Technical Analysis & ETFs: Generating Higher Returns in all Markets

Transcription

1 Technical Analysis & ETFs: Generating Higher Returns in all Markets Paul Baiocchi, Moderator ETF Analyst, IndexUniverse Tom Dorsey, Presenter President & Founding Member Dorsey, Wright & Associates

2 ETFs Across Every Major Asset Class Now What? With 1,300 ETFs also comes the need to choose among them and determine a manner in which to use them together For Advisor Use Only. Not For Use With The Public.

3 WHERE DID IT ALL BEGIN? History ETFs had their genesis in 1989 with Index Participation Shares, an S&P 500 proxy that traded on the American Stock Exchange and the Philadelphia Stock Exchange. This product, however, was short lived after a lawsuit by the Chicago Mercantile Exchange was successful in stopping sales in the United States. WIKIPEDIA Spiders Debut 1993 and it s off to the races Options on XAU Indexes began trading in 1983.

4 ETF World Circa 2000: 30 ETFs The investment lights of the world have been turned on ETF World Circa 2012: approx. 1,300 ETFs For Advisor Use Only. Not For Use With The Public. 4

5 The Dow has experienced 8 major structural markets, each lasting an average of 14 years. Must be able to navigate through both Bull and Bear markets. 12+ years (so far ) For Broker / Advisor Use Only. Not For Use With The Public. For Advisor Use Only. Not For Use With The Public.

6 A Game Plan Based on 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. For Broker / Advisor Use Only. Not For Use With The Public.

7 Original Point & Figure Chart Dates back to the late 1800 s Depicts the battle between supply & demand For Broker / Advisor Use Only. Not For Use With The Public.

8 Point & Figure Method: The Most Basic Patterns Double Top Double Bottom 45 O 45 X X O X O X O O X O X O O X O O O X X S 40 O X 40 X O O X X O O X X O O X X O O X X O 35 O B 35 X O O X X X O X O X X O X O X X O O X For Broker / Advisor Use Only. Not For Use With The Public.

9 Quiz Question: Who s in Control? Knowing nothing about this security. Does the chart suggest demand, or supply, is controlling the price movement? What would you do? For Broker / Advisor Use Only. Not For Use With The Public.

10 How Did So Many Get it Wrong New York Times- December 31st 2000 How can so many who are paid so much to scrutinize companies have blown it so spectacularly for their investor customers? Anthony Noto at Goldman, Sachs sums the situation up quite well. Article suggests he remained positive on the internet stocks he followed until after they lost 98% of their value during the 52 week period. Our research is driven by fundamental analysis and is not influenced by anything else, Mr. Noto said. He went on to explain that the companies he follows had their stock prices drop last spring not because their operations were failing, but because market psychology had changed. He downgraded the stocks much later because only then had it become clear through his research that the companies results were deteriorating. In hindsight, he said we should have lowered our ratings sooner. We regret that. Citigroup (C): For Broker / Advisor Use Only. Not For Use With The Public.

11 Relative Strength Staying on the Path All major sports have a ranking system. The Point & Figure Relative Strength tool is the ranking system we use for ETF s. Daily Calculation: Stock / ETF X 100 = RS Market Index Reading This reading is plotted on a Point & Figure chart which then tells us whether we can expect that stock or ETF to outperform or underperform the base index. For Broker / Advisor Use Only. Not For Use With The Public.

12 Stock vs. Market Relative Strength Apple (AAPL) vs. S&P Equal Weighted Index (SPXEWI) Relative Strength Basics: Stock RS This relative strength chart is on a Point & Figure Buy Signal and in a column of X s AAPL has positive long term and short term RS versus the broad market. It has been on a buy signal since March 10 th, 2004 (to 11/7/11) AAPL = % SPXEWI = % For Financial Professional Use Only. Not For Use With The Public. 12

13 Peer Relative Strength Medtronic (MDT) vs. The DWA Healthcare Sector (DWAHEAL) With Positive RS vs. Healthcare Sector (7/2/97 3/1/01) MDT: % DWAHEAL: % With Negative RS vs. Healthcare Sector (3/1/01 1/31/2011) MDT: % DWAHEAL: % 13

14 For Financial Professional Use Only. Not For Use With The Public. SML gave buy signal versus SPX on 2/18/2000 to suggest Small Cap Stocks should outperform Large Cap stocks. Since 2/18/2000 SML: % SPX: % What lost decade? * Returns thru 11/7/11 Buy Signal = Favors Small Caps Sell Signal = Favors Large Caps 14

15 ETFs in the Pantry = Ingredients Curry Onions Steak Baking Soda Shrimp White Sugar Salt Vanilla Extract Black Pepper Grated Carrots Cinnamon Baking Powder Butter Chopped Pecans Cheese Capers Croutons Tomatoes Asparagus Dry Mustard Celery Basil Chicken Cabbage Lettuce Red Pepper Mushrooms Snap Peas Tomato Sauce Nutmeg Rice Vinegar Heavy Cream Garlic Salt Beets Bacon Squash Ground Beef Parsley Sweet Potato Oysters Eggplant Milk Lasagna Noodles Lemon Juice Yeast Chives Potatoes Flour Salmon Apples Spinach Turkey Pork Shank Pineapple Mint Leaf Almonds Cauliflower Honey Corn Syrup Lobster Eggs Feta Cheese Wasabi Powder Sausage Ginger Eggs Vegetable Oil

16 Ingredients For? Curry Onions Steak Baking Soda Shrimp White Sugar Salt Vanilla Extract Black Pepper Grated Carrots Cinnamon Baking Powder Butter Chopped Pecans Cheese Capers Croutons Tomatoes Asparagus Dry Mustard Celery Basil Chicken Cabbage Lettuce Red Pepper Mushrooms Snap Peas Tomato Sauce Nutmeg Rice Vinegar Heavy Cream Garlic Salt Beets Bacon Squash Ground Beef Parsley Sweet Potato Oysters Eggplant Milk Lasagna Noodles Lemon Juice Yeast Chives Potatoes Flour Salmon Apples Spinach Turkey Pork Shank Pineapple Mint Leaf Almonds Cauliflower Honey Corn Syrup Lobster Eggs Feta Cheese Wasabi Powder Sausage Ginger Eggs Vegetable Oil

17 Directions for Carrot Cake 1. Preheat oven to 350 degrees F (175 degrees C). Grease and flour a 9x13 inch pan. 2. In a large bowl, beat together eggs, oil, white sugar and 2 teaspoons vanilla. Mix in flour, baking soda, baking powder, salt and cinnamon. Stir in carrots. Fold in pecans. Pour into prepared pan. 3. Bake in the preheated oven for 40 to 50 minutes, or until a toothpick inserted into the center of the cake comes out clean. Let cool in pan for 10 minutes, then turn out onto a wire rack and cool completely. 4. To Make Frosting: In a medium bowl, combine butter, cream cheese, confectioners' sugar and 1 teaspoon vanilla. Beat until the mixture is smooth and creamy. Stir in chopped pecans. Frost the cooled cake.

18 Example: First Trust Focus 5 Model All Sector Funds from First Trust (25 ETFs) RS Screening Sieve (Top 5 Rank on a Relative Strength Matrix) Weekly Monitoring For Example Purposes only (DWA Website subscription)

19 PowerShares ETF Line Up Best Ranking Focus Buying on the top of the RS Matrix Avoid those at the bottom of the RS Matrix Worst Ranking For Internal Use Only. Not 19

20 PowerShares DWA Technical Leaders Portfolio (PDP) Universe of Over 1500 Names Relative Strength Arm Wrestling Match Ranked Strongest to Weakest Current PDP Allocations Source: Holdings, 65% Mid Cap Largest Sector Weighting in Industrials, Consumer Cyclicals, and Technology FOR BROKER USE ONLY. NOT FOR USE WITH THE PUBLIC

21 RS Matrix Application: Buying Germany

22 For Financial Professional Use Only. Not For Use With The Public.

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24 Notification Received, Ordered Placed Order placed On 13-Jan-2012 at 8:37:43 AM (GMT) You placed order to buy 195 MRCG:xetr limit G.T.C.. Front office order id: Account: Order placed On 13-Jan-2012 at 8:24:44 AM (GMT) You placed order to sell 63 PUMG:xetr limit G.T.C.. Front office order id: Account: A seamless transaction through the use of Technology: This is the Future!

25 REPLACING ONE COUNTRY WITH ANOTHER

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27 For Financial Professional Use Only. Not For Use With The Public.

28 Finding Leadership: Relative Strength In What Works On Wall Street, Jim O Shaughnessy found that relative strength was a factor in all 10 of the top performing strategies. He also found that the worst strategy in his testing was buying the stocks with the worst relative strength. Large Losers Most Trades Large Winners For Advisor Use Only. Not For Use With The Public.

29 Building a Business And a Brand Rinse Wash Rebalance Mean Variance Optimization Source: wealthfront.com

30 Question: Strategic Allocation Report Card What was the cumulative return of this Strategic Allocation Approach since 12/31/1999 with annual rebalancing? (For perspective, Money Market gained 30.4% during this time.) A. + 0%, or less B. +30% C. +60% D. +150%, or more

31 December 31, December 31, 2011 December 31, December 31, Money Int'l Int'l Int'l Fixed Int'l Fixed Money Int'l Int'l Int'l Fixed Int'l Fixed Commod. Market Commod. Commod. Commod. Income Commod. Income Commod. Commod. Market Commod. Commod. Commod. Income Commod. Income Commod % 14.39% 3.33% 3.33% 18.42% 18.42% 40.83% 40.83% 20.91% 20.91% 21.44% 21.44% 26.65% 26.65% 17.24% 17.24% 2.05% 2.05% 33.79% 33.79% 25.19% 25.19% 4.07% 4.07% % % Money Fixed Foreign US Int'l US Int'l Money US US Strategic Money Fixed Foreign US Int'l US Int'l Money US US Strategic Market Income Currency Commod. Market DWA6040 Allocation Market 5.91% Income 1.81% Currency 9.75% 27.37% Commod % 16.62% 13.34% 12.63% Market 1.33% 23.89% 14.18% DWA % Allocation 30.54% 5.91% Fixed 1.81% Foreign 9.75% Fixed 27.37% Strategic 12.47% Strategic 16.62% Strategic 13.34% Strategic 12.63% Foreign 1.33% Foreign 23.89% Strategic 14.18% Strategic 0.62% Money 30.54% Money Fixed Foreign Fixed Strategic Strategic Strategic Strategic Foreign Foreign Strategic Strategic Money Money Income Currency Income Allocation Allocation Allocation Allocation Currency Currency Allocation Allocation Market Market Income Currency Income Allocation Allocation Allocation Allocation Currency Currency Allocation Allocation Market Market 4.18% -5.33% 2.37% 24.24% 11.10% 7.30% 12.93% 7.62% % 22.14% 10.36% 0.05% 30.40% 4.18% -5.33% 2.37% 24.24% 11.10% 7.30% 12.93% 7.62% % 22.14% 10.36% 0.05% 30.40% Money US US Strategic US Foreign Money US US Strategic US Foreign DWA6040 DWA6040 DWA6040 DWA6040 Market Market DWA6040 DWA6040 Commod. Commod. Allocation Allocation DWA6040 DWA6040 Commod. Commod. DWA6040 DWA6040 Currency Currency -4.07% -4.07% -6.82% -6.82% 1.58% 1.58% 15.26% 15.26% 9.84% 9.84% 3.65% 3.65% 9.19% 9.19% 6.25% 6.25% % % 20.07% 20.07% 8.92% 8.92% -0.14% -0.14% 27.97% 27.97% Strategic Strategic Strategic Strategic Strategic Strategic Foreign Foreign Foreign Foreign Money Money Money Money Int'l Int'l Foreign Foreign Fixed Fixed Allocation Allocation Allocation Allocation Allocation Allocation Currency Currency Currency Currency Market Market DWA6040 DWA6040 Market Market Commod. Commod. DWA6040 DWA6040 Currency Currency Income Income -4.58% -4.58% -8.70% -8.70% -7.72% -7.72% 14.93% 14.93% 6.27% 6.27% 3.01% 3.01% 7.79% 7.79% 4.36% 4.36% % % 14.37% 14.37% 8.69% 8.69% -1.63% -1.63% 15.91% 15.91% Foreign Foreign US US Foreign Foreign Strategic Strategic Foreign Foreign Foreign Foreign Strategic Int'l Int'l Currency Currency DWA6040 DWA6040 Commod. Commod. DWA6040 DWA6040 DWA6040 DWA6040 Currency Currency DWA6040 DWA6040 Allocation Currency Currency Allocation -6.65% -6.65% % % % % 11.32% 11.32% 5.32% 5.32% -1.96% -1.96% 6.93% 6.93% 3.61% 3.61% % 8.93% 5.86% -4.67% 12.96% US US Int'l Int'l Money Money Money Money Fixed Fixed Money Money US US US US Money Fixed Commod. Commod. Market Market Market Market Income Income Market Market Market Market Income Commod. DWA % -8.03% % % % % 0.98% 0.98% 1.40% 1.40% -2.04% -2.04% 4.74% 4.74% 3.47% 3.47% % % 0.21% 0.21% 2.14% 2.14% -9.20% -9.20% -0.41% Int'l Int'l Int'l Int'l US US Fixed Fixed Fixed Fixed Foreign Foreign Fixed Fixed Fixed Fixed Int'l Int'l Fixed Fixed Money Money Int'l Int'l US US Income Income Income Income Currency Currency Income Income Income Income Income Income Market Market % % % % % % -0.67% -0.67% -0.39% -0.39% -7.99% -7.99% -0.70% -0.70% 2.74% 2.74% % % -0.48% -0.48% 0.16% 0.16% % % -6.09% -6.09% Strategic Allocation and Money Market have identical returns since 12/31/1999 Legend: Legend: Strategic Allocation Inventory Tactical Allocation Inventory Strategic Allocation Inventory Weighting Tactical Allocation Inventory Money Market DWA Money Market (MNYMKT) Vanguard Total Stock Market ETF (VTI)* Weighting 26.70% Money Market DWA Money Market (MNYMKT) Vanguard Total Stock Market ETF (VTI)* Fixed Income Vanguard Total Bond Fund (BND) Vanguard MSCI EAFE ETF (VEA) 26.70% 19.40% Fixed Income Vanguard Total Bond Fund (BND) Vanguard MSCI EAFE ETF (VEA) Foreign Currency DWA Foreign Currency Index (DWAFXI) Vanguard MSCI Emerging Markets ETF (VWO) 19.40% 10.40% Foreign Commodity Currency DWA Greenhaven Foreign Currency Commodity Index (DWAFXI) Fund (GCC) Vanguard MSCI Emerging Markets ETF (VWO) Vanguard REIT Index ETF (VNQ)* 10.40% 7.30% Commodity Greenhaven Commodity Fund (GCC) Vanguard REIT Index ETF (VNQ)* ipath Dow Jones-UBS Commodity Index ETN (DJP) 7.30% International SPDR MSCI ACWIsm ex-us ETF (CWI) ipath Dow Jones-UBS Commodity Index ETN (DJP) 6.20% International US SPDR ishares MSCI ACWIsm S&P 1500 ex-us Index ETF (ISI) (CWI) Vanguard Total Bond Market ETF (BND) 6.20% 30.00% US ishares S&P 1500 Index (ISI) Vanguard Total Bond Market ETF (BND) 30.00% DWA 6040 Index (DWA6040) represents a daily rebalanced index of 60% S&P 500 Index (SPX) and 40% Vanguard Total Bond Index (BND) DWA 6040 Index (DWA6040) represents a daily rebalanced index of 60% S&P 500 Index (SPX) and 40% Vanguard Total Bond Index (BND) * Prior to 2002, EUSA was substituted for VTI for hypothetical returns, and IYR was substituted for VNQ * Prior to 2002, EUSA was substituted for VTI for hypothetical returns, and IYR was substituted for VNQ

32 ishares International Model: 80/20 Rule at Work The majority of the trades in the ishares International Model were marginal versus the benchmark. However, notice the big winners to the right. Perhaps more importantly, the portfolio did not experience any big losers. 32

33 Education is not the filling of a pail, but the lighting of a fire. William Butler Yeats For Financial Professional Use Only. Not For Use With The Public.

34 Have a Vision For Financial Professional Use Only. Not For Use With The Public.

35 To: Thomas, Mitch, Samantha From: Dad Subj: Vision "Imagination will often carry us to worlds that never were. But without it, we go nowhere." ~ Carl Sagan Astronomer and Author All through your lives I've told you to DARE TO DREAM. Imagination is another term for dreaming. It's also called vision. You know well, vision is what carried my company 25 years thus far. Imagine what you might do in this world. Think of your wildest dreams, and then make them happen. Mitch you have shifted gears giving up a great position at one of the most prestigious hotels in the world to follow your dream of culinary arts. As I write this you are getting ready to head to the subway for a grueling day in the kitchen with your instructors. But by fitting this piece into your dream puzzle the picture of your future becomes a little more clear and within reach. Thomas you have found your passion in the Billiards Industry. How will you change the world and your industry now that you clearly know your direction? Samantha you are slowly but surely beginning to focus on exactly what your passion is. You will shortly find a way to get someone to pay for you to live your passion of travel. To this day I imagine, dream, and think of what can be. It s never left me since I was a kid. I surround myself with people like Watson, Tammy, Sue, Jay, and the rest of the DWA crew. They keep me thinking, and imagining. Surround yourselves with these kinds of people. We live in the jungle of entrepreneurship, which means you must have vision, imagination and drive to do something special or you will end up on someone's dinner plate. Oh and keep the "F" word active in your vocabulary, FUN. Dad

36 The Hole vs. The Drill VS. "People don't want to buy a quarter inch drill. They want a quarter inch hole! Theodore Levitt For Financial Professional Use Only. Not For Use With The Public.

37 Technical Analysis & ETFs: Generating Higher Returns in all Markets Paul Baiocchi, Moderator ETF Analyst, IndexUniverse Tom Dorsey, Presenter President & Founding Member Dorsey, Wright & Associates