The Word from Main Street

Market Update for the Week of July 8th, 2019

The second quarter of 2019 is in the books and the stock market managed to further the year-to-date gains as the S&P 500 (SPX) was up 3.79% for the quarter and more than 17% through the first six months.  

As we head into the third quarter of 2019, Domestic Equities (stocks) remain the number one seed as it is the top-ranked asset class in our Dynamic Asset Level Investing (DALI) tool, which ranks assets based on relative strength. DALI helps us to identify where strength (or weakness) resides across, as well as within, the broad asset classes. When we look at the rankings today, Domestic Equities is ranked number one as it has been consistently for nearly three years. With that said, one of the goals of the DALI strategy is to overweight the strongest asset classes in the market and underweight the weakest. With regard to our various DALI Tactical Tilt strategies, they are designed with a strategic target in mind, based on our clients’ need for income, liquidity, time horizon, and risk tolerance. This means establishing ranges within which the portfolio can adapt. As the research from Dorsey Wright has proven over the past years, those ranges must be wide enough to allow real adaptation to take place, but narrow enough to avoid the common complaints of purely tactical portfolios. In a sample Moderate Tilt allocation, an offensive portfolio could have 75% exposure to Domestic Equities while a sample defensive portfolio could be only 20% Domestic Equities and 60% Fixed Income (bonds).

In the evolution of DALI testing and strategies, we have utilized the Tactical Tilt process, which offers a happy medium between traditional strategic allocation and pure tactical asset allocation. Once the minimum weightings in each asset class, based on strategic boundaries, are satisfied, the remaining portfolio allocations are filled beginning with the strongest asset class in DALI up to that asset class's maximum. Once the maximum weighting for the top-ranked asset class is achieved, then we simply fill the second-ranked asset class, and so on, until 100% of the total allocation is achieved. Therefore, using the Moderate Tilt allocation as an example in the current market, 20% would go to Domestic Equities to fulfill the minimum requirement, 5% to International Equities, 17% to Fixed Income, and 3% to Cash. The remaining 55% is left to Tactically Tilt. Since Domestic Equities is the number one asset class, that asset class is filled up to the maximum of 75%, or until there is nothing left to allocate (which is the case today), therefore the remaining amount to allocate brings Domestic Equities up to 75% of the portfolio.

Some strategies do better than others at different points in time and in different market environments. While certain markets can certainly lend themselves nicely to asset class rotation, often times it is the sub-asset class decisions that help to generate significant alpha (outperformance) in the portfolio over time. For example, should you be overweighting Technology or Real Estate? Treasuries or High Yield Bonds? Emerging or Developed Markets? We monitor the sub-asset classes weekly and want to be invested in the top 5, based on relative strength, on an ongoing basis.

The current DALI rankings are as follows:

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Past performance is no guarantee of future results. All investing involves risk including the loss of principal. Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.

S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock's weight in the Index proportionate to its market value.

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 7/8/19. 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.