Relative Strength Investing Questions: Advisors Asked, We Answered

Speaking to our advisor clients every day provides our analyst team at Nasdaq Dorsey Wright (NDW) with a good sense of what advisors are challenged with and what kinds of questions they are hearing from clients. Below is a recent roundup of advisor questions and corresponding answers from our Sr. Portfolio Manager who sheds light on current trends using a Relative Strength perspective:

Advisor Q: Are there any common themes in the types of stocks that are showing up in the top of the relative strength ranks as you look at a snapshot of the rankings now?

John Lewis: The major leadership has been the same for a while now. Technology and Large Cap Growth have really led the way for a long time. Companies with business models that can thrive in this COVID environment are all at the top of our rankings. There have been periods of underperformance, and laggard rallies, but this leadership continues to pull back and push to relative highs.

Advisor Q: How stable has market leadership been in recent months?

JL: We have seen some rotation outside of the major leadership in recent months. The “dead cat” bounce at the bottom of the bear market was fantastic for the laggard stocks, but that theme seems to have run its course (at least for now), and the old leadership has retaken the top spots again.

One thing we are watching is the performance of the US Dollar, and the implication on various asset classes, industry groups, and stocks. The dollar has depreciated quite a bit from the highs it made back in the spring. A weak dollar environment often provides a tailwind for different types of assets. We have seen the metals rise to the top of the ranks as a result of the falling dollar. Gold, silver, and copper are all performing well on the commodity side, and the stocks of companies that mine the metals are also performing well. Another area that has picked up strength is Emerging Markets. International equities often do well in a falling dollar environment, but Emerging markets have outpaced Developed markets recently. Crude Oil is the one area that has not responded to the weakness in the dollar. The slow global economy is most likely the culprit for the weakness in oil.

Advisor Q: Which bond classes have been showing strength in recent months and which have been showing weakness?

JL: It has been a wild year in the bond market! We have seen a risk on, risk off, and risk on again market in the span of a few months. During the weakness in the spring, US Treasuries were the place to be as investors were incredibly risk averse. Once the market began to recover, more risky bonds began to perform well. Convertible bonds have been the big winner lately. These bonds do well when equities perform well because they have embedded equity options in them. High yield and Emerging markets bonds have also done in this risk-on environment.

Advisor Q: As you look at the relative strength rankings for our Systematic RS International Portfolio, are there any regions of the world that seems to be stronger than others?

JL: Right now, it seems to be less about regions and more about individual stock picking. It’s similar to what we are seeing domestically. In this country, there are groups that have tons of dispersion, and it is very important to own the right stocks. Consumer Discretionary is a good example of that. Internationally, it is really paying to own certain types of stocks rather than just a whole country or region. If we want Emerging markets exposure, we are seeing the stocks of miners performing much better than something in Consumer Staples, for example. Stock picking has always been important in that strategy because it is very concentrated, but it seems to be more important than normal right now.

Advisor Q: How would you assess the strengths/weaknesses of momentum strategies that focus on shorter-term measures of strength rather than more intermediate measures?

JL: You have been able to get away with a very short-term momentum strategy because the laggard rally was so powerful. If you used some very short-term timing you could have flipped out of the leadership and into the laggards right near the bottom of the bear market. Normally, that doesn’t work! It is much more profitable to trade the intermediate-term trends over time. The reason is that the shorter you go in terms of determining what is strong the more noise you wind up trading on. It is imperative you trade the trend and not the noise. So while there have been instances this year when being very short-term was quite lucrative, over time it is difficult to make that work.

Advisor Q: What do you view as the competitive advantages of the Systematic RS Portfolios over time?

JL: The biggest advantage is the discipline in the portfolios. We use an unemotional, objective measure to determine what is strong and what is weak. The process just relentlessly pushes the strategy towards the strongest parts of the market. That discipline also allows to recognize quickly when we are wrong and move on – it doesn’t allow us to fall in love with anything. From quarter to quarter or even year to year we will have periods of outperformance and periods of underperformance. But the discipline embedded in the strategies become more important the longer we run them.

About Nasdaq Dorsey Wright

Nasdaq Dorsey Wright has been an advisor to financial professionals worldwide for more than 30 years. Using Point & Figure Charting, Relative Strength Analysis, and numerous other tools, Dorsey Wright can help advisors analyze market data and deliver actionable insights to investors. Learn more about the ways advisors are benefitting from our strategies:

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.

© Nasdaq Dorsey Wright

© Nasdaq Dorsey Wright

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