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use of technical analysis in asset allocation and risk management for ETFs

Transcript of TechnicalAnalysis&ETFs

Technical Analysis&ETFs: Generating HigherReturns inallMarkets

PaulBaiocchi,ModeratorETFAnalyst,IndexUniverse

TomDorsey,PresenterPresident &Founding Member Dorsey,Wright&Associates

ETFsAcrossEveryMajorAssetClassNowWhat?

With1,300ETFsalso comestheneedto chooseamongthemand determineamannerin whichtousethem together

ForAdvisorUseOnly.NotForUseWithThePublic.

WHERE DID IT ALL BEGIN?History ETFshadtheirgenesisin1989withIndex ParticipationShares,anS&P500 proxythat tradedontheAmericanStockExchange and thePhiladelphiaStockExchange.Thisproduct, however,wasshortlivedafteralawsuitbythe ChicagoMercantileExchange wassuccessfulin stoppingsalesintheUnitedStates.

WIKIPEDIASpidersDebut1993anditsofftotheraces OptionsonXAUIndexesbegantradingin1983.

ETFWorldCirca2000:30ETFs

Theinvestmentlights oftheworldhavebeen turnedonETFWorldCirca2012:approx.1,300ETFs

4 ForAdvisorUseOnly.NotForUseWithThePublic.

TheDowhasexperienced8major structuralmarkets,eachlastingan averageof14years.Mustbeabletonavigate throughbothBullandBear markets.

12+years (sofar)

ForBroker/AdvisorUseOnly.NotForUseWithThePublic.

ForAdvisorUseOnly.NotForUseWithThePublic.

AGamePlanBasedonSupplyandDemand Weallunderstandthebasic forcesofsupplyand demand. Thesameforcesthataffect pricesinthesupermarket alsoaffectpricesinthestock market. Stocks,sectors,andasset classesmoveinandoutof favorjustlikeproduceinthe supermarket.For Broker / Advisor Use Only. Not For Use With The Public.

Original Point & Figure ChartDates back to the late 1800s59 58 57 56 55 54 53 52 51 51 50 50 50 49 49 49 48 48 58 57 56 55 54

Depicts the battle between supply & demand

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For Broker / Advisor Use Only. Not For Use With The Public.

Point & Figure Method: The Most Basic PatternsDouble Top45 O O O O O X O X O X O X O X O X O B O X X O X O X O X O X O O 45

Double BottomX X X O X O X O X O X O O X S X O X O X O X O X O X O X X X X

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For Broker / Advisor Use Only. Not For Use With The Public.

QuizQuestion:WhosinControl?

Knowing nothing about this security. Does the chart suggest demand, or supply, is controlling the price movement? What would you do? ForBroker/AdvisorUseOnly.NotForUseWithThePublic.

How Did So Many Get it WrongNew York Times- December 31st 2000 How can so many who are paid so much to scrutinize companies have blown it so spectacularly for their investor customers? Anthony Noto at Goldman, Sachs sums the situation up quite well. Article suggests he remained positive on the internet stocks he followed until after they lost 98% of their value during the 52 week period. Our research is driven by fundamental analysis and is not influenced by anything else, Mr. Noto said. He went on to explain that the companies he follows had their stock prices drop last spring not because their operations were failing, but because market psychology had changed. He downgraded the stocks much later because only then had it become clear through his research that the companies results were deteriorating. In hindsight, he said we should have lowered our ratings sooner. We regret that.

Citigroup (C): 2008 - 2009

ForBroker/AdvisorUseOnly.NotForUseWithThePublic.

Relative Strength Staying on the Path Allmajorsportshavearankingsystem.ThePoint& FigureRelativeStrengthtoolistherankingsystem weuseforETFs.

DailyCalculation: Stock/ETF X100=RSMarketIndexReading ThisreadingisplottedonaPoint&Figurechart whichthentellsuswhetherwecanexpectthat stockorETFtooutperformorunderperform the baseindex.

For Broker / Advisor Use Only. Not For Use With The Public.

Stock vs. Market Relative StrengthApple (AAPL) vs. S&P Equal Weighted Index (SPXEWI)

RelativeStrengthBasics: StockRS Thisrelativestrengthchartis onaPoint&FigureBuySignal andinacolumnofXs AAPLhaspositivelongterm andshorttermRSversusthe broadmarket. Ithasbeenonabuysignal sinceMarch10th,2004(to11/7/11)

AAPL=+2788.22% SPXEWI=+38.36%

ForFinancialProfessionalUseOnly.NotForUseWithThePublic.

12

Peer Relative StrengthMedtronic (MDT) vs. The DWA Healthcare Sector (DWAHEAL)

With Positive RS vs. Healthcare Sector (7/2/97 3/1/01) MDT: + 119.27 %

DWAHEAL: + 62.31 %

With Negative RS vs. Healthcare Sector (3/1/01 1/31/2011) MDT: - 22.11%

DWAHEAL: + 123.91%

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SML gave buy signal versus SPX on 2/18/2000 to suggest Small Cap Stocks should outperform Large Cap stocks. Since 2/18/2000 SML: + 100.65% SPX: - 6.31%

What lost decade?*Returnsthru11/7/11

Buy Signal = Favors Small Caps Sell Signal = Favors Large Caps14ForFinancialProfessionalUseOnly.NotForUseWithThePublic.

ETFs in the Pantry = IngredientsCurry Shrimp BlackPepper Butter Croutons Celery Lettuce TomatoSauce HeavyCream Squash Oysters LemonJuice Flour Turkey Almonds Lobster Sausage Onions WhiteSugar GratedCarrots ChoppedPecans Tomatoes Basil RedPepper Nutmeg GarlicSalt GroundBeef Eggplant Yeast Salmon PorkShank Cauliflower Eggs Ginger Steak Salt Cinnamon Cheese Asparagus Chicken Mushrooms Rice Beets Parsley Milk Chives Apples Pineapple Honey FetaCheese Eggs BakingSoda VanillaExtract BakingPowder Capers DryMustard Cabbage SnapPeas Vinegar Bacon SweetPotato LasagnaNoodles Potatoes Spinach MintLeaf CornSyrup WasabiPowder VegetableOil

Ingredients For ?Curry Shrimp BlackPepper Butter Croutons Celery Lettuce TomatoSauce HeavyCream Squash Oysters LemonJuice Flour Turkey Almonds Lobster Sausage Onions WhiteSugar GratedCarrots ChoppedPecans Tomatoes Basil RedPepper Nutmeg GarlicSalt GroundBeef Eggplant Yeast Salmon PorkShank Cauliflower Eggs Ginger Steak Salt Cinnamon Cheese Asparagus Chicken Mushrooms Rice Beets Parsley Milk Chives Apples Pineapple Honey FetaCheese Eggs BakingSoda VanillaExtract BakingPowder Capers DryMustard Cabbage SnapPeas Vinegar Bacon SweetPotato LasagnaNoodles Potatoes Spinach MintLeaf CornSyrup WasabiPowder VegetableOil

Directionsfor CarrotCake1. 2. 3. 4. Preheatovento350degreesF(175degreesC).Greaseandfloura9x13inchpan. Inalargebowl,beattogethereggs,oil,whitesugarand2teaspoonsvanilla.Mixin flour,bakingsoda,bakingpowder,saltandcinnamon.Stirincarrots.Foldinpecans. Pourintopreparedpan. Bakeinthepreheatedovenfor40to50minutes,oruntilatoothpickinsertedintothe centerofthecakecomesoutclean.Letcoolinpanfor10minutes,thenturnoutontoa wirerackandcoolcompletely. ToMakeFrosting:Inamediumbowl,combinebutter,creamcheese,confectioners' sugarand1teaspoonvanilla.Beatuntilthemixtureissmoothandcreamy.Stirin choppedpecans.Frostthecooledcake.

Example: FirstTrustFocus5ModelAll Sector Funds from First Trust (25 ETFs)

RS Screening Sieve(Top 5 Rank on a Relative Strength Matrix)

WeeklyMonitoring (DWA Website subscription)For Example Purposes only

PowerShares ETF LineUp

BestRanking

FocusBuyingon thetopoftheRS Matrix

Avoidthoseat thebottomof theRSMatrix WorstRanking 19 ForInternalUseOnly.Not

PowerShares DWA Technical Leaders Portfolio (PDP)UniverseofOver1500 Names RelativeStrengthArm WrestlingMatch RankedStrongestto Weakest

CurrentPDPAllocationsSource:www.invescopowershares.com

100Holdings,65%MidCap LargestSectorWeightingin Industrials,Consumer Cyclicals,andTechnologyFOR BROKER USE ONLY. NOT FOR USE WITH THE PUBLIC

RS Matrix Application: Buying Germany

ForFinancialProfessionalUseOnly.NotForUseWithThePublic.

WWW.DORSEYWRIGHT.COM WWW.DIF.PT

Notification Received, Ordered PlacedOrder placed On 13-Jan-2012 at 8:37:43 AM (GMT) You placed order to buy 195 MRCG:xetr shares @ 76.900 limit G.T.C. . Front office order id: 135126700 Account: 63000 400624 Order placed On 13-Jan-2012 at 8:24:44 AM (GMT) You placed order to sell 63 PUMG:xetr shares @ 225.850 limit G.T.C. . Front office order id: 135125824 Account: 63000 400624

AseamlesstransactionthroughtheuseofTechnology:ThisistheFuture!

REPLACINGONECOUNTRYWITHANOTHER

ForFinancialProfessionalUseOnly.NotForUseWithThePublic.

Finding Leadership: Relative StrengthInWhatWorksOnWallStreet,JimOShaughnessyfoundthatrelativestrengthwasafactor inall 10ofthetopperformingstrategies.Healsofoundthattheworststrategy inhis testingwasbuyingthestockswiththeworstrelativestrength.

Large Losers

Most Trades

Large Winners

ForAdvisorUseOnly.NotForUseWithThePublic.

BuildingaBusinessAndaBrandRinseWash Rebalance

MeanVariance Optimization

Source:wealthfront.com

StrategicAllocationReportCardQuestion: Whatwasthecumulativereturnof thisStrategicAllocationApproach since12/31/1999withannual rebalancing? (Forperspective,MoneyMarket gained30.4%duringthistime.) A. B. C. D. +0%,orless +30% +60% +150%,ormore

December 31, 1999 - December 31, 2011 December 31, 1999 - December 31, 2011 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 2000 - 2011 2000 - 2011

Money Int'l Money Int'l Commod. Market Commod. Equities Commod. Market Commod. Equities 14.39% 3.33% 18.42% 40.83% 14.39% 3.33% 18.42% 40.83% Money Fixed Foreign US Money Fixed Foreign US Market Income Currency Equities Market Income Currency Equities 5.91% 1.81% 9.75% 27.37% 5.91% 1.81% 9.75% 2