Dorsey: Biotech, Chips, Drugs Top US Sectors

December 16, 2014 I think those are pretty much the same as the last time we spoke.
Dorsey: That's the interesting thing about it, because things in motion tend to stay in motion. When you look at modern portfolio theory that says, "Something that has really done well is going to start doing poorly. Let's start buying the stuff that has done poorly because we know it's going to end up doing well." Wrong. Because things in motion tend to stay in motion—basic physics. So like you said, these were the ones that were the play the last time. They still are and you want to be in them until they suggest to you that you shouldn't be there.

U.S. equities have been running No. 1 by our relative strength worldwide since October 2011 and that hasn't changed, and we don't see any signs of that changing at this point in time. Since 2011, your portfolio would be overweighted to U.S. equities, and that is still the right play.

If you asked me, "Tom, on a normal distribution, where is the S&P overall?" I would say the S&P is probably two standard deviations above trend, which would suggest some sort of a correction here. Maybe we get a correction like October, maybe a correction like back in March, but I don't see anything more than that. That would be more like the pause that refreshes than anything else. What about Europe? Europe has pulled back pretty much since July, but a lot of folks are expecting QE from the ECB sometime in Q1 of next year. What are your models telling you about broad European funds?
Dorsey: No, Europe is definitely still a buy. Regarding hedged Europe versus the nonhedged, if you look at the WisdomTree Europe Hedged Equity ETF (HEDJ | B-49), it's ranked No. 10 on our list of the best places to be. So, hedging Europe has been the right play and I don't see any change with that, because the dollar is so strong. So anything in Europe I think makes a lot of sense to be short the euro along with it. What is the top Europe ETF right now in your model?
Dorsey: The top European ETF in the model is Spain. A few years ago, they were talking about Spain being the same as Greece, that it was all over for Spain, but Spain is No. 1 ranked. Switzerland is No. 2 and Belgium is No. 3. Who would ever think of investing in Belgium? What is your current top five overall in the equity space?
Dorsey: If we look at the world ETF matrix and say, "OK, these are all the ETFs that trade worldwide," No. 1 is the iShares Dow Jones US ETF (IYY | A-100), and that has been the case since October 2011. Next comes the WisdomTree India Earnings ETF (EPI | C-72). Third is the iShares MSCI Philippines ETF (EPHE | B-99). The WisdomTree Middle East Dividend ETF (GULF | F-91) is next, and that has been up there now for a couple of years. Spain comes next, then Switzerland, then Belgium, Egypt is No. 8, Thailand is No. 9, and HEDJ comes in at No. 10. China comes in at No. 11 out of all of them. What about the Guggenheim S&P 500 Equal Weight ETF (RSP | A-80)? RSP has been sitting up there for a long time on your list. Did that fall off your top 10 there?
Dorsey: No it hasn't. It's right up there. RSP is right next to IYY. They come in Nos. 1 & 2, but since that was all U.S., we just said, "OK, let's just take one of them out and just leave IYY there at No. 1." Ninety percent of all money managers never outperform RSP. You've got to own that in your portfolio. Let's talk about Russia. A lot of folks are trying to pick the bottom in Russia. Where does Russia rank on your list?
Dorsey: If you look at a chart of the Market Vectors Russia ETF (RSX | B-67), it looks terrible. It couldn't look worse. This is a place that Jim Rogers is now saying that you've got to invest in. Now he is always one to try to find things that are at bottoms rather than tops, so he is not a momentum player or relative strength player.

But what is interesting here is that when you look at The Economist, which is probably the best magazine out there to go opposite what the cover does, on the November 22 issue, the cover says, "Russia's wounded economy," and it shows a bear with his head hanging down. That is the kind of magazine cover that picks bottoms.

Our whole board room wall is covered with magazine covers that we have talked about in the past that have marked bottoms. I mean tons of them. So this would be one of them that I would say, "OK, if you're willing to take something relative strengthwise, I can't make a case for RSX, but if you want to try to bottom-fish and go along with Jim Rogers, this magazine cover suggests to me I might pick a little bit of it up." You're known for your technical models, but aside from technical analysis, do you have a favorable view on a specific market or even an asset class?
Dorsey: Another market that I really like is Indonesia, and Indonesia is going to probably be the fifth-largest country in the world in 2015. There is so much happening over in the Far East, it's just incredible. You've got to get into a plane and head over there and go spend some time in Indonesia, and then go over to Malaysia. Malaysia is a country that I like to have in my portfolio. It's got a good yield, and also Malaysia is the lowest volatility of any country in the world, and so I like to have my foot in the stirrup in Malaysia pretty much at all times in my portfolio. What about ETFs combing the bottom of your list for those contrarian investors who might say, "These are the most hated markets right now. I want to start looking into this"?
Dorsey: The very bottom is the iShares MSCI Brazil Capped ETF (EWZ | C-97), and that was the favorite for the longest time. That is the worst one there. Colombia is the second-worst one. You think back about a decade or so, that was exactly the place to be. When you should have been out of United States, all of these were doing fantastic, and Colombia was one of the best places you could have been for the money.

RSX is ranked No. 46, so that is third from the bottom. The SPDR S&P Emerging Europe ETF (GUR | F-87) is fourth from the bottom. The iShares Latin America 40 ETF (ILF | B-77) is also on the bottom. The Market Vectors Africa ETF (AFK| D-25) is also on the bottom, but I think Africa is going to be a place that I really want to begin focusing on down the road. I've got a keen eye there. I think Africa is going to be a great place to invest. Austria is also one of the ones down on the bottom. Obviously energy has been in the headlines recently. What are your models telling you about energy right now?
Dorsey: Energy couldn't look worse. I mean, as you look at the chart on energy, it just looks terrible. One of the interesting things about energy is that in our models, because they are rules-based, it never allowed energy to be in any of our models. That's one of the reasons FV is such a phenomenal performer, and our DWA Sector 4 model, the same thing: It didn't let energy get in there.

The December 6 cover in The Economist says "Sheikhs versus Shale," and it's got a picture of an Arab sheik with one of the filler handles from when you're pumping gas in your car, and backed up to him is a tough-looking U.S. fracker, and he's holding also a Phillips nozzle in his hand, so they look like two guns, and they're about to take 40 paces and turn around.

So, sheiks versus shale, it tells you the new economics of oil, and there is no new economics of oil. It's all about supply and demand, plain and simple. This is a beautiful example of how capitalism works. Saudi Arabia wants to keep the pressure on the frackers, and they're going to keep the price of oil down and try to put the frackers out of business.

The frackers are saying, "No, we're going to continue on in business." So it's interesting the citizens of the U.S. are benefiting with this, but this tells me it's all about supply and demand, and there is so much supply on the market right now, at some point, somebody gives. This tells me we're getting close to a bottom. Thanks for your time.

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