catches their opponents flat-footed. Although the two styles of play differ immensely, Brazil and Italy have won over half of the World Cups played. These two very different approaches have been tremendously successful, proving there is indeed more than one ‘right answer’ to the question of how to win a world cup. In soccer like in my business, employing a sound strategy and employing it well, leads to success over time. There is no one single investment approach that is right for the temperament of all investors, but a great many that can be ‘right’ if applied correctly. Relative Strength-based risk management using the Point and Figure methodology is my ‘style of play,’ and it works for me.
One reason I rely on relative strength is the simple fact that it gives me the objective capability to rank different assets and instruments. It does not matter if it's a stock or an ETF, I can compare it against another, and then rank them from strongest to weakest. This same concept of using rankings can be found almost everywhere in sports, including soccer. The Fédération Internationale de Football Association (FIFA) puts together the FIFA/Coca-Cola World Rankings to objectively rank the national teams from strongest to weakest - with the expectation that those at the top will most likely continue to perform better than the teams at the bottom. Does this sound familiar? The ranking tools I employ operate similarly, comparing different assets against each other and then ranking them from strongest to weakest, the assets at the top of the matrix have developed trends of outperformance, and history has demonstrated that these trends tend to sustain themselves for extended durations of time, so I look to these leaders to remain leaders until proven otherwise.
Currently, Brazil, Spain, Portugal, Netherlands, and Italy are the five strongest teams out of 202 entering the tournament. Simply put, the teams at the top have been performing better relative to the other teams. So, by having the strongest performance over the last few years, the teams at the top, have exemplary relative strength characteristics – just like what I want to own in your portfolio. The teams at the bottom of the ranking exhibit the lowest RS readings. In anticipation of the World Cup, we should expect to find Brazil and Spain making a strong push toward the finals.
In summary, by using relative strength I am able to rank the different ‘parts’ of the market. So as we go through the current market correction, we continue to hold the strongest sectors and shed those sectors dropping in rank while keeping an eye toward the future market leaders so we can add them to the portfolio when the time is right.
Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence.This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations.
Thursday, June 3, 2010
Looking Under the 'Hood' of the Market
Since peaking about a month ago, the S&P 500 (SPX) has given back about 12%; however, as I continue to look ‘under the hood’ of the market, there have been some interesting developments from a relative strength (RS) perspective.
Today, there are 13 out of the 40 US economic sectors that have a higher RS reading than on April 23rd. By the way, 38 out of the 40 economic sectors produced positive returns last year (2009) and certainly, some sectors did better than others, but simply being in the market produced attractive returns. However, as we are now five months into 2010 it is becoming more and more apparent that having a tactical sector rotation strategy is going to be extremely important going forward. So far, there are 22 out of the 40 sectors which have produced positive returns this year. In other words, without a disciplined strategy you had roughly a 50 / 50 chance at picking a winning sector this year.
The correction for the vast majority of strong relative strength names has been just that - a correction, many investments are still in positive trends with strong technical attributes.
While volatility can wreck havoc on an investor's psyche, it is also the reason why equity returns are higher than returns on more stable assets like CD's.
Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence.This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations.
Today, there are 13 out of the 40 US economic sectors that have a higher RS reading than on April 23rd. By the way, 38 out of the 40 economic sectors produced positive returns last year (2009) and certainly, some sectors did better than others, but simply being in the market produced attractive returns. However, as we are now five months into 2010 it is becoming more and more apparent that having a tactical sector rotation strategy is going to be extremely important going forward. So far, there are 22 out of the 40 sectors which have produced positive returns this year. In other words, without a disciplined strategy you had roughly a 50 / 50 chance at picking a winning sector this year.
The correction for the vast majority of strong relative strength names has been just that - a correction, many investments are still in positive trends with strong technical attributes.
While volatility can wreck havoc on an investor's psyche, it is also the reason why equity returns are higher than returns on more stable assets like CD's.
Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence.This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations.
Tuesday, May 18, 2010
Big Picture: reversion to the mean & relative strength
Last week, I discussed how the pull-back in early May (mostly on the 6th of May) resolved what had been a generally overbought market; and in doing so has set up better entry points. Realize that a reversion to the mean is healthy and is not unusual when the market experiences a pull-back. Occasionally we see even the strongest ETFs and stocks give initial sell signals. But what is important is the bigger picture -- that of overall trend and relative strength characteristics.
While your holdings did indeed pull-back, the trend and relative strength traits remained firmly positive for most holdings. Those that deteriorated have been sold. In other words, the holdings I have retained still have exemplary relative strength versus their peer group and the market.
Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence.
This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations.
While your holdings did indeed pull-back, the trend and relative strength traits remained firmly positive for most holdings. Those that deteriorated have been sold. In other words, the holdings I have retained still have exemplary relative strength versus their peer group and the market.
Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence.
This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations.
Thursday, May 13, 2010
International Markets Fall Out of Favor
Whether it is a computer “glitch”, bailout announcement, or an employment numbers surprise, it appears that the markets are just looking for some news (good or bad) to react to. Without a doubt, the past week has been a whirlwind within the financial markets with the Dow Jones Industrial Average (DJIA) down nearly 1000 points at one point Thursday afternoon. Then on Monday morning we see the same index up more than 400 points. Whether we like it or not, these moves did in fact take place. The good news is that as a result of last week's action, we have seen the generally overbought condition in the market reversed; as most stocks, indexes, and ETFs have pulled back toward the middle of their ten-week trading bands.
The international markets and the trouble in Greece have also grabbed their fair share of headlines over the last couple of weeks and that has made investors nervous about international holdings. Throw in the fact that the US Dollar has been rising and this activity did affect out market indicators: International Equities have moved out of an emphasized position. This sets up a situation where international holdings need to be examined more closely - I am in the process of eliminating the weakest international holdings from portfolios.
Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence.This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations.
The international markets and the trouble in Greece have also grabbed their fair share of headlines over the last couple of weeks and that has made investors nervous about international holdings. Throw in the fact that the US Dollar has been rising and this activity did affect out market indicators: International Equities have moved out of an emphasized position. This sets up a situation where international holdings need to be examined more closely - I am in the process of eliminating the weakest international holdings from portfolios.
Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence.This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations.
Thursday, May 6, 2010
Putting the Market's Drop in Perspective
Last Tuesday brought one of the biggest declines of 2010 and that always makes investors nervous. This Tuesday brought more of the same. Are these one or two-day events or the start of something more dramatic and prolonged? Thus far these two sessions don't appear to be anything out of the ordinary.
For some perspective we need to understand the Dow Jones Industrial Average. When Charles Dow developed this index over 100 years ago, he added up the prices of the stocks in the index and then divided by the number of companies; the result was an average of the price. Today, the Dow remains a price weighted index. Over the years, stocks rose in price and then split, this caused the divisor in the Dow to decline. Today, there have been enough splits in the Dow that the divisor has fallen below 1, to 0.132319125. In other words, the ‘divisor’ has now become a ‘multiplier’. Let’s look back at an example: the divisor was around 7 back in the late 1970’s. If every stock in the Dow gained $1 back then, it would have produced a move in the Dow of 4.29 points ($1 times 30 stocks, divided by 7). Today the move is far greater. The same 1 point move in each of the 30 Dow stocks results in the index moving 226.72 points. This is basically what we saw the past two Tuesdays. While a 200+ point decline is not a lot of fun, a little perspective can help. I don’t like to see huge declines in the market anymore than the next guy, but in the grand scheme of things these declines were not as significant as they first appear, or as the media makes it out to be...
Last Tuesday’s market drop caused my primary indicator, the NYSE Bullish Percent indicator (BPNYSE), to fall by 0.56. This Tuesday it dropped 1.42, this means that the indicator remains at 77.654%. To bring the defensive team onto the field it would need to drop to 74%. Normally it takes a number of days or even weeks to see the Bullish Percent reverse direction, up or down. There are exceptions, but those typically occur at market bottoms and not market tops, as bottoms tend to be far more volatile than tops. Lastly, before the Bullish Percent reverses down, we typically see a number of other indicators reverse and turn negative as a ‘heads up’ of sorts - I have not yet seen that either.
In summary, despite a ‘large’ decline in the DJIA last week and today, the indicators remain positive at this time.
Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence.This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations.
For some perspective we need to understand the Dow Jones Industrial Average. When Charles Dow developed this index over 100 years ago, he added up the prices of the stocks in the index and then divided by the number of companies; the result was an average of the price. Today, the Dow remains a price weighted index. Over the years, stocks rose in price and then split, this caused the divisor in the Dow to decline. Today, there have been enough splits in the Dow that the divisor has fallen below 1, to 0.132319125. In other words, the ‘divisor’ has now become a ‘multiplier’. Let’s look back at an example: the divisor was around 7 back in the late 1970’s. If every stock in the Dow gained $1 back then, it would have produced a move in the Dow of 4.29 points ($1 times 30 stocks, divided by 7). Today the move is far greater. The same 1 point move in each of the 30 Dow stocks results in the index moving 226.72 points. This is basically what we saw the past two Tuesdays. While a 200+ point decline is not a lot of fun, a little perspective can help. I don’t like to see huge declines in the market anymore than the next guy, but in the grand scheme of things these declines were not as significant as they first appear, or as the media makes it out to be...
Last Tuesday’s market drop caused my primary indicator, the NYSE Bullish Percent indicator (BPNYSE), to fall by 0.56. This Tuesday it dropped 1.42, this means that the indicator remains at 77.654%. To bring the defensive team onto the field it would need to drop to 74%. Normally it takes a number of days or even weeks to see the Bullish Percent reverse direction, up or down. There are exceptions, but those typically occur at market bottoms and not market tops, as bottoms tend to be far more volatile than tops. Lastly, before the Bullish Percent reverses down, we typically see a number of other indicators reverse and turn negative as a ‘heads up’ of sorts - I have not yet seen that either.
In summary, despite a ‘large’ decline in the DJIA last week and today, the indicators remain positive at this time.
Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence.This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations.
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