TRENDRATING VS. DORSEY WRIGHT

TRENDRATING VS. DORSEY WRIGHT A LOOK AT HOW SMART MOMENTUM CAPTURES TRENDS LONGER THAN RELATIVE STRENGTH AND PERFORMS BETTER DURING REVERSALS LONDON Phone: +44-203-705-2246 Email: [email protected]

BOSTON Phone: +1 508-315-6313 Email: [email protected]

© 2013-2018 TRENDRATING S.A. ALL RIGHTS RESERVED

LUGANO Phone: +41-91-91-06-590 Email: [email protected]

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Contents 1. 2017 IN REVIEW – A LOOK AT THE WINNERS AND LOSERS ............................................................................. 3 2. FACTORS THAT CONTRIBUTE TO A RELIABLE MOMENTUM MODEL .............................................................. 4 2.1 MARKET TRENDS AND REQUIRED ELEMENTS OF A WINNING MODEL ....................................................... 4 3. COMMONLY USED MODELS TODAY ARE BASED ON OUTDATED RESEARCH ................................................. 5 4. TRENDRATING SMART MOMENTUM ............................................................................................................. 9 4.1 Our Methodology ........................................................................................................................................ 9 4.2 Why Trendrating Outperforms .................................................................................................................... 9 5. COMPARATIVE ANALYSIS OF TRENDRATING VS. SOME POPULAR DWA ETFs............................................... 10 5.1 Trendrating vs Dorsey Wright ETFs Framework & Summary..................................................................... 10 5.2 Trendrating Strategy vs First Trust Focus Five ETF (FV) ............................................................................ 11 5.3 Trendrating Strategy vs PowerShares DWA Momentum Portfolio (PDP) .................................................. 13 5.4 Trendrating Strategy vs PowerShares DWA Developed Markets Momentum Portfolio (PIZ) .................. 15 5.5 Trendrating Strategy vs PowerShares DWA Emerging Markets Momentum Portfolio (PIE)..................... 17 5.6 Trendrating Strategy vs PowerShares DWA Healthcare Momentum Portfolio (PTH) ............................... 19


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1. 2017 IN REVIEW – A LOOK AT THE WINNERS AND LOSERS 2017 was a strong year for the US markets, with the S&P 500 up 20% and the MSCI USA Momentum Index up 38%. It was also a strong year for active managers, as dispersion in the market increased after years of below average levels. The ability to pick the winners was not an easy task, as can be seen below:

Top 10 Stocks NRG ALGN FSLR VRTX WYNN BA MU NVDA DHI PYPL

Performance 131% 130% 107% 101% 93% 89% 86% 85% 84% 83%

Bottom 10 Stocks UAA RRC SCG GE CHK MAT AAP SIG APA FL

Performance -50% -49% -46% -45% -45% -44% -42% -40% -35% -34%

The question isn’t just how early Trendrating and Dorsey Wright were able to identify these trends, but also the frequency of signals. The data below takes a look at these best and worst stocks, and shows how you could have fared using these two services. Findings: • • • •

DWA issued significantly more buy and sell signals through the year In the 20 stocks analyzed, Trendrating resulted in a higher ending value 80% of the time (1 was a tie) Both models would have protected against significant losses for the bottom 10 stocks Trendrating captured 33% more upside than Dorsey Wright for the 10 best stocks in 2017

Best 10 Performers of 2017 - S&P 500 Trendrating Dorsey Wright Market Average # of Signals: 0.5 4.2 Ending Portfolio Value: $1,874,370.00 $1,537,838.67 $336,531.33 $1,989,000.00 $(114,630.00) Percentage Gain: 87.44% 53.78% 33.66% 98.90% -11.46%

Average # of Signals: Ending Portfolio Value: Percentage Loss:

Worst 10 Performers of 2017 - S&P 500 Trendrating Dorsey Wright 0.9 3.6 $854,942.94 $829,021.68 $25,921.26 -14.51% -17.10% 2.59%


Market $570,000.00 -43.00%

$284,942.94 28.49%

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2. FACTORS THAT CONTRIBUTE TO A RELIABLE MOMENTUM MODEL

Momentum is a strong and persistent factor, whose value in terms of enhanced returns has been widely documented by an increasing number of white papers. However, in order to maximize ‘upside capture’ whilst minimizing ‘downside capture’ a fresh, new approach to designing momentum models is required.

2.1 MARKET TRENDS AND REQUIRED ELEMENTS OF A WINNING MODEL The key challenges are: Capturing momentum at an 1. early stage as well as identifying momentum reversals as soon as possible. 2. Filtering out price action noise (high volatility, false break-outs, temporary counter-trend moves) in order to assess the true underlying momentum structure and avoid a sequence of conflicting signals. 3. Measuring the quality of momentum as a proxy for assessing the probability of continuation of the current trend. A model that can reasonably address these three issues is expected to outperform traditional momentum models. if ‘yes’ here are the benefits

if ‘no’ here are the risks

maximum upside capture during trends

late entry - reduced participation to bull trends

minimum downside capture at trend reversal

late exit- substantial downside capture

2. FILTERING MARKET NOISE

low turnover, robust signals

high turnover, conflicting signals

3. MEASURING THE QUALITY OF MOMENTUM

more effective selection and allocation

random selection and allocation

1. CAPTURING MOMENTUM EARLY

The first issue ‘capturing momentum early’ is by far the most important.


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3. COMMONLY USED MODELS TODAY ARE BASED ON OUTDATED RESEARCH The most commonly adopted momentum models in the industry are derived from white papers published by prominent academics. They suggest using returns calculated from the last 6, 9 or 12 months as the basis for identifying momentum.

This methodology has an inherent problem - it is late 6, 9 or 12 months.


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If we look at the distribution curves of uptrends and downtrends for a sample of around 10,000 global stocks for the last 10 years, we find: During Bull Markets Only 43% of the time the duration of positive momentum lasts more than 6 months and only 13% of the time does it lasts longer than 12 months. This means that classic, simple momentum models based on 6 to 12 month returns are by definition, missing 57% of trends lasting less than 6 months, or 87% of trends lasting less than 12 months. The result is that you capture only a part of the positive trends most of the time.

On the other hand, during bear phases: 66% of the time the negative trend duration is shorter than 6 months. Here the classic momentum models bear the risk of adjusting too late at the critical time of momentum reversals.


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The inherent problem with momentum models based on simple performance analysis and rigid time windows can be graphically displayed. By being late 9 or 12 months the impact is a substantial reduction of upside capture coupled with the risk of miss-reading a positive trend while actually being in a bear phase. If for example you use a model based on 12 months return, then: -

When uptrends (positive momentum) last more than 12 months the model captures only a part of the upside potential, and When uptrends last less than 12 months the model suggests entering a long position when in reality a bear phase or a correction is under way.


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A fixed time window cannot be in synchrony with different cycles and focusing on performance only is extremely basic. Dorsey Wright uses a different methodology. At the core of their model is an old technical analysis tool – Point and Figure, associated with Relative Strength (RS) analysis. This approach offers a timelier identification of momentum, however is has some drawbacks. Here the foundation of the model is one indicator, whose intrinsic weaknesses are not counterbalanced by other analytical tools, offering a high concentration of risk. The filter is driven solely by RS. RS was developed to measure the price strength of a stock against another stock or an index. It works if trends are relatively linear, but in practice stocks show a whole variety of price patterns that can produce a sequence of conflicting RS signals. How often a trend develops via a series of well-defined up legs followed by ranging markets if not counter-trend corrections. When a similar time series is measured against the more consistent and smooth uptrend of another stock then continuously changing RS readings are produced, leading to a string of late adjustments of the signals. Therefore, RS can be hostage to extreme price swings and long-lasting consolidation phases generating erratic outputs that force a continuous change in terms of selection/allocation and a high turn-over.


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4. TRENDRATING SMART MOMENTUM Trendrating is the next generation of momentum models. It is faster to react and smarter in self-adjusting to different cycles and patterns. The management team of Trendrating has more than 20 years of experience in technical analysis and modelling. The development of Trendrating’s Smart Momentum model required 5 years of research and development, performing multiple tests across 25 years of data for 12,000 listed securities. A complex problem requires a complex understanding of the solution. We felt that the overly simplistic approach to momentum modeling offered by other providers could be beaten by a more sophisticated methodology.

4.1 Our Methodology We tested a vast library of indicators and studies from technical analysis across 25 years of daily data. We selected 8 indicators that in our research proved to be the most accurate and consistent in capturing momentum. By combining them into a model we have been able to produce a more robust analysis, not impacted by the specific weakness of one individual indicator.

4.2 Why Trendrating Outperforms The filter is based on four different metrics measuring each instrument’s short-to-medium term overall volatility as well as the upside volatility. 1. This structure supports: i)

a well-timed signal able to react faster to momentum developments

ii) a refined selection based on four grades of rating (A, B, C or D) iii) a continuous quantitative Smart Momentum Score exposing the strength of the underlying indicators iv) the filtering of most market noise, usually the biggest problem with fast models


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5. COMPARATIVE ANALYSIS OF TRENDRATING VS. SOME POPULAR DWA ETFs 5.1 Trendrating vs Dorsey Wright ETFs Framework & Summary The following comparisons are for illustrative purposes only. Trendrating does not offer any investable ETFs or products, and the results below were generated using the Trendrating Strategy Builder. All data is run over the past 10 years as of 12/15/2017, except where otherwise noted. -

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Trendrating Momentum vs First Trust Focus Five ETF (FV) Performance

Trendrating

DWA PDP

Difference

Annualized (Since March 2014)

+10.89%

+8.75%

+2.14%

Trendrating Momentum vs PowerShares DWA Momentum (PDP) Performance

Trendrating

DWA PDP

Difference

Annualized (10 yrs)

+10.71%

+6.35%

+4.36%

Trendrating Momentum vs PowerShares DWA Developed Markets Momentum (PIZ) Performance

Trendrating

DWA PIZ

Difference

Annualized (10 yrs)

+7.57%

+0.77%

+6.80%

Trendrating Momentum vs PowerShares DWA Emerging Markets Momentum (PIE) Performance

Trendrating

DWA PIE

Difference

Annualized (10 yrs)

+11.26%

-2.29%

+13.56%

Trendrating Momentum vs PowerShares DWA Healthcare Momentum (PTH) Performance

Trendrating

DWA PTH

Difference

Annualized (10 yrs)

+16.39%

+8.51%

+7.88%


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5.2 Trendrating Strategy vs First Trust Focus Five ETF (FV) The First Trust Focus Five ETF uses relative strength to identify and purchase the top five First Trust Sector ETFs. These are only sold when they fall sufficiently out of favor. The ETF remains fully invested at all times. Trendrating Selection criteria: • • • •

Universe: 19 First Trust US Sector ETFs Selection Rules: Top 5 ETFs with the highest performance since rated. The maximum The positions are equally weighted Rebalancing Frequency: Monthly Time Frame: March 1, 2014 – February 5, 2018

Performance Trendrating

DWA FV

Difference

Cumulative

+52.34%

+40.71%

+11.63%

Annualized

+10.89%

+8.75%

+2.14%

Yearly Average

+9.33%

+7.31%

+2.02%

7

10

-3

Max consecutive positive quarters

Key ratios Trendrating

DWA FV

Difference

Sharpe ratio

1.0069

0.7361

+0.2708

Sterling ratio

0.7525

0.5460

+0.2065

Sortino ratio

2.1505

1.2643

+0.8862


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Risk Trendrating

DWA FV

Difference

Max drawdown

-16.95%

-25.40%

+8.45%

Average yearly drawdown

-9.31%

-11.33%

+2.02%

Monthly standard deviation

3.75%

4.18%

-0.43%

Yearly performance

Max drawdown

Year

Trendrating

DWA PDP

Added value

Trendrating

DWA PDP

Added value

2014

9.66%

10.87%

-1.22%

-11.77%

-10.67%

-1.10%

2015

1.84%

6.63%

-4.79%

-15.41%

-16.11%

0.70%

2016

3.79%

-1.49%

5.28%

-7.67%

-18.99%

-11.32%

2017

31.15%

19.14%

12.01%

-4.23%

-4.08%

-0.15%

2018

0.21%

1.41%

-7.49%

-6.80%

-0.69%

-3.53%

Annualized

10.89%

8.75%

2.14%

-9.31%

-11.33%

2.02%


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5.3 Trendrating Strategy vs PowerShares DWA Momentum Portfolio (PDP) The PowerShares DWA Momentum Portfolio is based on the Dorsey Wright Technical Leaders Index, which is primarily made up of US stocks. Trendrating Selection criteria: • • • •

Universe: Largest 3,000 US stocks by market cap Selection Rules: Top 100 ‘A’ rated names with the highest performance since rated. The maximum weight for any individual security is set at 6%. Rebalancing Frequency: Monthly Time Frame: 10 years as of 12/15/2017


DWA PDP

Difference

Cumulative

+185.58%

+88.73%

+96.85%

Annualized

+10.71%

+6.35%

+4.36%

Yearly Average

+14.17%

+9.39%

+21.17%

8

13

-5

Trendrating

DWA PDP

Difference

Sharpe ratio

0.4766

0.3452

+0.1314

Sterling ratio

0.4373

0.2719

+0.1654

Sortino ratio

1.2887

0.6720

+0.6167


Key ratios


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Risk Trendrating

DWA PDP

Difference

Max drawdown

-57.46%

-58.76%

+1.30%


-20.31%

-17.88%

-2.43%

6.78%

6.22%

+0.56%


Yearly performance

Max drawdown

Year

Trendrating

DWA PDP

Added value

Trendrating

DWA PDP

Added value

2008

-41.19%

-46.43%

5.24%

-51.11%

-57.99%

6.88%

2009

19.95%

27.19%

-7.24%

-26.79%

-24.52%

-2.27%

2010

34.88%

26.26%

8.62%

-22.76%

-17.86%

-4.90%

2011

1.18%

1.40%

-0.22%

-28.82%

-22.28%

-6.54%

2012

20.77%

17.11%

3.66%

-11.21%

-9.87%

-1.34%

2013

59.51%

31.41%

28.10%

-6.95%

-8.12%

1.17%

2014

10.64%

11.91%

-1.27%

-20.34%

-9.92%

-10.42%

2015

2.81%

0.76%

2.05%

-12.15%

-11.72%

-0.43%

2016

9.50%

1.52%

7.98%

-16.03%

-13.15%

-2.88%

2017

23.62%

22.81%

0.81%

-6.92%

-3.39%

-3.53%

Annualized

10.71%

6.35%

4.36%

-20.31%

-17.88%

-2.43%


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5.4 Trendrating Strategy vs PowerShares DWA Developed Markets Momentum Portfolio (PIZ) The PowerShares DWA Developed Markets Momentum Portfolio is based on the Dorsey Wright Developed Markets Technical Leaders Index, which includes ADRs and GDRs in developed markets. Trendrating Selection criteria: • • • •

Universe: Largest 3,000 US stocks by market cap Selection Rules: Top 100 ‘A’ rated named with the highest performance since rated. The maximum weight for any individual security is set at 6%. Rebalancing Frequency: Monthly Time Frame: 10 years as of 12/15/2017


DWA PIZ

Difference

Cumulative

+112.23%

+8.23%

+104.00%

Annualized

+7.57%

+0.77%

+6.80%

Yearly Average

+10.88%

+4.29%

+6.59%

7

12

-5

Trendrating

DWA PIZ

Difference

Sharpe ratio

0.4289

0.0243

+0.4046

Sterling ratio

0.3359

0.0193

+0.3166

Sortino ratio

0.9031

0.0565

+0.8466


Key ratios


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Risk Trendrating

DWA PIZ

Difference

Max drawdown

-53.41%

-61.09%

+7.68%


-17.09%

-21.72%

+4.62%

4.99%

7.02%

-2.03%


Yearly performance

Max drawdown

Year

Trendrating

DWA PIZ

Added value

Trendrating

DWA PIZ

Added value

2008

-44.36%

-46.34%

1.98%

-49.27%

-58.46%

9.19%

2009

15.66%

34.92%

-19.27%

-16.30%

-24.62%

8.31%

2010

32.72%

20.45%

12.27%

-15.74%

-21.75%

6.01%

2011

-6.37%

-21.13%

14.75%

-24.17%

-33.14%

8.97%

2012

13.92%

15.28%

-1.36%

-8.68%

-17.09%

8.40%

2013

38.49%

31.58%

6.92%

-10.67%

-11.12%

0.45%

2014

14.89%

-9.32%

24.21%

-13.15%

-17.97%

4.82%

2015

16.71%

-1.00%

17.71%

-12.38%

-17.68%

5.31%

2016

-5.12%

-10.09%

4.97%

-14.72%

-12.74%

-1.98%

2017

32.23%

28.52%

3.71%

-5.87%

-2.61%

-3.25%

Annualized

7.57%

0.77%

6.80%

-17.09%

-21.72%

4.62%


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5.5 Trendrating Strategy vs PowerShares DWA Emerging Markets Momentum Portfolio (PIE) The PowerShares DWA Emerging Markets Momentum Portfolio is based on the Dorsey Wright Emerging Markets Technical Leaders Index, which includes ADRs and GDRs based on securities in emerging markets. Trendrating Selection criteria: • • • •

Universe: Largest 2,000 emerging markets stocks by market cap Selection Rules: Top 100 ‘A’ rated names with the highest performance since rated. The maximum weight for any individual security is set at 6%. Rebalancing Frequency: Monthly Time Frame: 10 years as of 12/15/2017


DWA PIE

Difference

Cumulative

+200.63%

-21.27%

+221.91%

Annualized

+11.26%

-2.29%

+13.56%

Yearly Average

+15.84%

+3.65%

+12.19%

14

9

+5

Trendrating

DWA PIE

Difference

Sharpe ratio

0.6282

-0.0986

+0.7268

Sterling ratio

0.5419

-0.0800

+0.6219

Sortino ratio

1.2253

-0.2426

+1.4679


Key ratios


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Risk Trendrating

DWA PIE

Difference

Max drawdown

-54.06%

-73.06%

+19.00%


-14.90%

-25.14%

+10.24%

3.68%

7.68%

-4.00%


Yearly performance

Max drawdown

Year

Trendrating

DWA PIE

Added value

Trendrating

DWA PIE

Added value

2008

-50.42%

-63.26%

12.84%

-54.06%

-71.66%

17.60%

2009

45.49%

58.22%

-12.72%

-6.34%

-30.14%

23.80%

2010

43.13%

24.68%

18.45%

-7.45%

-18.34%

10.89%

2011

-3.36%

-13.20%

9.85%

-17.68%

-29.65%

11.97%

2012

35.11%

16.62%

18.49%

-5.68%

-14.06%

8.38%

2013

19.90%

-2.26%

22.16%

-17.86%

-25.44%

7.58%

2014

24.89%

-3.36%

28.25%

-8.70%

-16.16%

7.46%

2015

9.63%

-14.86%

24.50%

-14.61%

-26.36%

11.75%

2016

6.72%

-1.40%

8.12%

-12.16%

-13.50%

1.34%

2017

27.27%

35.35%

-8.08%

-4.45%

-6.13%

1.68%

Annualized

11.26%

-2.29%

13.56%

-14.90%

-25.14%

10.24%


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5.6 Trendrating Strategy vs PowerShares DWA Healthcare Momentum Portfolio (PTH) The PowerShares DWA Healthcare Momentum Portfolio is based on the Dorsey Wright Healthcare Technical Leaders Index. Trendrating Selection criteria: • • • •

Universe: All stocks covered by Trendrating that are part of the US Healthcare sector as classified by the FTSE Russell classification system. Selection Rules: Top 50 ‘A’ rated named with the highest performance since rated. The maximum weight for any individual security is set at 6%. Rebalancing Frequency: Monthly Time Frame: 10 years as of 12/15/2017


DWA PTH

Difference

Cumulative

+378.55%

+132.13%

+246.42%

Annualized

+16.39%

+8.51%

+7.88%

Yearly Average

+20.98%

+11.33%

+9.65%

9

9

0

Trendrating

DWA PTH

Difference

Sharpe ratio

0.5700

0.3907

+0.1793

Sterling ratio

0.6483

0.3515

+0.2968

Sortino ratio

2.1293

0.9696

+1.1597


Key ratios


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Risk Trendrating

DWA PTH

Difference

Max drawdown

-39.12%

-50.33%

+11.21%


-21.34%

-20.33%

-1.01%

7.07%

6.34%

+0.73%


Yearly performance

Max drawdown

Year

Trendrating

DWA PTH

Added value

Trendrating

DWA PTH

Added value

2008

-29.90%

-34.75%

4.86%

-38.73%

-46.86%

8.13%

2009

70.16%

20.49%

49.68%

-13.57%

-24.11%

10.54%

2010

11.33%

13.58%

-2.25%

-21.99%

-16.00%

-5.99%

2011

4.79%

6.85%

-2.06%

-26.02%

-24.23%

-1.79%

2012

20.40%

14.40%

6.00%

-16.08%

-8.94%

-7.15%

2013

72.77%

44.15%

28.62%

-10.78%

-4.69%

-6.09%

2014

15.84%

14.75%

1.09%

-29.76%

-18.78%

-10.98%

2015

5.38%

1.51%

3.87%

-24.61%

-23.64%

-0.98%

2016

-7.66%

-12.61%

4.95%

-24.63%

-30.10%

5.47%

2017

46.65%

44.93%

1.72%

-7.23%

-5.98%

-1.25%

Annualized

16.39%

8.51%

7.88%

-21.34%

-20.33%

-1.01%


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