We implement a top down approach to properly allocating a portfolio across various asset classes and types, using various relative strength indicators, allowing for tactical active adaptation to market changes and trends.

The Big Picture – Step 1

The Markets (and economy) cycle in four stages: Market Bottom (Trough), Bull Market (Uptrend), Market Top (Peak), and Bear Market (Downtrend).

Using a top down approach and a series of indicators, the first step is to determine the trend of the global and domestic broad markets. Is demand in control and is offense on the field or is a defensive position required while supply is present? The level of risk is determined by evaluating if the markets are in the overbought or oversold area of the trading bands. In declining trends with supply pressuring the markets, the likelihood of a long position being successful is reduced. However, when demand is present with the markets exhibiting bullish attributes, the potential for success is much greater.

Market Capitalization – Step 2

Following the broad market mood, it is important to determine which market capitalization is favored in an effort to gain an edge in our investment strategy. Is demand pouring into smaller companies while the largest known names remain stagnant? Again, relative strength measurements determine whether Large Caps, Mid Caps, or Small Caps are in favor. The bias often lasts for multiple years.

Style Evaluation – Step 3

The third stage is to evaluate style. Within the overall market, are Value stocks showing more strength or are Growth stocks in favor? Using indicators that divide each category into the overall market to calculate relative strength, the style is determined whether value, growth, or a blend is in play, which is often a multi-year bias.

Sector Evaluation – Step 4

The next step is to analyze the various economic sectors of the market. Which sectors qualify as “favored?” Favored Sectors are in the ‘sweet spot’ with 3 - 4 positive characteristics, including: (1) Overall strong relative strength; (2) A favorable percentage of stocks in a positive trend, (3) A favorable percentage of stocks in demand, and (4) A favorable percentage of stocks with relative strength buy signals.

Throughout each stage in the market cycle, specific sectors come to life. Within strong sectors, individual companies are more likely to outperform companies in laggard sectors. “There’s always a Bull Market somewhere” is the battle cry that popular Mad Money TV show host, Jim Cramer uses to end his show. It is true. Something is usually working while others are not and the goal is to find those sectors and the Exchange Traded Funds (ETFs) that represent these sectors.

In specific cases, the narrowing of a sector into a specific industry may take place. While there are about 40 different sectors, there are near 200 industries within those sectors.

Individual Stock Evaluation – Step 5

If a client’s investment objective is appropriate for individual stock positions, once the focus has been narrowed down to a list of strong sectors to target, a screen is run to generate the “best of breed” stocks. The goal is to be positioned in the dominant companies of the strongest sectors, as they will more than likely prove successful. A technical and fundamental evaluation is performed utilizing a variety of research tools, most importantly Dorsey Wright’s point and figure analysis and the methodology of Investor’s Business Daily (for growth companies). The strategy is to get into the leaders and get out of the laggards!

Extras

Additional screens and asset allocation models would determine which global market economies belong in a portfolio, which level of fixed income (if applicable), and if any alternative investments or direct participation programs have a place in the portfolio.

The explanation provided for the top down approach is a trademark methodology that Dorsey Wright & Associates calls D.A.L.I. - Dynamic Asset Level Investing. The information is extracted from the password protected research service of www.dorseywright.com.

“Patience, persistence, and perspiration make an unbeatable combination for success.” -Napoleon Hill