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 ETF.com 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.
ETF.com: 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.
ETF.com: 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.
ETF.com: 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.
ETF.com: 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.
ETF.com: 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.
ETF.com: 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?
ETF.com: 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.
ETF.com: 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.
ETF.com: 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."
ETF.com: 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.
ETF.com: 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.
ETF.com: 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.
ETF.com: Thanks for your time.
Dorsey says: "Ninety percent of all money managers never outperform RSP. You've got to own that in your portfolio." That's quite a strong statement. RSP holds all the stocks in the S&P 500, but weights them equally rather than by market cap. Equally weighted funds often lean hard toward smaller firms, and therefore toward higher risk, but the impact here is more muted. While the fund has about one-third exposure to midcaps, we see only slightly elevated market risk (beta of 1.02). RSP avoids large sector biases too. The fund has a 10-year track record, so investors can check performance in good times and bad. RSP is extremely large and liquid, with about $10 billion in assets and trading more than $85 million most days.
IYY is currently the No. 1-ranked ETF on Dorsey's relative strength technical model. According to Dorsey, U.S. equities have topped his list since October 2011, and he doesn't see that changing anytime soon. IYY is a highly efficient cap-weighted ETF that captures more than 1,200 U.S. stocks and 95% of the U.S. equity market cap. It charges only 20 basis points and tracks its index remarkably. Combine that with great liquidity and marketlike coverage, and IYY is one of the few ETFs that carries an A-100 ETF.com score.
ETF.com Alpha Think Tank ETF Tracker
Methodology: ETF selections are made solely by ETF.com. They are neither selected by, nor are they investment recommendations from, Alpha Think Tank strategists. ETF selections are made by the ETF.com 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 ETF.com 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||ETF.com Pick Date||TR % (Since Pick Date)||TR % (1 Yr)||Closing Price $ (12/12/14)||Inspired By|
|INDA||iShares MSCI India||2/24/14||23.77||24.73||29.84||Roubini|
|XTN||SPDR S&P Transportation||10/15/14||19.45||33.15||103.42||Kotok|
|DBJP||Deutsche X-trackers MSCI Japan Hedged Equity||6/12/14||12.88||10.22||40.22||Roubini|
|GXC||SPDR S&P China||2/3/14||12.65||2.33||77.32||Rogers|
|IYT||iShares Transportation Average||10/15/14||11.86||26.84||159.11||Kotok|
|XLU||Utilities Select SPDR||4/9/14||11.53||26.71||45.91||Kotok|
|VHT||Vanguard Health Care||7/2/14||11.12||29.66||126.47||Yardeni|
|INDA||iShares MSCI India||4/9/14||10.47||24.73||29.84||Kotok|
|BAB||PowerShares Build America Bond||4/9/14||9.56||16.67||30.56||Kotok|
|MCHI||iShares MSCI China||4/15/14||9.31||2.67||48.14||Faber|
|USDU||WisdomTree Bloomberg US Dollar Bullish||4/15/14||8.99||N/A||27.03||Faber|
|VTI||Vanguard Total Stock Market||4/28/14||7.81||13.86||103.34||Luskin|
|RSP||Guggenheim S&P 500 Equal Weight||3/10/14||7.14||15.33||77.76||Dorsey|
|SIVR||ETFS Physical Silver||11/4/14||5.93||-13.28||16.72||Faber|
|USDU||WisdomTree Bloomberg US Dollar Bullish||9/23/14||5.01||N/A||27.03||Yardeni|
|NKY||Maxis Nikkei 225||2/3/14||4.74||-2.58||17.24||Rogers|
|SGOL||ETFS Physical Swiss Gold||11/4/14||4.65||-0.75||119.69||Faber|
|GMF||SPDR S&P Emerging Asia Pacific||4/9/14||4.56||9.61||82.33||Kotok|
|USDU||WisdomTree Bloomberg US Dollar Bullish||9/29/14||3.80||N/A||27.03||Roubini|
|DBB||PowerShares DB Base Metals||5/8/14||3.20||0.31||16.43||Gartman|
|VTI||Vanguard Total Stock Market||6/10/14||2.85||13.86||103.34||Friedman|
|MUB||iShares National AMT-Free Muni Bond||7/16/14||2.81||8.94||110.26||Kotok|
|EWH||iShares MSCI Hong Kong||4/15/14||2.17||6.03||20.73||Faber|
|VTI||Vanguard Total Stock Market||10/24/14||2.17||13.86||103.34||Bremmer|
|EWJ||iShares MSCI Japan||3/3/14||0.86||-3.09||11.36||Friedman|
|SCPB||SPDR Barclays Short Term Corporate Bond||3/17/14||0.34||0.80||30.59||Yardeni|
|FNDX||Schwab Fundamental US Large Company||9/23/14||0.19||13.04||29.22||Yardeni|
|IYY||iShares Dow Jones U.S.||9/3/14||0.18||14.16||101.00||Dorsey|
|ITA||iShares U.S. Aerospace & Defense||5/5/14||-0.15||10.01||109.24||Bremmer|
|AMU||ETRACS Alerian MLP ETN||1/27/14||-0.63||3.58||27.33||Luskin|
|UDN||PowerShares DB US Dollar Index Bearish||11/11/14||-0.96||-9.91||24.37||Schiff|
|GXC||SPDR S&P China||10/8/14||-1.34||2.33||77.32||Merk|
|EWS||iShares MSCI Singapore||5/5/14||-1.72||5.62||13.19||Bremmer|
|DBJP||Deutsche X-trackers MSCI Japan Hedged Equity||11/18/14||-1.97||10.22||40.22||Luskin|
|DBGR||Deutsche X-trackers MSCI Germany Hedged Equity||2/24/14||-2.04||5.19||25.24||Roubini|
|INDA||iShares MSCI India||7/23/14||-2.42||24.73||29.84||Bremmer|
|EWP||iShares MSCI Spain Capped||1/27/14||-2.89||3.24||36.14||Luskin|
|PXH||PowerShares FTSE RAFI Emerging Markets||2/17/14||-3.30||-6.83||18.16||Arnott|
|FXC||CurrencyShares Canadian Dollar Trust||3/14/14||-3.93||-7.82||85.94||Schiff|
|AUNZ||WisdomTree Australia & New Zealand Debt||10/22/14||-4.09||-0.79||19.00||Gartman|
|TAO||Guggenheim China Real Estate||8/12/14||-4.37||5.73||21.00||Faber|
|ELD||WisdomTree Emerging Markets Local Debt||2/17/14||-4.74||-6.87||41.54||Arnott|
|EWW||iShares MSCI Mexico Capped||3/3/14||-4.85||-14.28||56.43||Friedman|
|EIDO||iShares MSCI Indonesia||5/28/14||-5.36||20.37||26.49||Fitzsimmons|
|IEMG||iShares Core MSCI Emerging Markets||4/28/14||-5.40||-3.65||46.27||Luskin|
|HEDJ||WisdomTree Europe Hedged Equity||12/3/14||-5.68||9.08||56.46||Fitzsimmons|
|VNM||Market Vectors Vietnam||4/15/14||-5.81||6.06||19.53||Faber|
|EPI||WisdomTree India Earnings||9/3/14||-6.32||31.09||21.78||Dorsey|
|INDA||iShares MSCI India||9/8/14||-6.37||24.73||29.84||Fitzsimmons|
|ROBO||Robo-Stox Global Robotics and Automation||3/3/14||-6.38||-1.40||25.24||Friedman|
|INDA||iShares MSCI India||11/18/14||-6.63||24.73||29.84||Luskin|
|GULF||WisdomTree Middle East Dividend||3/10/14||-6.68||6.56||20.15||Dorsey|
|FXA||CurrencyShares Australian Dollar||3/14/14||-7.29||-5.85||82.60||Schiff|
|EPOL||iShares MSCI Poland Capped||3/3/14||-7.87||-10.12||26.34||Friedman|
|EWP||iShares MSCI Spain Capped||2/24/14||-8.03||3.24||36.14||Roubini|
|BKF||iShares MSCI BRIC||5/22/14||-8.05||-5.40||34.55||Arnott|
|FXB||CurrencyShares British Pound Sterling Trust||7/9/14||-8.54||-4.22||154.38||Merk|
|VGK||Vanguard FTSE Europe||8/19/14||-8.59||-1.80||52.26||Luskin|
|EWY||iShares MSCI South Korea Capped||2/24/14||-8.88||-10.41||54.88||Roubini|
|EIDO||iShares MSCI Indonesia||7/23/14||-9.56||20.37||26.49||Bremmer|
|EWP||iShares MSCI Spain Capped||3/10/14||-9.71||3.24||36.14||Dorsey|
|DBC||PowerShares DB Commodity Tracking||11/25/14||-9.98||-24.24||19.31||Arnott|
As of 12/12/14