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Relative Strength Investing Trends: Managing the Impulse to Sell

A recent article in the WSJ (Investors Approaching Retirement Face Painful Decisions, 6/15/20) included results of a recent study by Fidelity revealing that nearly a third of investors who are above the age of 65 dumped all of their stocks sometime between February and May and presumably missed out on the subsequent market recovery.  In this edition, we look at some potential ways to address this impulse to sell.

What’s Hot…and Not

How different investments have done over the past 12 months, 6 months, and 1 month.  Never before has it been easier for investors to invest in the strongest trends wherever they might be found in the world.  Relative strength offers a disciplined framework for allocating among those trends.  Markets are global and your portfolio should be too.  As of 6/15/20:

Relative Strength Investing June 2020 Chart 1

Past performance is not indicative of future results.

See disclosures in Appendix A, which includes the ETFs and Indexes used for this performance table. Performance numbers include dividends but do not include all transaction costs. Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.

Fund Flows

Total estimated inflows to long-term mutual funds and net exchange traded fund (ETF) issuance collected by The Investment Company Institute.

Relative Strength Investing June 2020 Chart 2

See disclosures in Appendix A.

Sector and Capitalization Performance

Relative Strength Investing June 2020 Chart 3

Past performance is not indicative of future results.

See disclosures in Appendix A.

High RS Diffusion Index

As of 6/15/20:

Relative Strength Investing June 2020 Chart 4

The 10-day moving average of this index is 77% and the one-day reading is 79%.  This index has rebounded over the last couple of months after hitting a one-day low of 1% on March 23. 

See disclosures in Appendix A.

Relative Strength Spread

The chart below is the spread between the relative strength leaders and relative strength laggards (universe of mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.  As of 6/15/20:

Relative Strength Investing June 2020 Chart 5

The RS Spread dropped sharply the last week or two of May and the first part of June as the RS laggards staged a strong rally.  However, the RS Spread has started to rise more recently as the RS leaders have performed better relative to the RS laggards.

See disclosures in Appendix A. 

Managing the Impulse to Sell

A recent article in the WSJ (Investors Approaching Retirement Face Painful Decisions, 6/15/20) included the following stunning chart revealing that according to a Fidelity study, nearly a third of investors who are above the age of 65 dumped all of their stocks sometime between February and May and presumably missed out on the subsequent market recovery:

Relative Strength Investing June 2020 Chart 6

The fear that this age group has about market declines is certainly understandable.  Many of this age group will need access to their investments sooner than younger investors. 

I suspect that many financial advisors would offer similar advice in this situation.  One likely solution includes spending adequate time and effort to construct a well-diversified portfolio which includes asset classes like bonds and cash that can help buffer the volatility and provide stability during equity market declines.  That’s Finance 101.  Additionally, I think it can be particularly helpful for this age group to have exposure to equity strategies that have the ability to reduce equity exposure in market declines so that the decision to raise cash and put cash back to work is done in a more systematic fashion rather in a more emotional way.

I believe that our Systematic RS Growth Portfolio is well designed in order to have the ability to invest in U.S. equities, but also have the ability to raise cash in down markets.  Some quick facts on this strategy:

  • Inception 12/31/2006
  • Can invest in 20-25 U.S. mid and large cap stocks when fully invested
  • Has the ability to raise up to 50% cash in down markets
  • Has outperformed the S&P 500 Total Return Index on a gross and net basis since inception with a beta of 0.75.  (Click here for the fact sheet)

We are happy with how this portfolio has performed over time and how it has navigated these markets so far in 2020.  To learn more about this strategy, please click here for a 2 minute video or call 626-535-0630 or e-mail andy.hyer@nasdaq.com.

Dorsey, Wright & Associates, LLC, a Nasdaq Company, is a registered investment advisory firm. Registration does not imply any level of skill or training.  Neither the information within this email 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 communication 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 to be successful or outperform any index, asset or strategy.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 previous performance.  Investors should have long-term financial objectives. There are risks inherent in international investments, which may make such investments unsuitable for certain clients. These include, for example, economic, political, currency exchange, rate fluctuations, and limited availability of information on international securities.  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.

Other Relative Strength Sources

  • Brush, John S. “Eight Relative Strength Models Compared.” Journal of Portfolio Management (1986).
  • Berger, Israel, Moskowitz. “The Case for Momentum Investing.” AQR Capital Management. 2009.
  • Jegadeesh and Titman. “Returns to Buying Winners and Selling Losers.” Journal of Finance (1993).
  • O’Shaughnessy, James P. What Works on Wall Street. McGraw Hill, 1997.

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