Dorsey: Biotech, Chips, Drugs Top US Sectors

December 16, 2014

Note: Alpha Think Tank will take a two-week hiatus. The next issue will be Jan. 6, 2015.

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, Virginia, 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 which markets are exhibiting the greatest strength, according to his indicators, as the Dow and S&P 500 surge to record highs. He tells us which U.S. sectors are hot and how to play a rebound in European ETFs. Finally, he gives his insights into Russia and Energy ETFs. The First Trust Dorsey Wright Focus 5 ETF (FV | B-23) just surpassed the $1 billion mark. What is drawing so many investors to FV?
Tom Dorsey: That's an interesting question that I think most of the media have really missed. It really dates back 27 years, and what Dorsey Wright is all about. We are first and foremost educators, and we have educated all of our clients in our methodologies, and the clients that have stayed with us for the longest have become true craftsmen at this. In 2002, we began creating models that automatically run, because everything we do is a rules-based approach. There is no human DNA on anything that we run. We let the computer do it. We have already written the rules.

We ran a First Trust model for a number of years before it came out into an ETF. So our clients were already very familiar with it, and I'm willing to bet you we probably put $4.5 billion in that First Trust Five model where the broker would basically take the model and execute it himself at his firm.

There are two types of brokers out there. One is the wire house broker whom I would say typically would prefer to have more CUSIPs in an account and they would gravitate to the model, and the model automatically runs and they are emailed when a change takes place and they like to make that change. Then you have the advisor out there who is running his own business. He is the investment advisor and he has ticket charges. So for him the least number of ticket charges possible is what he wants.

So when we came out with FV, it's exactly the same as the model, both the model and the ETF run right next to each other, and they both do exactly the same thing. One is a single CUSIP. One is five different CUSIPs. So that's why it went so fast, because there was pent-up demand for a single CUSIP product on that model. Your model is based on relative strength. The Dow and S&P are at all-time highs. What would you say to investors concerned about volatility and high-momentum stocks with regard to your model?
Dorsey: All we're saying is we're taking the AlphaDex's way of constructing the sectors that First Trust has, and they constructed AlphaDex as a fundamental approach. Then we look at those sectors and say which ones have the strongest relative strength. So if a customer is willing to go into the AlphaDex First Trust sectors, then fine; all we're going to do is organize it, or a customer could say, "Look, I don't want anything that is high volatility." OK, that's fine. Then all we have to do is take a group of stocks, like the PowerShares S&P 500 Low Volatility ETF (SPLV | A-46), and organize those.

It's kind of a misnomer when you say this is momentum, and therefore Dorsey Wright only deals in high velocity. That's not the case. If you give me a list of the lowest-volatility stocks in the world, we'll organize those for you, and we'll give you the best ones to be in low volatility. So for us, it doesn't make any difference whether it's high volatility, low volatility or whatever it is; the customer decides what he wants to be in. Within U.S. stocks, which sectors in particular right now are flashing "buy" according to your technical models?
Dorsey: Within the U.S. stocks, you have semiconductors, drugs, biotechnologies and aerospace.


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