Spring 2016 Point & Figure Institute    |    Las Vegas, NV     |    April 21st & 22nd    |    Event Agenda    |    Registration     |

DWA State of the Market & Q1 2016 Update Webinar

On Thursday, January 21st at 12:00PM EST, Dorsey Wright will conduct a webinar to discuss the current state of the market as we begin Q1 2016. The relative strength strategies behind the growing line of products that follow DWA indexes and models will also be covered, as well as practical implementation ideas for using these products. We like to hold these calls at the beginning of each quarter, as that is when we reconstitute our Technical Leaders Indexes, which are tracked by the 14 PowerShares ETFs. Tammy DeRosier, President of DWA, and John Lewis, Vice President and Portfolio Manager, will host the discussion. There is no cost to attend the webinar, but space is limited and registration is required. A replay will be made available to all registrants.

Click here to reserve your spot today! The password is: pnfpnf

While looking through the charts the other day, reviewing the aftermath of this past week's volatility, one chart ominously stood out - Citigroup, Inc. C. During the recent market rout, C manged to stay out of the headlines, unlike the 2008 financial crisis and market meltdown. So why bring it up today? Well, if you look at C's chart today, which features a recent trendline violation and big base breakdown, and compare it to C's 2007 collapse, the two charts from the two different periods look quite similar. Between 2004 and 2007, we saw C forming a big base before ultimately breaking down in late 2007. C peaked in December 2006, before trading lower, and then broke through the trendline at $48 (pre-split price levels) before falling to the low 40's. It was around this region where considerable support had formed, going back to 2004. Ultimately, we know what happened, C broke through all of the support, starting with a triple bottom break in October 2008 at $44, then a violation of the 2004-2005 support lows with the move to $42. Fast-forward eight years, the chart is set up in almost the exact same manner, which does not leave one with a warm fuzzy feeling. After peaking in July 2015, C began to work down from the top, trading lower and violating its bullish support line. C managed to regain some demand, rallied up to the trendline, just like it did back in 2007, but failed to penetrate the bearish resistance line (just like it did back in 2007, sorry for the repetition). All the while, it was forming a big base that dates back to 2013. With the recent market action, C fell even further, violating support in the 46 to 48 region, echoing the 2007 breakdown (sidebar: the breakdown also occurred around similar price levels). The charts below show you exactly how and where the breakdowns occurred. As you can see, the charts look similar. Hopefully this isn't a major tell for the market and is rather just some coincidence, but it certainly makes you go, "Hmmmmm...." 

In Monday's Daily Equity Report from last week, we provided an in depth update on where we stand in terms of our "Defensive Preparedness" indicators.  What we found is that the weight of the evidence had shifted from positive to negative with the last few weeks of market activity.  Throughout the remainder of the week, things went from bad to worse, especially with Friday's activity.  The S&P 500 SPX fell through another key support area taking out its August/September lows at $1880 on the 20-point per box chart with a low of $1860. The Dow and the Nasdaq were both also down substantially as well, and the calls were steady throughout the day. We will use today's report as an opportunity to address some of the "FAQs" we received last week and Friday afternoon in particular.

1. What's going on with the Market?

This is a broad question that perhaps can be best addressed by looking at the trend charts of the broad indexes.  Below you will find a snapshot of the PnF charts for the SPX, the DJIA and the NASD. Looking at these charts, if we ask ourselves, "What's going on with the market?" the answer is clearly that supply is in control of equities at this juncture.  Below are some key observations for each chart:

• S&P 500 Index SPX
  • Long-term trend: Negative
  • Point & Figure Signal: Consecutive Sell Signals
  • Violated key support with a move to $1860 on Friday, completing a spread quadruple bottom and making a new 52-week low on the chart
  • Next available support is between $1820 and $1840, which mark the pullback lows from April and October of 2014. 

• Dow Jones Industrial Average DJIA
  • Long-term trend: Positive by one box
  • Point & Figure Signal: Buy 
  • The move to $16000 on Friday puts the chart up against key support from September and October of last year, as well as its bullish support line. A move down to $15800 would be a trend violation and triple bottom breakdown. 
  • Beyond $16000, the next available support on the long term chart is the $15400, which marks lows from August of last year and February of 2014.

• Nasdaq Composite NASD
  • Long-term trend: Positive
  • Point & Figure Signal: Consecutive Sell Signals
  • The move to $4450 on Friday took out its September low, leaving its trend line and the August, 2015 lows as the next support at $4300. 

2. Has this week's action caused any changes in key RS comparisons?

The relative strength relationships of Equity indices versus Fixed Income and/or Cash indices have been good indicators for us over the last twenty years.  So not surprisingly, we, and many of you, are watching these closely.  In the images below you can see that we are at a pivotal point on several of these charts, and have started to see some changes on others.  One chart that is likely getting a lot of eyeballs is the SPX versus iShares Core US Bond ETF AGG.  Because we use closing prices for RS calculations, this chart will not quite reverse into O's as the market was able to rally back from its intraday lows on Friday afternoon. A reversal on that chart would put us one box from a sell signal, and the sell signal would be the first since moving to a buy signal in the summer of 2009.  In contrast to the SPX, the S&P 500 Equal Weighted Index SPXEWI has been struggling a little more as the large cap names have helped disguise some of the carnage.  With Friday's close, the SPXEWI index will fall to a relative strength sell signal versus the AGG. The SPXEWI has already given a sell signal versus the iShares 7-10 Year Bond Fund (IEF).  Should we have a plurality of these charts fall to sell signals, it would suggest an even more defensive stance and a posture of losing opportunity and not losing money.  We can always make up opportunity but it’s hard to make up money.  A final takeaway from these charts is that the sell signals don’t happen at the exact top, we don’t expect that, but when they do occur there is usually have decent follow through with equities continuing to face several months of supply being in control.  We will continue to keep you updated on any changes in these charts.

3. What should I do with my stock positions? Sell? Buy? Hold? Duck-and-Cover?

The answer to this one is: review! While we do not recommend putting new money to work here, what we do recommend is that you are diligently reviewing each stock chart (and ETF or fund chart, for that matter).  There are times where simply focusing on strong attributes/Scores and positive trend lines alone is adequate.  This is not one of those times.  Use the Portfolio tool and the Thumbnails view to be able to look at the trend charts for each of your holdings.  What are you looking for?  Well let's work through a couple of examples to help you hone in on what to pay attention for.  We'll examine what we would categorize as a good stock versus a bad stock.

• The Good Stock: The Clorox Company CLX

​One theme we have noticed over the last few weeks, and often comes to the surface during tough markets is a "flight to safety".  This means the Large Cap, low beta, higher yielding names are typically the areas that hold up and may even show signs of increasing demand.  CLX is an example of such a stock.  It is also categorized within the broad Consumer Non-Cyclical sector, which finds itself in the #2 ranked spot of the Sector level of DALI. Looking at the default chart, notice that CLX has done little more than pullback toward the middle of its 10-week trading band.  However, the default chart also doesn't offer any viable support until the $106 level, so we have included the more sensitive 1-point per box chart to show several reasonable support levels.  A violation of these levels can be used as partial or full stops for any open positions moving forward, but as of now, there has been no material breakdown on the chart, and it remains above even its November support.  One of the main reasons CLX remains on our "hold" list, though, is not the attractive chart, but the fact that it is one of just 9 stocks in the entire S&P 500 that have given a new market RS buy signal.  This confirms that CLX is a positive diverger.  Finally, CLX offers an attractive yield of about 2.4%.   

• The Bad Stock: Apple Inc. AAPL

​While Apple might not be the absolute worst stock out there, we selected it for this exercise for two reasons.  First, everyone wants to know about Apple.  Second, Apple is a position that is very easy to get emotional about.  From a strictly objective, technical standpoint, the weight of the evidence is negative for AAPL, which is the first time in a few years that this has been the case.  In fact, with the recent trend line violation the stock downticked to a 2 for 5'er, making it a weak attribute name for the first time since October of 2013.  AAPL can be categorized as a negative diverger given that it violated its September lows ahead of the market earlier in the month.  If we ignore the volatile action that occurred on the chart during the trading session on August 24th (with the stem down to $92), we find that the move to $104 actually took out all of the support built in 2015.  It's current move to $96 puts it right up to its October 2014 low.  Additionally, take a look at the RS chart of AAPL versus Cash MNYMKT.  It initially fell to a sell signal in August, demonstrating weak RS versus Cash.  While it was able to rally ahead of the market and return to X's in September and October, it has since returned to a column of O's and completed a second sell signal on this RS chart. The last time this chart was on a sell signal was back in mid-2013.  For these reasons, AAPL is characteristic of stocks that should be sold out of the portfolio, especially on any future bounce over the next several days.       

4. What should I continue to watch?

There are two indicators we will be keeping a close eye on in the coming days and weeks, both found within DALI.  

• The first is the main DALI Asset Class Rankings 1-6.  Specifically, we will be watching for US Equities to abdicate the #1 spot.  Now, in order for that to happen, we will have to see US Equities give up Relative Strength buy signals versus other asset classes.  Just in the last week (not including Friday's action), it has already given up almost 40 buy signals, falling from 341 down to it's current reading of 302 (see tally rankings below).  Note that most of these signals have landed in Fixed Income (which has picked up about 13) and Cash (which has picked up about 18). Currencies are responsible for picking up the rest.  So the leadership is shifting to defensive asset classes. Should US Equities fall out of the #1 spot, this would force a change in the allocation across each of the DALI Tilt Strategies. 
• The second will be the Cash Percentile Rank Reading for US Equities.  This week we saw the reading rise above 33%, giving us a cautionary yellow light.  If that reading continues higher from here, it will signal towards the need to be more and more defensive.  A "red light" will appear on this indicator if the percentile ranking moves above 66%. 

Michael Batnick of The Irrelevant Investor cites statistics from SPIVA showing that 79.59% of large-cap managers have failed to beat their benchmark over the last 10 years and then makes these astute observations:

I believe the days of superstar stock pickers is a thing of the past. For many of these professionals, career risk is too large a hurdle to overcome. Straying too far from the index keeps their returns looking a lot like it and fees generally eat up any alpha they might earn. Aside from career risk, here are a few other risk factors to consider that can negatively affect a portfolio manager.

1. Maybe they get divorced.
2. Maybe they lose a key analyst.
3. Maybe they go through a bad stretch and start second guessing themselves.
4. Maybe they leave for another company.
5. Maybe they want to spend more time with their kids.

This is just too many maybes and why I believe that if you’re going to deviate from the index, it’s important to do so in a systematic way. With quantitative strategies, you understand there will be times when it falls out of favor, in fact you sign up for that ahead of time. However, if a stock picker hits a rough patch, you don’t know if they will ever regain the ability it appeared they once had. Furthermore, it can be difficult to ascertain what caused them to outperform in the first place; that whole thing about distinguishing luck from skill.

When considering active strategies, it’s important for us that we’re not relying on anyone’s intuition, expertise, or mental or emotional well being. We don’t want our PMs speaking with management, doing channel checks or backing out the cash. We want them to follow their models with as little interference as humanly possible.

A focus on process over short-term results is a hallmark of DWA.  We long ago recognized the need to systematize strategy decision rules in order to minimize the negative effect of human emotion on investment results.  Part of the reason that we were comfortable with this is because of the mountain of research on momentum which suggests that momentum is a premier investment factor.  With something that effective over time, why mess with it?  Honing our craft is an ongoing process, but we take great pride in the level of consistency of our investment process over time.

Too often, our industry notes the percentage of active managers that fail to beat an index and comes to the wrong conclusion---essentially throwing the baby out with the bathwater.  A much more telling statistic would be the percentage of systematic vs. non-systematic investment managers that beat an index over time.  I suspect that the former number would be much higher than the latter.

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  

The Intermediate All Equity Funds bullish percent is moving through the bottom third and into the bottom quarter of the field position on the chart.  This indicator measures the default intermediate charts for every mutual fund and ETF related to equity anywhere in the world markets.  Major turbulence occurs at the lower section of a bullish percent’s field position, and you will want to brace your allocation for the potential of higher turbulence, while we see where the advance of sell signals bottoms out.  We have not seen these levels in this bullish percent since 2011, and with several years of not having to face this type of action, you have to prepare yourself to navigate this situation now, in 2016.  

Alternative assets scores have surged recently, in context to a longer term modest rise in Group Score over the last couple years.  The last surge was in the summer of 2015 and then it abated.  Now the Alternatives universe is back close to the 3 score line. 

Alternatives mean alternatives to basic long equity or basic long fixed income.  Real Estate is often a “go to” place for investors historically.  Here Real Estate does have a respectable score.  But Managed Futures lead scoring among these groups now with a 3.85 as it shows the strongest positive Score Direction in this landscape.  The near term is the wrong time to go contrarian and seek exposure to low relative strength ALTS.  Commodities and such remain dangerous in this context until further notice.  So for those concerned about equity exposures, you choices are to raise quality in equity towards larger cap exposures, along with a mixture of cash, Real Estate and Managed Futures can help your allocation behave more neutral while the market is in this period of turbulence.

Fixed Income is a very important piece to any allocation that is designed to work in bad weather.  But make no mistake, if your aim is protect against equity erosion, then you can maintain exposure to High Yield.  US High Yield as well as Global High Yield has at least a 0.7 correlation or higher to the S&P 500 equity benchmark.  So the raising quality aspect to playing defense includes raising quality in fixed income for sure.  The below score plot shows you the relative strength difference between US Government related funds versus US High Yield exposures.  Each of these Score Lines include any mutual fund or ETF that trades in these respective spaces.  High Yield funds trade on average just below 2 points and maintain a declining score path.  US Government funds are trading above 3.50 score mark.  At present there is no contest between the 2 groups and so you should continue to migrate to the Highest Quality at your disposal.

The Distribution Report below places Major Market ETFs and Indices into a bell curve style table based upon their current location on their 10-week trading band. The middle of the bell curve represents areas of the market that are "normally" distributed, with the far right being 100% overbought on a weekly distribution and the far left being 100% oversold on a weekly distribution. The weekly distribution ranges are calculated at the end of each week, while the placement within that range will fluctuate during the week. In addition to information regarding the statistical distribution of these market indexes, a symbol that is in UPPER CASE indicates that the RS chart is on a Buy Signal. If the symbol is dark Green then the stock is on a Point & Figure buy signal, and if the symbol is bright Red then it is on a Point & Figure sell signal. 

Average Level: -57.12

The average Bullish Percent reading this week is 25.09% down 6.03% from the previous week

	RSP
	efa
	nasd
	cl/
	VOOV
gsg	uv/y
rut	VOOG
MID	djia						agg
SML	NDX	hyg		lqd		FXE	tlt
vwo	spx	XLG	dvy	ICF	GC/	DX/Y	shy	ief
<--100	-100--80	-80--60	-60--40	-40--20	-20-0	0-20	20-40	40-60	60-80	80-100	100->

Daily Option Ideas for January 15, 2016