Odds & Ends:

• Join us Friday, May 12th at 2:00 pm ET for a live webinar exclusively for new or beginner DWA Platform users. The webinar will cover different aspects of the research as well as provide new users with the opportunity to ask questions. Click Here to access the registration link. The password is pnfpnf. Registration is required.

• Please join Andy Hyer, Client Portfolio Manager at DWA, for a webinar on our family of Systematic Relative Strength Portfolios on Friday, May 12th at 1 p.m. ET.  These strategies are available on a large and growing number of SMA and UMA platforms. Click here to register for the webinar. The event password is dwadwa.

• There was a change to the iShares Alternative Model ISHRALT. The iShares Silver Trust SLV was sold due to its deterioration in the matrix rankings and the iShares Cohen & Steers Realty ETF ICF was added in its place.
• Not only has Energy deteriorated from a Domestic Equity sector standpoint (currently 10th out of 11 broad sectors), but it also has fallen to the bottom of the broad Commodity matrix in fourth place. This continues to be an area we will avoid due to its poor relative strength characteristics.

• Check out our Podcast and other important updates on Twitter! 

Listen to this week’s DWA Podcast – Mkt Updates For Seasonal Weak Months: https://t.co/q02lS8MrYf …$DWA $IEV $EWU $EWG $EWF $EWQ $TNX $EZU

— Dorsey Wright (@DorseyWrightDWA) May 11, 2017

The major market indices continue to hover around their highs with solid gains logged so far this year.  Volatility, as represented by CBOE SPX Volatility Index VIX, remains at record lows, and sector themes have stabilized.  Investors, by and large, are "happy" - or as happy as the average investor can be.  Of course there will always be obstacles to face and complaints to be heard; but generally speaking, there has been (and continues to be) broad upside participation in this market, which bodes well for most investors. Knowing that this environment will not last forever, now is as good a time as any to educate current and prospective clients on the importance of incorporating tactical allocation within the portfolio. This discussion need not be overly complicated.  Today, we will provide you with some guidance on one effective way to have this conversation. 

A long-term perspective of the Dow Jones Industrial Average DJIA, since 1896, reveals the reality that there are extended periods of time in which the US Equity market will trend generally upwards and also lengthy periods of time where the market will instead stagnate or move generally lower. There have been eight such alternating cycles completed since 1896, with each averaging fourteen years in duration. On its own, this is not earth-shattering information; however, the application of this concept to investing is integral to the importance of tactical strategies.  

Consider this, let's say an individual begins to accumulate meaningful wealth with which to invest around the age of 40.  Assuming an average life expectancy around 80, the individual should plan to endure three of these cycles during his investing lifespan. The unknown, of course, is whether the investor will see two bull markets and just one bear market, or be faced with two bear markets and only one bull market. Where an individual gets on the “investment train” can have a tremendous impact on portfolio returns overtime; however, even an individual fortunate enough to see two bull markets needs a game plan to navigate a potential 14+ years' worth of a bear market. It is important to have at one's disposal strategies that are effective in both generally rising (bull) markets and falling (bear, or "fair") markets.

"It is important to have at one's disposal strategies that are effective in both bull markets and bear markets."

One methodology that has existed since the late 1800's and proven effective in both kinds of markets is Point & Figure. One of the first proponents of the methodology was Charles Dow, founder of the Wall Street Journal. Although a fundamentalist at heart, Dow appreciated the merits of recording price action in order to understand the changing relationship between supply and demand in any investment. The Point & Figure Methodology has evolved over the past 100+ years but at its core remains a logical, organized means for recording the supply and demand relationship in any investment vehicle. As both consumers and investors, we are innately familiar with the forces of supply and demand. It is the first subject introduced in any Economics class, and we experience its impact regularly in our daily lives. We know why tomatoes in the winter don’t often taste particularly good, have a short shelf-life, and are paradoxically more expensive than those sent to market in July. What many investors are slow to accept is that the very same forces that cause price fluctuations in a supermarket also trigger price movement in the financial markets. In a free market of any kind, if there are more buyers than sellers willing to sell, price will rise; when there are more sellers than buyers willing to buy, price will fall. If buying and selling are equal, price will remain the same. By charting this price action in an organized manner, we can ascertain who is winning that battle, sellers or buyers (i.e. supply or demand). By having the ability to evaluate changes in the market we have taken the first step toward also becoming responsive to both bullish and bearish periods.

Looking back at the recent stretches of structural bull and bear markets, we find that there has been a clear theme reverberating within the Asset Class Rankings of DALI. During the bull market of the 1990's, US Equities were the #1 ranked asset class 76% of the time, while Cash never managed to garner an overweight position. However, during the bear market of the 2000's, the DALI Asset Class Ranking varied dramatically. US Equities managed to gain the #1 spot just 4% of the time. A stark contrast to the 1990s.  Looking at the past six years, between 2010 to today, we find that the current ranking potentially reflects or is at least characterized as that of a "bull market." US Equities have been ranked #1 for 86% of the past six years, while Cash and Currencies have failed to achieve a top ranking. Granted, we know that history will ultimately be a judge of this characterization, but based on the relative strength dynamics of today's market compared to that of the 1990's, we have enough evidence to support the fact that we remain in a bull market for US Equities.  We know asset classes rotate and can remain in or out of favor for frustratingly long periods of time, so we are driven to adhere to a form of investment analysis that is capable of changing when those key trends do...and stay with the trends as long as they are in force. Equities, remain a strong trend today.  How much longer that will be the case, we cannot possibly know. However, we do know that the only "normal" in this business is that such things change, and our clients pay us to manage that change for them when it occurs.

A current score direction review reveals that Non-US assets make up most of the improvers among the asset classes as we have entered into the seasonally weak market cycle.  At #1 and #2 in score direction on the system are India and then Europe.  The European group's rRisk is much lower than India's, therefore the concept of risk adjustment and consistency could come into play to say the European is the best idea among these improvers.  

This inflection of Non-US improvement is indeed showing up in your inventory one way or another.  If you are modeling or using models then you can see the infusion of Non-US exposure climbing in these mechanisms.   As a segway towards examining this would be to look at the example of the flagship American Funds Top 5 MMPR50 model.  This model recently updated and added the Small Cap World Fund SMCWX to the lineup.  As you know, the model updates on seasonal quarters and the fund line-up does change on an active basis. While that sounds simple enough, the internal breakdowns of the asset allocation really reveal sophisticated asset shifting.  As a case in point let’s dive into particulars about this latest allocation.

The weighting scheme of the model equal weights across 5 options, so each fund holds 20% of your money.  Glancing at the current fund scores we can see that each of them are scoring better than 4.  None of these score above 5 at this time as American Funds does not have a fund scoring 5 or better.   The net weighted portfolio fund score is at a 4.49, well above the group score net average of 3.75.  Each fund within the line-up is well above the average score of the groups in which they compete. The Morningstar rating nets out to a 3.60 as 2 of these funds are rated below a 4 on that system.  The high score belongs to New Economy, which is among the lowest rated Morningstar fund in this field.  Fund score is sensitive to the question of what should we invest in NOW, not focusing on the way things used to be. 

From a portfolio incremental breakdown we can see a net equity weighting of 90%, which the highest equity weighting I have seen in quite a while.  But what is interesting here is that the Non-US weighting has risen to 23% as of this update.  Non-Stock and Cash are at 10% so what you have here is a 90-10 model footprint.  This 90-10 is more of the highest aggressive weighting scheme we often see from this model.  As it typically hovers around 70-30, possibly much lower at specific times.   The high US stock weighing goes to Washington Mutual and the high Non-US goes to Small World.  The high Bond position goes to Amcap with 2% and it also holds the high on Cash positions at 9%.  

Concerning relative Risk, the higher rRisk values go to New Economy and Small World with a 1.13 respectively.  The low rRisk goes to Washington Mutual with a .96.  What is interesting here is that the Net weighted portfolio rRisk lands at a 1.05, well below the reading of the Average Group rRisk which would land at a 1.18.  This set up gets you well above averaging on relative strength compared to the average strength of the asset classes, but gets you in that strength at a lower volatility than the average risk of those asset classes.  This relationship is indeed a selling point to talk over with your clients and prospects.  

The sector breakdowns can be seen here through Morningstar mechanics. You got it all here with the higher sector weighting going to Technology and the next spot going to Consumer Cyclicals.  What you don’t have here is Real Estate and Utilities and Energy has a relatively low weighting.  If you are in agreement with that, then this is a great allocation scheme for you.  Real Estate has a current score of 2.81 and if you need that you could but another fund if you wish.  The Non-US country high weighing goes to Asia Emerging markets and European Developed Markets.  The top stocks held here are Microsoft and Amazon and Home Depot in the US with Avago Tech from China to get you started.

The result of a dynamic Top 5 Model can tell a wide story that many of your clients would want to hear about.  Included in that story is the weighting scheme, the sector stratification, the country exposure and the top stocks that are in play.  Though FSM is a simple strategy for you to deploy, it produces a vibrant picture for you to talk about.  Summing up, a descent of appropriate benchmark for the model could indeed be the 70/30 split benchmark.  Over time the model inflects exposure above that line and then also well below that line, not to mention that the whole model can go to 100% cash.  From a Wealth Building point of view, the American Funds model defeats the benchmark long term.  Along the way, the win ratio of single years is running at 80%.  Put FSM to work for your clients.

*Images from Morningstar, courtesy of Morningstar.

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: 18.06

The average Bullish Percent reading this week is 58.33% down 0.9% from the previous week

							SML
							rut
							djia
					shy		MID
					ICF		hyg
				GC/	VOOV	agg	RSP
				CL/	tlt	dvy	spx	XLG		VOOG	NDX
		uv/y	gsg	DX/Y	ief	lqd	FXE	vwo		nasd	efa
<--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 May 11, 2017