Cornerstone - Technical Analysis
"The rule is to cut losses short but let profits run." - Charles Dow, 1920
The cornerstone of our investment approach is technical analysis – specifically, Point & Figure Charting and Relative Strength Analysis. Our tools cut through the clutter of day-to-day market action, identifying meaningful patterns in daily share price movements.
These can be applied at the country, sector, or individual share level, and across a variety of asset classes. The goal, always, is to manage risk and concentrate investments in those areas of the market with the highest probabilities of future outperformance.
Some key principles:
Relative Strength, the measurement of how one security performs in comparison to another, is a key concept within Dorsey Wright’s methodology. Before investing in UPS, one should understand its recent performance relative to FedEx, or the S&P 500. The same logic can be applied to sector analysis, asset class evaluation, mutual funds, ETFs, commodities, fixed income, and even foreign countries. A relative strength matrix is like a massive tournament, where a huge quantity of investment options can be compared to one another – and we see who is strongest. Relative strength is the basis for virtually all of our managed products, where we select what we believe to be the best investment options from within a large universe of options.
We use primary market indicators to get a measure of overall risk, and then analyze broad industry sectors to determine which are in favor. We want to invest in sectors that are controlled by demand. We then select investments that have positive relative strength and have a good probability of outperforming the market. We do not feel compelled to be fully invested in stocks when an alternative investment (cash reserves) offers a more attractive opportunity. In fact, it is our belief that avoiding severe losses is extremely important in achieving strong market performance over the course of an entire market cycle.
Offense or Defense:
One of the most important considerations when investing is determining whether to take an offensive or defensive posture. When market movements indicate significant risk, defense is suggested, and we endeavor to protect existing positions.
When market trends appear favorable, offense is suggested, and we want long exposures. Dorsey Wright uses technical market indicators to determine whether offense or defense is dictated.
Please read our whitepaper for a more quantitative exploration of the performance of relative strength strategies. Below is an example: