Dorsey: Stay Long US; Spain & Switzerland Best Of Europe

June 30, 2014

Tom Dorsey is one of the leading technical researchers of our time. He is the president and co-founder of Dorsey, Wright & Associates, a registered investment advisory firm based in Richmond, Va., that specializes in point and figure charting, relative strength and other technical analysis. He has authored several books, including "Point & Figure Charting," "Thriving as a Broker in the 21st Century" and "Tom Dorsey's Trading Tips."

Dorsey recently sat down with to discuss markets exhibiting the greatest strength, according to his indicators. He looks back on his top three picks from last quarter, tells us his favorite European equity plays at the moment, and explains why currency-hedging never made sense to him. The First Trust Dorsey Wright Focus 5 ETF (FV) is the newest ETF to incorporate your model. Tell me about the fund's methodology.
Tom Dorsey: To answer your question directly, what we do in the ETFs that we manage is the same method that we have used for 27 years at Dorsey, Wright and Associates. It's basic fourth-grade arithmetic. We have simply been able to tell the computer to look at the X's and O's—which is very simple for a computer, because it's used to 1's and 0's—in various combinations and permutations and whatnot. We utilize relative strength. Now, relative strength has been changed to the new chic word, "momentum."

It's point and figure relative strength, which is different than any other type of relative strength, because ours is just totally basic arithmetic. We'll take a lineup of stocks. You say, "Tom, I want you to create a matrix"; in other words, compare and contrast each one of these stocks in that lineup that I'm giving you. When you compare and contrast them, I want to accumulate the stock for the company that has the most relative-strength point and figure buy signals against its competition.

In other words, say you gave me 50 names. I'm going to enter them into a 50-man arm wrestling contest, in essence. A relative-strength chart is created by dividing one thing by another. So, if I wanted to look at Coca-Cola and Pepsi Cola, I would simply divide the price of Coca-Cola by the price of Pepsi Cola.

That gives me a number. I then can take that number from that division and plot it on a point and figure chart, which looks like a trend chart but isn't. It's a point and figure relative-strength chart, whose signals can last two to 2 1/2 years. So it's very long term in nature.

Those 50 that you gave me, I'll rank them. No. 1 shows the most buy signals on a point and figure chart, doing that relative-strength fourth-grade division. Then I'll take No. 2 and No. 3, and rank them all the way down to No. 50. No. is the one that has the least strength and was unable to perform any buy signals against all the rest of them.

First Trust has an AlphaDex sector suite of ETFs, and they do a great job themselves within the AlphaDex fundamental construction of their indexes. We take these ETFs of their sectors and organize them on that relative-strength basis. We take the top five out of the group. That is our Focus 5. When we last interviewed you in early March, your models favored U.S. equities, then developed international markets next. Have there been any changes on that front?
Dorsey: That still holds true. This is long term, what we do. Since October 2011, U.S. equities are the No. 1 asset class you should be in. You should be overweighted, plain and simple. That still is the case; it has not changed one iota.

International equities is ranked No. 2. As you just mentioned, last year our play was developed markets, not emerging markets. That played out extremely well, because you wanted to underweight emerging and definitely overweight developed. Now what you have is a condition in which the emerging markets are beginning to gain strength.

So in that international sleeve of our dynamic asset-level investing concept, you would probably be 50/50 between developed markets and emerging markets, whereas a year ago, you would have probably been 70 percent developed and 30 percent emerging. Valuations in developed markets have now eclipsed those in emerging markets, causing concern among some investors. Does your model have a "frothiness" component? For example, if a market gets too hot, does it trigger some sort of a signal?
Dorsey: No, it does not. As a matter of fact, for us, when things get too hot, they typically get even hotter. You think back to the hottest sector back in the 1950s was the vending machine sector. Then you look into the '70s, the hottest sector that just kept getting hotter and hotter was gold. In the '80s, oil. I could go on to the dot-com craze and on and on.

Just because something's hot doesn't mean it has to stop. We don't do any fundamental valuation. When the indicators begin to change, what we'll see—like in 2008 with our dynamic asset-level investing—is that the more defensive asset classes begin to move up.

In 2008, what happened was, fixed income and cash began to move up that list and pushed U.S. equities out, and pushed international equities out, and kept pushing them to the point where they were ranked fifth and sixth, where they were so far down the list you couldn't have even put any money into them.

It's not a matter of getting out or getting in, or market timing or not market timing. Our whole concept is that we want to be in the right asset class at the right time. We'realways going to be invested. But asset classes move back and forth just the way you'd do a volume thing where you take your mouse and the volume goes hot or horizontal.

That's what happens with our asset allocation; this volume is continuing to change. It's very long term in nature. Like I said, U.S. equities have been the place to be since October 2011. That hasn't changed. I can't predict when it will change. As an asset class, what about fixed income and commodities? Where do they currently sit based on your indicators?
Dorsey: Fixed income is ranked No. 3. Commodities are ranked zero, last, No. 6. The way we look at it is that we'll take strategic allocation, and we will be willing to go with the minimums that strategic allocation suggests. From the minimums to the maximums, that's where our tactical work comes in.

What's left in that bucket of money will begin pouring into the No. 1, No. 2, No. 3 asset classes. We'll never get down to five and six, which now, cash is ranked No. 5; commodities is ranked six. Getting down to specific ETFs, last quarter, your top three were RSP, GULF , then EWP. Are they still your top three right now?
Dorsey: Yes. These things are long term in nature. They don't change overnight. In fact, you know the old market adage, that the market likes to climb a wall of worry. You've got nothing but worry in the Middle East, right? Exactly the place that no one would invest, no one would ever think of investing, but it's the place you need to be investing. So the Middle East is still right up there, and Spain is too. RSP is still ranked No 1. You mentioned turmoil in the Middle East. Right now, you've got this precarious situation in Iraq. How does geopolitics play into your model?
Dorsey: It cannot play into the model, because what are you going to do with geopolitics? When Egypt was blowing up, and you wouldn't look at Egypt and you were saying, "I won't even go there on vacation," that was the place to buy it. EGPT was the play of the century. The same with Greece. It was over for Greece, totally bankrupt, we'll never know Greece again the way it used to be. Oh my God, it's the worst place to be. It was exactly the place you should have invested. That being the case, would you consider any kind of a pullback that we're seeing in GULF as an opportunity?
Dorsey: Yes, absolutely. Because you think about these old market adages, like "buy when the blood is running in the streets," well, it's running in the street. Switzerland is ranked No. 4. You definitely want to be in Switzerland, but I'd want to be in it on a pullback. That's the way I always like to buy: on sale. But I'm not looking for anything to bottom out or anything like that. I want the momentum to continue. What about broad Europe? I know you mentioned EWP is No. 3, but what is your indicator pointing to for European equities?
Dorsey: For European equities, you definitely want to be in the right place at the right time, naturally. I would be in Sweden, Switzerland. Germany is a potential. But there isn't much happening there, though I wouldn't mind owning Germany. Last year the best play was England. Our English model, which I happened to own at that point in time, was up 50 percent last year. This year it hasn't done that much. India is a place that also looks fantastic, the WisdomTree India Earnings ETF (EPI | C-78). Last year, the WisdomTree Japan Hedged Equity ETF (DXJ | B-61) was the big play. This year, eurozone equities are in focus, but based on the ECB's actions, some investors are skeptical about the euro. For investing in a region through an ETF, do you have a view on currency hedging?
Dorsey: I sure do have a view. As a matter of fact, I invest in these places. I invest directly in Europe. When I say "direct," when I own Sweden, I own Sweden in kronas. When I own Germany, I own it in euros. So I deal with lots of currencies around the world in my accounts. I have never once found it necessary to hedge anything, because the way I look at it is, I may hedge something and find out, at the end, I shouldn't have hedged it, because you never know until ex post facto.

People are worried about the euro, but I like the euro. If I'm investing in a country that is domiciled by euro, I'm in it. So currency hedging never crosses my mind. Maybe the big guys that run trillions of dollars may have to think about that. Still, I think the best thing to do is keep it as simple as you possibly can, and you're going to be a winner. Thanks for your time. INSIGHT

Guggenheim S&P 500 Equal Weight (RSP | A-76)
Tom Dorsey advocates overweighting U.S. equities, which, according to his indicators, continues to be the best asset class since October 2011. Among the barrage of available U.S. equity-focused ETFs, RSP remains Dorsey's No. 1 pick. With the S&P 500 Index rallying 25% over the past year, RSP's outperformance comes as no surprise. By equal-weighting the constituents of the S&P 500, RSP takes on more market risk (1.05 beta) and carries a growth bias, with midcaps getting a boost in weighting. Investor interest in RSP is strong: It boasts more than $8 billion in AUM and trades more than $45 million a day. For bullish investors looking to add a bit more strength on the upside during a U.S. equity rally, RSP remains a solid choice.

iShares MSCI Switzerland Capped ETF (EWL | B-97)
Dorsey notes that Switzerland is one of his top country picks, and that while he wants to see momentum continue, he would use pullbacks as a buying opportunity. Well, things are lining up nicely: EWL recently bounced off its highs, tumbling a few percentage points after a consistent two-year tear that saw returns in excess of 65 percent. That sounds like momentum with a pullback, which is exactly what Dorsey is looking for. Much like the Swiss equity market, EWL is highly concentrated, with more than 70 percent of its assets allocated to its top-10 holdings, including a whopping 17 percent allocation to Nestle. This ETF is also highly liquid, with pennywide spreads and more than $10 million of shares trading hands most days. Overall, EWL presents an efficient, liquid and representative portfolio for investing in Swiss equities. Alpha Think Tank ETF Tracker

Methodology: ETF selections are made solely by They are neither selected by, nor are they investment recommendations from, Alpha Think Tank strategists. ETF selections are made by the Analytics team based on the themes highlighted in each weekly interview with Alpha Think Tank strategists.

We implement a stop-loss of 10% from the Pick Date, whereby any funds triggered by that stop will drop off the tracker. The tracker data is updated weekly and is subject to change, according to our ongoing interviews with our strategists.

Ticker Fund Name Pick Date TR % (Since Pick Date) TR %
(1 Yr)
Closing Price $ (6/27/14) Inspired By
INDA iShares MSCI India 2/24/14 22.78 28.92 29.60 Roubini
AMU ETRACS Alerian MLP ETN 1/27/14 16.71 19.38 32.83 Luskin
EWP iShares MSCI Spain Capped 1/27/14 15.01 57.38 42.80 Luskin
CCXE WisdomTree Commodity Country Equity 3/14/14 13.79 19.35 32.20 Schiff
EWW iShares MSCI Mexico Capped 3/3/14 13.76 8.11 67.47 Friedman
EWI iShares MSCI Italy Capped 1/27/14 13.31 48.44 17.41 Luskin
PXH PowerShares FTSE RAFI Emerging Markets 2/17/14 12.56 15.97 21.43 Arnott
GDX Market Vectors Gold Miners 3/31/14 10.06 15.07 25.98 Merk
RSX Market Vectors Russia 2/3/14 9.63 9.66 26.76 Rogers
INDA iShares MSCI India 4/9/14 9.58 28.92 29.60 Kotok
GXC SPDR S&P China 2/3/14 9.43 19.91 75.11 Rogers
EWP iShares MSCI Spain Capped 2/24/14 8.92 57.38 42.80 Roubini
EWY iShares MSCI South Korea Capped 2/24/14 7.87 24.80 64.97 Roubini
NKY Maxis Nikkei 225 2/3/14 7.48 10.67 17.69 Rogers
EWW iShares MSCI Mexico Capped 2/11/14 7.15 8.11 67.47 Fitzsimmons
EWP iShares MSCI Spain Capped 3/10/14 6.93 57.38 42.80 Dorsey
ELD WisdomTree Emerging Markets Local Debt 2/17/14 6.91 2.03 47.47 Arnott
EWJ iShares MSCI Japan 3/3/14 6.37 9.17 11.98 Friedman
VCLT Vanguard Long-Term Corporate Bond 3/17/14 6.32 14.03 90.19 Yardeni
IEMG iShares Core MSCI Emerging Markets 4/28/14 5.91 15.55 51.80 Luskin
XLU Utilities Select SPDR 4/9/14 5.72 21.38 43.91 Kotok
VTI Vanguard Total Stock Market 4/28/14 5.65 24.71 101.73 Luskin
DBB PowerShares DB Base Metals 5/8/14 5.59 4.41 16.81 Gartman
MCHI iShares MSCI China 4/15/14 5.47 16.73 46.45 Faber
RSP Guggenheim S&P 500 Equal Weight 3/10/14 5.28 26.36 76.68 Dorsey
FXA CurrencyShares Australian Dollar 3/14/14 4.92 3.42 94.35 Schiff
GMF SPDR S&P Emerging Asia Pacific 4/9/14 4.80 17.29 82.52 Kotok
ERUS iShares MSCI Russia Capped 5/22/14 4.54 8.41 20.54 Arnott
FXC CurrencyShares Canadian Dollar Trust 3/14/14 4.14 -1.53 93.27 Schiff
EWH iShares MSCI Hong Kong 4/15/14 3.25 18.45 20.95 Faber
BKF iShares MSCI BRIC 5/22/14 2.87 16.02 38.65 Arnott
DBC PowerShares DB Commodity Tracking 3/14/14 2.73 5.86 26.74 Schiff
BAB PowerShares Build America Bond 4/9/14 2.72 8.90 29.21 Kotok
DBJP Deutsche X-trackers MSCI Japan Hedged Equity 6/12/14 2.69 12.34 36.59 Roubini
ROBO Robo-Stox Global Robotics and Automation 3/3/14 2.56 N/A 27.65 Friedman
DBC PowerShares DB Commodity Tracking 3/31/14 2.37 5.86 26.74 Merk
EPOL iShares MSCI Poland Capped 3/3/14 2.34 27.13 29.26 Friedman
EWS iShares MSCI Singapore 5/5/14 1.26 10.36 13.59 Bremmer
CHIQ Global X China Consumer 3/17/14 0.91 7.94 14.37 Yardeni
KOL Market Vectors Coal 5/8/14 0.81 9.14 18.67 Gartman
VTI Vanguard Total Stock Market 6/10/14 0.79 24.71 101.73 Friedman
XRT SPDR S&P Retail 3/17/14 0.77 13.85 86.55 Yardeni
DBGR Deutsche X-trackers MSCI Germany Hedged Equity 2/24/14 0.63 19.61 25.93 Roubini
SCPB SPDR Barclays Short Term Corporate Bond 3/17/14 0.45 1.91 30.80 Yardeni
IEMG iShares Core MSCI Emerging Markets 6/12/14 0.28 15.55 51.80 Roubini
VNM Market Vectors Vietnam 4/15/14 0.17 13.63 20.77 Faber
USDU WisdomTree Bloomberg US Dollar Bullish 4/15/14 -0.85 N/A 24.59 Faber
EZU iShares MSCI EMU 6/12/14 -0.96 32.25 42.32 Roubini
FXE CurrencyShares Euro 3/31/14 -1.02 4.24 134.64 Merk
ITA iShares U.S. Aerospace & Defense 5/5/14 -1.03 34.72 108.53 Bremmer
GULF WisdomTree Middle East Dividend 3/10/14 -1.05 27.23 21.45 Dorsey
AFK Market Vectors Africa 5/5/14 -1.12 25.06 32.75 Bremmer
CHIQ Global X China Consumer 2/11/14 -2.97 7.94 14.37 Fitzsimmons
PEJ PowerShares Dynamic Leisure and Entertainment 3/17/14 -3.15 22.50 34.13 Yardeni
IAU iShares Gold Trust 3/14/14 -4.85 9.44 12.75 Schiff
TUR iShares MSCI Turkey 6/10/14 -5.48 -4.35 55.83 Friedman
EIDO iShares MSCI Indonesia 5/28/14 -7.65 -16.74 25.85 Fitzsimmons


Data as of 6/27/14


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