Dorsey Wright Summer School Now in Session!

Whether you are new to the Dorsey Wright platform, or have been a loyal subscriber for years, we invite you to join us for our Summer School Series. We have designed a six-part webinar course in an effort to help make every user more efficient in their daily navigation of the DWA website and research tools. Each recorded webinar session will be posted here in the "Were You Aware..." every Tuesday between now and Labor Day.  You can watch them each week, or save them to review at your leisure throughout the year. The "syllabus" is outlined below, and Modules 1 through 3 have been completed.

Module 1: Point & Figure Chart Basics

• Lesson 1: Reading a Point & Figure Chart
• Lesson 2: How to Read a Relative Strength Chart
• Lesson 3: Chart Links and Tools
• Lesson 4: Using the SmartChart

Module 2: Monitoring Positions

• Lesson 1: Individual Position Alerts
• Lesson 2: Portfolio Tool
• Lesson 3: Portfolio Alerts

Module 3: Idea Generation

• Lesson 1: Query Function
• Lesson 2: Database Reports
• Lesson 3: Fund Score Rankings
• Lesson 4: Analyst Picks and Comments

Module 4: The Power of Relative Strength

Module 5: Using DALI in Portfolios

Module 6: Options Give You Options

• iShares has decided to cut the expense ratio on 11 of their ETFs effective August 4th. These 11 ETFs include eight bond ETFs and three environmental, social and governance equity ETFs. The equity ETFs have experienced the largest cuts, which are almost half of their original expense ratio. The bond ETFs experienced an expense ratio cut of 2-10 basis points. The ETFs that saw these cuts are as follows: STIP, IMTB, ISTB, ILTB, IUSB, FALN, IAGG, ESGD, ESGU, and ESGE.

• Last week, ProShares announced that it would be shutting down 13 funds by September 6th, 2017. The funds are below:
  • ProShares USD Covered Bond (COBO)
  • ProShares German Sovereign/Sub-Sovereign ETF (GGOV)
  • ProShares Hedged FTSE Europe ETF (HGEU)
  • ProShares Hedged FTSE Japan ETF (HGJP)
  • ProShares Ultra Junior Miners (GDJJ)
  • ProShares Short S&P Regional Banking (KRS)
  • ProShares Ultra S&P Regional Banking (KRU)
  • ProShares UltraShort MSCI Mexico Capped IMI (SMK)
  • ProShares UltraShort Oil & Gas Exploration & Production (SOP)
  • ProShares UltraShort 3-7 Year Treasury (TBZ)
  • ProShares UltraShort TIPS (TPS)
  • ProShares Ultra MSCI Mexico Capped IMI (UMX)
  • ProShares Ultra Oil & Gas Exploration & Production (UOP)

• J.P. Morgan has filed for five new factor-based ETFs. Each of the five funds will track an index derived from the Russel 1000 Index. At this time, ticker symbols, listing exchanges, nor expense ratios were readily available. The five funds are as follows:
  • The JPMorgan U.S. Dividend ETF
  • The JPMorgan U.S. Minimum Volatility ETF
  • The JPMorgan U.S. Momentum Factor ETF
  • The JPMorgan U.S. Quality Factor ETF
  • The JPMorgan U.S. Value Factor ETF

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Throughout 2017 deterioration within the U.S. Dollar has been among the primary themes in focus, and understanding the Dollar’s impact on the positions in our portfolios is important.  Coming into 2017, investors found themselves within a rising dollar environment, as the NYCE U.S. Dollar Spot Index DX/Y had reached a 14-year high. The greenback has since deteriorated over the last eight months, so today we will provide a broad update on the technical picture of the U.S. Dollar and also discuss the Dollar’s impact on the broad asset classes.

What is the US Dollar Index (DX/Y)?

To begin we should first explain that the US Dollar Index DX/Y is priced in terms of a weighted basket of major foreign currencies. When we refer to moves in "the dollar," it is this index to which we are referring. The US Dollar Index is a geometrically-averaged calculation of six currencies weighted against the US dollar, which has been in existence since 1973. Futures Contracts were listed on the Index back in 1985 and only one major reconstitution of the Index has taken place since that time, a move to include the Euro.

Today the US Dollar Index contains six component currencies, which are "trade-weighted": the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc. Prior to the formation of the Euro FX, the US Dollar Index contained ten currencies, including as well the West German Mark, French Franc, Italian Lira, Dutch Guilder and Belgium Franc. Today the currency weights contributing to the pricing of this Index are as follows:

Currency Weights:

• Euro = 57.6%
• Canadian Dollar = 9.1%
• Japanese Yen = 13.6%
• Sweden Krona = 4.2%
• British Pound = 11.9%
• Swiss Franc = 3.6%

By the end of July the NYCE U.S. Dollar Spot Index DX/Y was sitting at the $93 level, which is more than 10% off of the chart high at $103.50. As a result, we are now effectively in a falling dollar environment. Prior to this transition, the U.S. Dollar had been in a rising dollar environment since May 4th, 2011, which is the longest rising dollar period we have seen since 1985. Although we do find ourselves now in a falling dollar environment it is worth noting that the DX/Y chart has registered some of the lowest weekly distribution readings since September 2012. Additionally, while there have been support levels violated along the way, the May 2016 low at $92 is still intact on the chart. All of this is to say that the potential for a bounce is possible, and investors should not necessarily make big shifts in their allocations based on just the 10% correction alone. As we’ll discuss in the U.S. Dollar Study below certain asset classes fair better than others during falling dollar environments, while others aren’t impacted to a significant degree.  

Our data on this NYCE U.S. Dollar Spot Index goes back to the point in time when a liquid market was created for this calculation of the Dollar with the inception of futures contracts on the U.S. Dollar Index (in 1985). Since that time we have seen many significant moves for the Dollar, and we would like to focus on identifying any meaningful correlation between other major asset classes and moves in the underlying currency markets. In other words, do some assets perform better with consistency in a rising dollar market, and vice versa? 

Traditional measures of correlation would look at daily or monthly returns of some security, the Dollar for example, and then match up the returns of something else (a bond index perhaps) in the same manner. If bonds were generally up during the same sessions that the Dollar posted gains, they would be considered positively correlated. If bonds were generally down during days (or months) when the Dollar was up, they would be considered inversely correlated. Such data is available elsewhere and didn't truly provide the type of research we wanted to provide to you.  Before we began to study this we set out a definition for "rising dollar market", versus a "falling dollar market."

Study Parameters:

• Rising Dollar Market: Any move of at least 10% from a low constitutes a new "rising dollar market." The beginning of this trend is established at the low watermark and the trend remains in force until a correction of at least 10% occurs, at which point the peak of that rally then marks the end of the rising trend in the dollar. This represents a "trough to peak" move in the dollar, and that time period is what we use to qualify a rising dollar market.
• Falling Dollar Market: Any decline of at least 10% in the dollar index from a peak begins a "falling dollar market". The beginning of this trend is established at the high watermark and the trend remains in force until a rally of at least 10% occurs off a low, at which point the trough of that decline marks the end of the falling trend in the dollar. This represents a "peak to trough" move in the dollar, and the time period within is what we used to qualify a falling dollar market.

Over the last 32 years, there have been a total of 11 rising dollar markets and 12 falling dollar markets (including the recent "rising" stint, which began on May 4th, 2011 and ended January 3rd, 2017) using our basic criteria. The average duration of a (rising or falling) cycle is 516 days, and results in average moves of about +/- 20% in each direction (keep in mind that the manner in which these trends were calculated means that no trend could have resulted in a move materially less than 10% in either direction). After this record of +2,000 days the average number of days for a rising dollar environment pushed up to 585. The return for DX/Y during this particular rising environment was +41.19% (5/4/11 to 1/3/17), which is well above the +22% historical average. Below we offer you a recap of all the historical rising and falling dollar environments, and associated returns for DX/Y, in addition to other pertinent benchmarks.

Having identified "rising dollar" and "falling dollar" environments going back to 1985, the next step was to look at various asset classes and their respective performance during these markets. To accomplish this we chose investment vehicles representing Domestic Equity, International Equity, Emerging Markets, Domestic Fixed Income, Foreign Currency, Various Equity Styles (Large, Mid, Small, Value, and Growth), and Commodities. The results were interesting as many assets did show meaningful performance biases during either rising or falling dollar markets. The red bars in the graphics below represent average performance during all falling dollar markets, while the green bars represent average performance by that same asset class during all rising dollar markets. For some assets we did not have data going back to 1985, so returns reflect the average since the time at which we had data (those dates are denoted). In the bullet points below, we have highlighted the notable takeaways about falling dollar environments.

Observations:

• The S&P 500 Index SPX has performed well in both rising dollar and falling dollar markets, with returns of 14% (rising) and 16% (falling).
• Value stocks tend to perform better than Growth stocks on average during falling dollar environments – 16% compared to 13%.
• In falling dollar environments International Equities tend to outperform Domestic Equities. Emerging Markets EEM had an average return of 30% during falling dollar periods, followed closely by Developed (International) Markets EFA, which gained 27%.
• Strong asset classes during falling dollar periods include Currency and Commodity indices.

So what does the information in the study mean for our portfolios today? At this point we would consider it less of a call to action and more of a cause for attention.  We continue to see Domestic Equities hang on to their superior relative strength over all other asset classes.  While International Equities have been rallying hard to close that gap, they will need another 50 buy signals to do so.  This is not outside of the realistic realm of possibilities over the course of the next few months. Although, Commodities and Currencies do fair well on average in falling dollar environments, the RS trends don't corroborate that story at this time.   

Every week, the analysts here at DWA organize and write approximately 11 feature stories focusing within the inventories of multiple ETF providers. These articles can be found within the weekly ETF reports we conduct for those ETF families with which we provide guided model-based solutions. The weekly reports can be accessed from the Research Menu, but as of this week we will also compile a handful of those stories, which we feel are particularly relevant. We hope that this will serve as an "in case you missed it..." sort of section, where you can quickly access timely ETF features in a comprehensive fashion each week. We will include a link to the report along with a brief abstract summarizing our discussion within the respective features. This week's compilation is below.

Guggenheim Spotlight Fund: Guggenheim China Small Cap ETF (HAO)

International Equities remains the most improved asset class on a year-to-date basis, led by Emerging Europe and Developed Asia. One area of strength in particular within the International space comes from China-related funds, which currently have an average group score of 5.02, trailing just India-related funds (5.04) in the non-US view on the Asset Class Group Scores page. One fund that has participated to the upside is the Guggenheim China Small Cap ETF HAO. HAO is up over 23% year-to-date, compared to the MSCI World ex-US Index MSCIWORLDXUS, up 14.73%. With yesterday’s intra… (Read More)

Strength in Clean Energy and Energy Infrastructure: GRID

While the broad Energy sector continues to struggle because of weakness in Oil, the clean energy and energy infrastructure sectors have displayed signs of strength. For example, in the First Trust Matrix Review section of this report, notice how the Energy funds are ranked at the bottom, as the First Trust Energy AlphaDEX Fund FXN, First Trust Natural Gas FCG, and the First Trust NASDAQ Oil & Gas ETF FTXN, are ranked in the bottom three positions within the matrix and are all scoring below 1. Meanwhile, the First Trust NASDAQ Clean Edge Green Energy... (Read More).

The Strength in the Healthcare Sector: PTH

The broad Healthcare sector is the most improved group within the sector level of DALI, up more than 50 buy signals year-to-date. The sector was able to make its way back into the top 4 rankings by the end of June, and was thus added to the Power4 model last month.  It was able to maintain its margin of leadership over other sectors... (Read More). 

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: 24.50

The average Bullish Percent reading this week is 56.17% down 2.02% from the previous week

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						dvy
						agg	RSP
						ICF	CL/
					SML	hyg	gsg
					rut	lqd	nasd	VOOG			djia
					ief	shy	NDX	efa			FXE
	DX/Y			uv/y	MID	GC/	VOOV	spx	XLG		vwo
<--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 August 8, 2017