Tactical Portfolio Management Using Relative Strength · PDF fileTactical Portfolio Management...

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

Fundamental Analysis vs. Technical Analysis

1. What to Buy 2. Company Management 3. Earnings Quality 4. Price/Earnings Ratio 5. Product Acceptance

1. When to Buy 2. Trend Analysis 3. Relative Strength 4. Momentum 5. When to Sell

What is Fundamental Analysis? What is Technical Analysis?

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.

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.

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.

Citigroup (C) Did the fundamental analysts learn from the 2000-2002 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.”

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.

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.

Relative Strength

• 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 long-term themes of strength

• 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

What it is… What it is NOT…

Relative Strength Process The Teams

The Games

The Rankings

Why Top-Down?

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

Commodities Fixed Income

Foreign Currencies Cash

Step One: Create Inventory

Step Two: Relative Strength Analysis

Step Three: Rank Each Asset Class

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.

Behind the Curtain on DALI: Good Inventory Management Does Matter

US Equities

Large Cap

Mid Cap

Small Cap

Equal Weight

Cap Weight

Growth

Value ETF / Index Name Symbol

% Change

NASDAQ Composite NASD 10.42SPDR S&P 500 ETF Trust SPY 34.14Vanguard Mega Cap 300 MGC 40.57Rydex S&P 500 Equal Weight ETF RSP 164.57SPDR S&P Midcap 400 ETF Trust MDY 207.33iShares S&P SmallCap 600 Index IJR 217.21Differential 206.79

Returns 12/31/1999 – 9/30/2014

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


Domestic Equities: Back at the Top

Domestic Equity

Intl. Equity Commodity Fixed Income Currency Cash

1990s 76% 16% 2% 2% 4% 0%

2000s 4% 51% 33% 4% 6% 3%

2010 - 2013 84% 10% 5% 0% 0% 0%

Percent of Time Asset Class Was Ranked in the #1 Spot of D.A.L.I.


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

Technical Attribute Study

Symbol Company Name Start Date End Date Number of Days

StockGain / (Loss)

Index Gain / (Loss)

Performance +/- SPXEWI

DIS The Walt Disney Company 8/24/2009 9/30/2014 1863 206.75% 107.54% 99.21%UNH UnitedHealth Group Incorporated 12/16/2009 9/30/2014 1749 167.86% 94.30% 73.56%AXP American Express Company 1/19/2010 9/30/2014 1715 103.77% 85.73% 18.04%V Visa Inc. 8/29/2011 9/30/2014 1128 146.44% 68.27% 78.17%HD Home Depot, Inc. 9/21/2011 9/30/2014 1105 171.26% 76.38% 94.88%NKE Nike Inc. 6/29/2012 9/30/2014 823 103.24% 53.11% 50.13%JPM J.P. Morgan Chase & Co. 10/17/2012 9/30/2014 713 39.06% 42.44% -3.38%XOM Exxon Mobil Corporation 11/18/2013 9/30/2014 316 -1.30% 9.82% -11.12%MMM 3M Company 11/25/2013 9/30/2014 309 7.96% 9.47% -1.51%INTC Intel Corporation 7/16/2014 9/30/2014 76 0.49% -1.39% 1.88%MSFT Microsoft Corporation 7/17/2014 9/30/2014 75 4.11% -0.17% 4.28%

AVERAGES 897 36.74%

Strong Attribute Dow Jones Industrial Stocks

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.

Technical Attribute Study

Symbol Company Name Start Date End Date Number of Days

Stock Gain / (Loss)

Index Gain / (Loss)

Performance+/- SPXEWI

JNJ Johnson & Johnson 1/8/2009 9/30/2014 2091 80.60% 165.27% -84.67%MRK Merck & Co., Inc. 4/21/2010 9/30/2014 1623 70.64% 71.63% -0.99%PG The Procter & Gamble Company 2/3/2012 9/30/2014 970 33.41% 50.40% -16.99%CAT Caterpillar, Inc 6/4/2012 9/30/2014 848 18.94% 63.64% -44.70%MCD McDonald's Corporation 10/22/2012 9/30/2014 708 7.19% 44.77% -37.58%DD E.I. du Pont De Nemours and Company 10/23/2012 9/30/2014 707 58.59% 46.54% 12.05%KO The Coca-Cola Company 1/10/2013 9/30/2014 628 15.42% 37.56% -22.14%WMT Wal-mart Stores Inc. 2/19/2013 9/30/2014 588 11.21% 30.28% -19.07%IBM International Business Machines 4/22/2013 9/30/2014 526 1.06% 28.42% -27.36%CSCO Cisco Systems, Inc 5/29/2013 9/30/2014 489 4.35% 20.91% -16.56%T AT&T Inc. 7/15/2013 9/30/2014 442 -0.98% 17.69% -18.67%VZ Verizon Communications Inc. 8/16/2013 9/30/2014 410 4.52% 19.00% -14.48%PFE Pfizer Inc. 12/16/2013 9/30/2014 288 -2.25% 10.26% -12.51%TRV The Travelers Companies Inc. 1/23/2014 9/30/2014 250 13.09% 7.36% 5.73%CVX Chevron Corporation 1/31/2014 9/30/2014 242 6.89% 9.75% -2.86%UTX United Technologies Corporation 2/5/2014 9/30/2014 237 -2.14% 11.77% -13.91%GE General Electric Company 2/19/2014 9/30/2014 223 0.87% 6.43% -5.56%GS Goldman Sachs Group Inc. 4/7/2014 9/30/2014 176 15.77% 5.32% 10.45%BA The Boeing Company 7/24/2014 9/30/2014 68 2.40% -1.63% 4.03%

AVERAGES 606 -16.09%

Weak Attribute Dow Jones Industrial Stocks

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.

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.

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.

Sector Performance Dispersion

Year Best Performing DWA Sector Worst Performing Sector Difference

1998 DWA Biomedics/Genetics (DWABIOM) 51.40% DWA Oil Service (DWAOILS) -54.50% 105.90%

1999 DWA Internet (DWAINET) 186.10% DWA Electric Utilities (DWAEUTI) -20.80% 206.90%

2000 DWA Gas Utilities (DWAGUTI) 89.60% DWA Internet (DWAINET) -93.70% 183.30%

2001 DWA Protection & Safety Equip (DWAPROT) 48.10% DWA Telecom (DWATELE) -30.60% 78.70%

2002 DWA Precious Metals (DWAPREC) 49.30% DWA Semiconductor (DWASEMI) -44.80% 94.10%

2003 DWA Semiconductors (DWASEMI) 106.70% DWA Food & Beverage Sector (DWAFOOD) 10.50% 96.20%

2004 DWA Steel & Iron (DWASTEE) 90.00% DWA Semiconductor (DWASEMI) -16.60% 106.60%

2005 DWA Oil Service (DWAOILS) 51.50% DWA Auto & Auto Parts (DWAAUTO) -21.80% 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) -50.30% 113.40%

2008 DWA Drug (DWADRUG) -10.80% DWA Gaming (DWAGAME) -71.00% 60.20%

2009 DWA Retail (DWARETA) 124.22% DWA Savings & Loan (DWASAVI) -20.29% 144.51%

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) -33.57% 54.38%

2012 DWA Building Sector (DWABUIL) 38.15% DWA Steel & Iron (DWASTEE) -12.63% 50.78%

2013 DWA Aerospace (DWAAERO) 79.05% DWA Precious Metals (DWAPREC) -47.08% 126.13%

2014* DWA Biomedics/Genetics (DWABIOM) 33.27% DWA Steel (DWASTEE) -15.46% 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

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, -15.46%) is about 48.73% already.

2000 – 2002 S&P 500 Index (SPX)

Index Performance (%)

DWA DJ Home Construction Index 186.88 DWA DJ Saving and Loan Index 107.02 DWA Trucking Index 101.36


DWA Computer Index -46.79 DWA Fixed Line Index -57.55 DWA Wireless Index -66.39

SPX: -40.12%

Losers Winners

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

Returns from 12/31/1999 thru 12/31/2002

2002 – 2007 S&P 500 Index (SPX)

Losers Winners


DWA DJ Steel Index 859.7 DWA DJ Mining Index 667.8 DWA DJ Heavy Machinery Index 533.7 DWA DJ Oil Secondary Index 477.8


DWA DJ Airlines Index -36.3 DWA DJ Diversified Financial Index -39.7

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

SPX: +66.89%

2007 – 2009 S&P 500 Index (SPX)

Losers Winners SPX: -24.06%


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


DWA DJ Investment Services Index -40.7 DWA DJ Casino Index -41.6 DWA DJ Marine Transp. Index -42.5 DWA DJ Full Line Insurance Index -55.8 DWA DJ Saving and Loan Index -74.3

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

2009 – 2014* S&P 500 Index (SPX)

Losers Winners

SPX: +72.82%


DWA DJ Tire Index 201.9 DWA DJ Diversified Financials Index 183.5 DWA DJ Footwear Index 173.1 DWA DJ Retail Drug Index 161.7


DWA Mining Index -65.7 DWA Marine Transportation Index -57.6 DWA Coal Index -52.3

*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 possibility of loss

When Do Corrections Become Bear Markets?

Higher Risk of Severe Equity Decline

Lower Tops in the Bullish Percents

Narrowing of leadership from

individual sectors

Trend Charts of major indices

turning negative and important support areas

violated Percent Positive Trend Indicators

Below 50%

Defensive Asset Classes giving

relative strength buy signals over offensive asset

classes

-60

-50

-40

-30

-20

-10

0

10% Corrections in S&P 500

Frequency and Timing of Significant Corrections

Performance data quoted represents past performance and does not guarantee future results.

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 1932. 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 1997. • 1/3rd (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 -

19.4%.

Performance data quoted represents past performance and does not guarantee future results.

Our Game Plan

Trend Analysis

Measuring Direction of Movement

Relative Strength

Measuring Magnitude

of Movement

The DWA Evaluation

Process Supply & Demand

The Point & Figure Methodology

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.

Theresa DeBello Branch Operations Manager 772-460-2500 Toll-Free: 800-445-4767 [email protected] www.MelvilleWealthManagement.com

Holly Kramer Client Service Associate 772-460-2500 Toll-Free: 800-445-4767 [email protected] www.MelvilleWealthManagement.com

Nancy Zehr Peavler Registered Client Service Associate 772-460-2500 Toll-Free: 800-445-4767 [email protected] www.MelvilleWealthManagement.com

Tracy Germano Client Service Associate 772-460-2500 Toll-Free: 800-445-4767 [email protected] www.MelvilleWealthManagement.com

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