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By John Lewis, Dorsey, Wright & Associates, a Nasdaq Company
With so much noise threatening to affect the financial markets – Brexit, the US Election, instability in the Middle East, and Wikileaks – how do you filter what really matters to you and your clients? At Dorsey, Wright & Associates, a Nasdaq Company, we use the tried and true Point & Figure methodology to cut through the clutter. Our DWA Technical Research Platform provides our analysts and thousands of clients a simple, objective and reliable view of the markets. With that, here is our Q3 Market Insights Recap:
The stock market spent the majority of the summer months moving sideways in a tight trading range. The S&P 500 finished the quarter up almost 4%, and is sitting on a gain of 7.8% so far this year.
S&P 500 YTD
International equity markets were a bright spot, and outperformed domestic markets. Developed markets finished up 6.5% and Emerging markets finished with a gain of 9.2%. Bonds also finished in positive territory with a 0.5% gain. Commodities were a weak spot in the third quarter. After strong gains in the first six months of the year, the S&P GSCI Commodity Index gave back 4.2% over the summer and now sits at a gain of 5.3% for the year.
The DWA Platform continues to pinpoint rotation below the surface in a number of different asset classes. In the U.S. equity markets there has been a momentum shift out of areas such as high dividend and low volatility stocks. The relentless reach for yield drove many investors into stocks instead of bonds, and drove valuations to historically high levels. The same valuation issues cropped up in low volatility stocks, which have been quite the hot ticket for the last year or so. These are not the areas that usually lead a robust bull market. Low Volatility, especially, tends to lead during down markets. As a result, there was a lot of hand wringing about how solid the market actually was with that kind of leadership. We felt the leadership we were seeing was more a result of investor’s preference for yield (and the lack of good fixed income options) rather than an indictment on the overall market.
The platform points to new leadership that appears to be emerging in what is traditionally considered positive for a strong bull market. Small capitalization stocks have had spotty performance for a while, but they really picked up steam in the third quarter. The Russell 2000 Total Return index finished with a gain of 9% moving it well ahead of the S&P 500 for the year. Technology stocks also dramatically outperformed what could be considered the old leadership (Utilities, Consumer Staples, and Low Volatility) over the summer. The relative improvement in these higher volatility areas shows investors are gaining more confidence in the market. Confidence is an incredibly important piece of the puzzle for momentum strategies so we are looking at this new development very favorably.
Utilities vs Technology Trailing 3 months
The appetite for higher volatility investments is also increasing internationally. As previously mentioned, emerging markets had a fantastic third quarter. Latin America has been the biggest driver of that performance so far this year. For the past couple of years, international markets have not fared as well as our domestic markets. That appears to be changing, and we are seeing increasing allocations to Emerging markets in those account styles that allocate internationally and globally. The overall composition of those portfolios has changed dramatically over the course of the year.
Trailing 1 Year S&P 500, Emerging Markets (EEM), Latin America (ILF)
As we head in to the final three months of the year it is impossible not to think about the upcoming election. Frankly, it is nothing short of a circus sideshow at this point. We fully understand the uncertainty people feel because neither candidate seems like a good choice. That, however, is politics, and we are investing. We encourage you not to get caught up in the headlines. We do expect some volatility around election time, but we don’t think either candidate’s victory means doom or exuberance for the stock market. It is incredibly difficult to forecast how politics will affect the market, and most so called experts get it wrong. Keep your politics out of your investing plan and you will be much better off for it in the long run. Never forget that there is always some reason not to invest, but the reality is that investing in stocks is a tremendous way to build wealth over time.
The final three months of the year should be interesting to say the least. There are pieces falling in to place that lead us to believe our relative strength strategies can do quite well if these trends are sustainable. If you have any questions about any of our strategies please give us a call at any time.
To learn more the DWA Technical Research Platform, click here to take a free 21-day trial . To learn more about Relative Strength and the Dorsey Wright Relative Strength strategies, download the whitepaper Point & Figure Relative Strength Signals , or contact us here..
Dorsey, Wright & Associates, LLC, a Nasdaq Company, is a registered investment advisory firm. Neither the information within this article, nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities, commodities or exchange traded products. This article does not purport to be complete description of the securities or commodities, markets or developments to which reference is made.
The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. Relative Strength is a measure of price momentum based on historical price activity. Relative Strength is not predictive and there is no assurance that forecasts based on relative strength can be relied upon.
Past performance, hypothetical or actual, does not guarantee future results. In all securities trading there is a potential for loss as well as profit. It should not be assumed that recommendations made in the future will be profitable or will equal the performance as shown. Investors should have long-term financial objectives. Advice from a financial professional is strongly advised.