Dorsey: Go Long US & Gulf States (Premium)

March 17, 2014

Leading technical researcher says to continue focusing on the U.S. and developed markets for now.

Tom Dorsey is one of the leading technical researchers of our time. He co-founded 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.

Dorsey recently sat down with to share his insight on which markets and regions look attractive, based on his proprietary technical indicators. Equally important, he discusses which markets to avoid. More broadly, he’s still very bullish on the U.S., and specifically, has his eyes on health care, consumer cyclicals and financials.

Excerpted: Let’s talk about the market a little bit. Which markets look attractive at the moment?

Tom Dorsey: Everything still suggests we be long U.S. equities, and we have been since October 2011. International equities are the second-best place to be; in particular, developed markets.

Today it seems like the world is coming apart. Russia today [March 3, 2014] raised their interest rates 200 basis points because they didn’t want capital fleeing from Russia. So they raised it at least temporarily, massively high. They had to prop up the ruble for the cost of them going into Crimea and Ukraine.

So there are a lot of problems that are beginning to escalate here, especially with China now siding with Russia on this. It goes back to what Jim Rogers said years ago that has never left me, that Russia will side with China, who will side with Japan. Russia has the natural resources. China has the people. Japan has the money. What he said there resonated with me.

And today China sides with Russia on the Ukraine situation. How far this gets into the market, I don’t know. But our stuff has not turned negative. Our defensive money markets for fixed income have not moved up on our dynamic-asset-level investing. So I would look at this as an opportunity to buy stocks that you wanted to buy. I don’t think this situation is going to last that long. So even though it looks painful, and it feels like the world is falling apart, the market’s still saying, “not yet”?

Dorsey: That’s right. The indicators we have suggest not yet. How far do you think it’d have to go before those indicators flip over?

Dorsey: You never know, because it’s on a relative calculation basis. What we do is compare and contrast six asset classes. If you look at U.S. equities of large-cap, small-cap, midcap—everything you can think of under U.S. equities—all of that goes into an arm-wrestling contest against everything else, and we come up with the best number of buy signals and whatnot.

So U.S. equities are it, international second, fixed income third. If I saw cash and commodities moving up the list and U.S. equities starting to move down the list, we’d have problems. But I see no changes yet. Within international, do you see developed markets doing better than emerging markets?

Dorsey: Developed markets, absolutely. I mean as far as international, it’s a tale of two cities. One has been, for over a year now, that developed markets is the place to be. And it’s interesting enough that, if I take all the ETFs, the world ETFs, and I rank them as to where you would want to be, the No. 1 rank is the equal-weighted S&P 500. Of course, nobody ever talks about that. That’s the red-headed stepchild.

Second rank in the world is the Gulf States. And that’s the symbol GULF, the WisdomTree Middle East Dividend ETF (F-88). No. 3 is Spain. No. 4 is the Dow Jones Total Market Index. No. 5 is Market Vectors Gulf States. Switzerland is No. 6. No. 7 is Greece.

All the places nobody would believe would be the places to invest. When blood is running in the streets, that’s when you need to buy. And that’s exactly when you needed to buy the Gulf States and you needed to buy Spain. Everybody wrote Spain off, and it was the end of the deal for Spain. But here it is, ranked No. 3. So things aren’t always what they seem … [continued]

To read the rest of our interview with Tom Dorsey, subscribe to a full year of the Alpha Think Tank Newsletter (50 issues) for only $299 by clicking here.



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