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The Word from Main Street

Market Update for the Week of January 7th, 2019

Happy New Year everyone! We enter 2019 hopeful for progress on issues, including trade with China, a hawkish Federal Reserve, a troubled Brexit, and of course, the government shutdown. These uncertainties dogged markets in late 2018, producing the worst annual performance for the Dow, the S&P 500, and the Nasdaq indices since 2008. Alarmist media coverage helped to inflame investors’ fears, accelerating selling pressures and volatility. Meanwhile, underlying fundamentals of the U.S. economy remain strong, perhaps the best globally, and do not reflect the characteristics of an economy headed for recession, at least, not in the immediate future. This is particularly evident with our strong dollar, stable inflation rates, and a Federal Reserve that can even consider making multiple interest rate increases going forward.

As mentioned many times before, uncertainties are ever-present when investing in stocks, bonds, commodities, whatever. With all of this noise, now is a good time to re-emphasize the importance of our money management process using a relative strength-based system. This system lends itself to creating objective, rules-based approaches for investing which are both repeatable and scalable. This system allows us to navigate changing market environments while removing human emotion and indecision from the equation. Relative strength (also known as momentum) is a key investment factor and has been tested and shown to be a robust factor that, when used as a selection criterion, is capable of delivering outperformance over the long-term (source: Dorsey Wright & Associates). Other investment selection criteria such as fundamental valuation, is more subjective in nature, while relative strength is evaluated on a purely quantitative or technical basis.

Relative strength is not designed to get you in at the bottom and get you out at the top. Instead, it is designed to allow you to participate in the “meat” of the move. It will force you to remain invested in strong trends and themes even if your gut may be telling you the ride is over. Just as importantly, it is designed to give you an indication to move to the sidelines when those trends do in fact come to an end. The overall goal of our relative strength strategies is to help us navigate the financial waters – whether the seas are calm or choppy – so that one day we can arrive at our end destination.

Remember the DALI (Dynamic Asset Level Investing) rankings we continue to update you about every week as the ranking depicts, in a leading fashion, changes in relative strength trends. See the latest ranking as follows: 

Last week, we reviewed another indicator called the Cash Percentile Rank (CPR) that helps us to make the call to raise cash in a portfolio. The CPR is an indicator that measures the position of a cash proxy within a specific asset class, say Domestic Equities. In the Domestic Equities asset class, for example, a cash proxy is compared against each security within the universe of U.S. stocks and ETF’s. To measure this, Dorsey Wright constructs custom matrices specific to each of the asset classes and includes a cash proxy as a member in each. They evaluate these matrices on a daily basis to see where cash resides and then display the results using a traffic light of sorts assigning the specific asset class either a green, a yellow, or a red light. If cash resides in the bottom third of the matrix, this suggests positive relative strength of the asset proxies in the matrix versus cash and the asset class gets a green light. As cash rises in the matrix, the light turns yellow, which suggests members of the asset class are starting to falter and we should move towards a more cautious or hedged approach to that asset class. Once cash ascends to the top third of the matrix, the light will turn red, indicating that on an aggregate basis, the asset class has weakened enough to merit cash as a better overall investment choice relative to that particular asset class. Last week, we introduced the “Rule of 66”, that is, if the Cash Percentile Rank for Domestic Equities rose above this relevant threshold, in this case 66%, we would take a position in cash and target a level of cash equal to the Cash Percentile Rank. As of this report, we have not needed to initiate this rule, but will keep you posted.

P.S. If you think this type of information would be of benefit to anyone you know, please share this communication with them. Also, if you, or someone you know, would like to be added to the weekly market update, please click here to provide us with the e-mail address.

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Past performance is no guarantee of future results. All investing involves risk including the loss of principal.

Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future. Dorsey, Wright & Associates developed the indicators described above. They have been prepared without regard to any particular investor's investment objectives, financial situation and needs. Accordingly, investors should not act on any recommendation (express or implied) or information in this report without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions.

Any statements nonfactual in nature constitute only current opinions and interpretations of their indicators, which are subject to change without notice. There may be instances when fundamental, technical and quantitative opinions may not be in concert. Any opinions expressed or implied herein are not necessarily the same as those of Wells Fargo Advisors or its affiliates. Any market prices are only indications of market values and are subject to change. The material has been prepared or is distributed solely for informal purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Data and opinions are current as of 1/7/19. Additional information is available on request.

Dorsey Wright’s “DALI" employs relative strength-based analysis to rank macro asset classes based on developing leadership trends within the global capital markets. The objective guidance within DALI provides the tools necessary to properly allocate portfolio across all major asset classes in an effort to emphasize strength wherever it exists. U.S. Equities, International Equities, Commodities, Global Currencies, Fixed Income and Cash are evaluated daily to identify dynamic developments across investment genres, as well as within them. This tool provides the tactical precision that allows investors to adapt as the market leadership changes.

Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of Main Street Wealth Advisors and are not necessarily those of Dorsey, Wright & Associates, LLC, Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.

Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Main Street Wealth Advisors is a separate entity from WFAFN.

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