wedbush securities chris henderson/vp investments member nyse/finra/sipc

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P.Johnson 1 Chapter 4 Experimental Research Designs

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Page 1: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Wedbush Securities

Chris Henderson/VP Investments

“Member NYSE/FINRA/SIPC”

Page 2: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Presentation Goals

Learn a modern method of portfolio management that is designed to lower risk compared with “buy and hold” strategies

○ Tactical investment method supported by well-published research

○ Infrequent buy and sell (flat) signals

○ Tax efficient in historical models

Page 3: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Presentation Goals

Learn simple technical tools to help identify the long term trend of the stock market and other asset classes (e.g. REITs, bonds)

Define and utilize the 200 day moving average of an asset class for trend identification

Reduce risk by allocating to asset classes that are in long term up trends and avoid asset classes that are in down trends to lower volatility within your diversified portfolio

Page 4: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Myth or Fact?

“You cannot successfully time the market”

Evidence the financial services industry uses to support position

○ Poor performance of most actively managed mutual fund managers Indexed/passive mutual funds historically have outperformed 60-

90% of actively managed funds

○ Missing the 10 best days in stock market history would markedly have lowered overall performance Over a 40 year period would cost 1/2 of capital gains (Javier

Estrada IESE Business School)

Page 5: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Myth or Fact?

Evidence against “buy and hold”

Missing the 10 worst days in the market over a 40-year period would have dramatically improved your stock holding performance

○ Missing those days increased total capital gains by 2.5X! (Javier Estrada IESE Business School)

Page 6: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Myth or Fact?

Evidence against “buy and hold”

“Buy and Hold” strategies have performed poorly for individual investors over the past decade (and for several periods of similar duration over the past 100 years)

○ retirement plans○ 529s○ savings.

Page 7: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Myth?

Historical data analysis suggests that there are technical methods to increase the likelihood of avoiding many but not all of the worst days and periods in market history

Page 8: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Reasons to Forget the Myth

Secular bull and bear markets lasting a decade or more have occurred in all asset classes throughout history

Risk free asset classes do not exist

Moves within a secular market can be profound

Page 9: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

What asset class is this? Chart of tulip mania

Page 10: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Tulip Mania (17th century Holland)

Price of tulips increased by 20X in a year

At one point a tulip was selling for 12 acres of land

Bubbles/chart patterns have occurred for hundreds of years

Page 11: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

What was the worst performing asset class for the 40 year period ending

2008?

Page 12: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Gold

Safe haven?

Secular bear

Early 1980s - 2001

Worst performing asset class over a 40 year period dating back from 2008

(Richard Bernstein, Merrill Lynch)

Page 13: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Gold (1980 - 2000)

Page 14: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Japan

Secular bull (1970s - 1990)

Secular bear (1990 - present)Level of the Japanese stock market in 2010

was equal to that observed in 1983

○ Nearly 30 years of the Japanese stock market creating zero value for buy and hold investors

Page 15: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Japan (1980 - 2010)

Page 16: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Secular Bear Markets US Stocks

Great DepressionBear market loss 69.45% over 20 years

○ Nearly 30 years to recover losses from market peak of 1929 (inflation adjusted prices)

Vietnam/Oil ShocksBear market loss 66.31% over 17 years

○ 24 years to recover losses from market peak of 1965 (inflation adjusted prices)

Tech Bubble/Financial CrisisAs of August 2011, investors who held stocks from

March 2000 were still hoping to break even.

Page 17: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Using Moving Averages to Define Trends

Moving average

Price action smoothing mechanism

200 day moving average

Often used to define bull and bear markets

Definition○ Sum of the prices of an asset class or stock at close of each

market day for the past 200 days divided by 200

Page 18: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Moving Averages

Should you pay attention to the S&P 500 price relative to its 200 day moving average?

Page 19: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Moving Averages

Famous bear markets during which the majority of losses occurred after the S&P 500 index had crossed below its 200 day moving average (MA)

The Great Depression

Tech Bubble○ S&P 500 crossed below the 200 day MA on 9/18/00

Index lost nearly 50% of its value in the next 24 months (Yahoo Finance)

Financial Crisis○ S&P 500 crossed below the 200 day MA on 11/11/07

Index lost nearly 55% of its value by March 2009 (Yahoo Finance)

The S&P 500 remained consistently below the 200 day MA from January 2008 till May 2009 (Yahoo Finance)

Page 20: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Moving Averages

Volatility and the 200 day MA

○ The stock market is historically 50% more volatile when the S&P 500 is below the 200 day MA (Source: Faber)

○ Avoiding stocks when the S&P 500 was below the 200 day MA would have led you to miss 72% of the 50 worst days in market history between 1951 - 2007 (Source: Faber)

Significant improvement in hypothetical portfolio performance even though biggest days were often missed as well

Past history may not reflect future performance

Page 21: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

S&P 500 vs. 200 day MA

Page 22: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Moving Averages

Problems with a simple 200 day MA cross strategy

Holding the S&P 500 only when it is above a 200 day moving average

Majority of simulated trade cycles are losing ones 181 trade cycles from 1950-2010 73% losing Unnecessary frequent trading

Page 23: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Moving Averages

Siegal Method

Stocks for the Long Run Jeremy Siegal, PhD (Wharton)

Buy the stock market when it trades above the 200 day moving average by more than 1%

Sell when the stock market when it trades below the 200 day moving average by more than 1% and hold US Treasuries Improves risks adjusted returns Winning trade cycles approximately 50% Tested on the NASDAQ 1972 - 2006 historical data

Annualized hypothetical returns are 4% greater than buy and hold

Page 24: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Moving Average

Problems with the Siegal Method

Must pay attention day to day anytime price action is in range of the 200 day moving average

Frequent trading cycles 74 (1950 - 2010)

Winning trading cycles still occur only 50% of the time

Page 25: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Moving Average

Tactical Asset Allocation Method

○ “A Quantitative Approach to Tactical Asset Allocation” (February 17, 2009). Journal of Wealth Management. (Faber) Working paper published in 2006

Improves on the Siegal method and shows stability across asset classes in simulated historical testing

Can be utilized to manage risk within a diversified portfolio of asset classes

Page 26: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Moving Average

Tactical MethodUses the 10 month moving average as the

signal line○ Analogous to the 200 day moving average as there are

5 days per trading week

All buy and sell decisions are based on the last day of the month○ Price movements of an asset class within the month

otherwise are ignoredReduces the number of trade signals significantlySeemingly reduces “whipsaw” tradesPortfolio on “autopilot” for 29-30 days each month

Page 27: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Moving Average

Tactical Method

○ If the price of the asset class is above the 10 month moving average on the last day of the month then buy/hold the asset class

○ If the price of the asset class is below the 10 month moving average on the last day of the month then sell the asset class and buy/hold 90 day US Treasury fundAlternatively buy/hold money market fund

Page 28: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Tactical Method / US Stocks

Page 29: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Tactical Method / REIT

Page 30: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Tactical Method / International Stocks

Page 31: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Tactical Method / 7-10 year US Treasuries

Page 32: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Tactical Method / Commodities

Page 33: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

*Total Simulated Returns (1900 - 2008)

Simulated historical returns may not be predictive of future performance

Source: Faber 2009

Page 34: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Tactical Method

Equal allocations to 5 different asset classes using the monthly timing model on each

US Stock Market (20%) International Stocks (20%) REITs (20%) Medium-Long Term US Treasuries (20%) Commodities (20%)

If a particular asset class is on a monthly sell signal, the 20% allocated to that asset class is held in 90 day US T-Bills

Page 35: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Comparison of Buy/Hold vs. Tactical Method

*2008

5 Asset Class Portfolio (1973 - 2008)

*Total Simulated, Historical Returns

Source: Faber 2009

Simulated historical returns may not be predictive of future returns

Page 36: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Tactical Method

5 asset class tactical portfolio may be constructed with low-fee index ETFs and/or low expense, no-load index mutual funds

ETFs trade like stocks, have low fees, and are often designed to mirror the performance of a given asset class

○ Low-fee structure of funds within portfolio reduces expense drag on a portfolio

Potential Tax efficiency Many Profitable simulated trade cycles are long term gains

Source: Faber

Page 37: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Tactical Method

Several ways to utilize the Tactical Method

Substitute for the stock portion of your portfolio○ Similar simulated historical return profile with lower volatility**

Add as an “alternative” asset class○ Perhaps 5-15% of portfolio depending on risk tolerance

Comprehensive, diversified portfolio with intrinsic design to balance risk**○ Best suited for investors with a long-term investment horizon

**Simulated historical performance and future performance may vary significantly

Page 38: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Questions for your financial advisor?

What is your method for reducing portfolio exposure to asset classes that are in long-term downtrends?

If the stock market remains in a secular bear market for the next decade, what is your strategy to grow a portfolio?

Page 39: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

We now know when to own different asset classes, how do we further

reduce portfolio risk and try and grow a portfolio in a secular bear or

sideways market?

Page 40: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Question

What’s your method for reducing portfolio exposure to asset classes that are in long term downtrends?We’ve seen that a move below the long-term

moving average has often proven to be a sign of turbulent times. Therefore, avoiding these asset classes has historically improved your returns and lowered volatility.

Page 41: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Benchmark Indexes

Major indexes including the S&P 500, MSCI EAFE, MSCI EM, & GSCI Commodity Index are made up of multiple sectors, countries, or other components.Within each index we have historically seen

secular and cyclical trends of the different components.

Page 42: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

So What Can You Do?

If the stock market remains in a secular bear market for the next decade, what is your strategy to grow a portfolio?

Determine the trends of the individual subsectors, countries, or commodity components.○ Identifying out of favor sectors allows an

investor to focus only on those areas that have momentum behind them.

Page 43: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

How Do We Identify Current Trends?

Relative Strength (RS)Measures the price movement of an

investment compared to a set benchmark or universe of its peers.○ RS improves if the price increases more than

the average in an uptrend or decreases less than the average in a downtrend.

Allows investors to focus on the strongest trends, wherever they may be found. It offers the ideal framework for allocating among these trends.

Page 44: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Relative Strength

Relative Strength can be used in many ways. For our purposes we will focus only on market relative strength.

We will also focus solely on sector, country, and commodity related ETFs.

Page 45: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Relative Strength

Market relative strength.(ETF price/S&P 500)*100 = market RS score(XLF/SPY)*100 = RS($15.58/$138.99)*100 = 11.21

○ If the RS score rises it signals relative strength vs. the S&P 500.

○ If the RS score declines it signals relative weakness against the S&P 500.

Page 46: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

A move to a column of X’s in April 2000 signaled strength vs. the S&P 500

A move to a column of O’s in August 2007 suggested the end of the trend. Financials were now showing weakness.

Page 47: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Relative Strength

For the period April 2000-August 2007, while the financials exhibited relative strength, XLF returned 60.58% compared to the S&P 500’s (SPY) return of 11.22%

(Source Stockcharts.com, Morningstar)

Page 48: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

A move to a column of O’s in October 2003 signaled weakness in the healthcare sector.

A move to X’s in August 2007 suggested that the weakness had ended and the healthcare sector was starting to exhibit strength.

Page 49: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Relative Strength

For the period October 2003-August 2007, while healthcare exhibited weakness to the market, XLV returned 27.03% compared to the S&P 500’s (SPY) return of 56.16%

(Source Stockcharts.com, Morningstar)

Page 50: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Relative Strength Across Asset Classes

Relative strength is checked the last trading day of each month.

If a subsector, country, or commodity component is in a column of X’s it is included in the portfolio.

If any subsector, country, or commodity component that is in a column of O’s it is excluded from the portfolio.

Page 51: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Relative Strength Universe

S&P 500:XLY, XLP, XLE, XLF, XLV, XLI, XLB, XLK, XLU

MSCI EAFE:EWU, EWJ, EWL, EWQ, EWA, EWC, EWG, EWP,

EWI, EWD, EWN, EWH, EWS, EWK, EWO MSCI EM:

FXI, EWZ, EWY, EWT, EZA, RSX, INDY, EWW, EWW, EWM, EIDO, THD, ECH, EPU, TUR, EPHE

GSCI: DBC, DBA, DBB, DBE, DBO, DBP, GLD, SLV

Page 52: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Relative Strength Across Asset Classes

Buy & Hold Relative Strength

S&P 500

(2002-2012)

3.95% 6.80%

MSCI EAFE

(2002-2012)

5.79% 10.15%

MSCI EM

(2002-2012)

13.89% 17.83%

GSCI

(2007-2012)

-3.28% 8.01%

(Source Stockcharts.com, Morningstar)Simulated historical returns may not be predictive of future performance.

Page 53: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Relative Strength Across Asset Classes

Relative strength, when applied to major asset classes, (S&P 500, MSCI EAFE, MSCI EM, & GSCI Commodity), has been shown to markedly improve returns compared to a “buy and hold” strategy. (Dorsey Wright)

Page 54: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Relative Strength Across Asset Classes

Each major asset class is equally weighted.○ 4 Asset Class portfolio receives 25% weighting.○ 5 Asset Class portfolio receives 20% weighting.

Each major asset class will equally weight those sectors exhibiting RS.○ If Major Asset class weighting is 20%, all sectors with

RS will be equally weighted to equal 20%.Example: If 5 sectors of the S&P 500 exhibit RS each will

have a portfolio weighting of 4%.

Page 55: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Relative Strength(4 Asset Class equal weighted)

(SPY, EFA, EEM, IYR)

2002-2012 Buy & Hold Relative Strength

Average Return 9.11% 12.16%

Standard Deviation

23.69% 25.15%

Best Year 40.15% 44.63%

Worst Year -39.42 -41.19

(Source Stockcharts.com, Morningstar)Simulated historical returns may not be predictive of future performance.

Page 56: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Growth of a Dollar(4 Asset Class Portfolio)

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Relative Strength

Buy & Hold

Page 57: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Relative Strength(5 Asset Class Equal Weighted)

(SPY, EFA, EEM, GSG, IYR)

2007-2012 Buy & Hold Relative Strength

Average Return 1.74% 6.02%

Standard Deviation

25.96% 27.64%

Best Year 33.13% 44.39%

Worst Year -41.55% -36.26%

(Source Stockcharts.com, Morningstar)Simulated historical returns may not be predictive of future performance.

Page 58: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Growth of a Dollar(5 Asset Class Portfolio)

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

2006 2007 2008 2009 2010 2011 2012

Relative Strength

Buy & Hold

Page 59: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Correlations of a New Market.

Creation of new investment products is quickly disrupting correlation of asset classes. (Commodity, International, and Futures ETFs)

Gold, Oil, and International stocks can now be traded easily through the use of ETFs.GLD, DBO, iShares Country Indexes

Page 60: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Commodities Not The Diversifier They Once Were

Page 61: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

I see how relative strength can help me during the good times but what can I do to maximize returns during the bad times?

Page 62: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Treasuries Are a Natural Hedge Against Fears in The Market

The Inverse relationship between stocks and treasuries remains mostly unaffected by the recent changes in correlation.

As a constant component of a Tactical Model treasuries may negatively impact portfolio returns in a bull market.

Treasuries perform best when market fears are present.

Owning treasuries only when the S&P 500 fell below its 200 DMA significantly improved both returns and volatility versus a 50/50 mix. (Stoken, 2010)

Page 63: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Gain to Pain Ratio

90 day T-bill: Risk free rate of return (3.62% 1926-2010) Average Underperformance (AU): Sum of all

underperforming years divided by the number of years observed.

Excess Return (ER): Compound return of an investment minus the compound return of the 90 day T-bill. Average return above that is the risk free rate.

Gain to Pain Ratio (Risk/Return): Amount of excess gain each 1 percent of risk yields. (ER/AU=G/P)

Page 64: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Gain to Pain Ratio

Investment CMPD Return

ER AU G/P Ratio

S&P 500 9.87% 6.25% (4.98%) 1.26%

LT Treasuries

5.50% 1.88% (2.56%) .73%

Int. Treasuries

5.35% 1.73% (1.11%) 1.56%

*85 year period 1926-2010 (Stoken 2010)

Page 65: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Treasury Risk & Return

IEF

2002-2011

S&P 500 < 200 DMA

S&P 500 > 200 DMA

Average Monthly Return

.93% .39%

Monthly Volatility

2.62% 4.19%

(Source Yahoo Finance, Morningstar)

Page 66: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Buy & Replace

A tactical strategy utilizing a long term moving average has proven considerably less volatile than a stand alone buy & hold strategy while still providing a better return.

Building on this strategy we need to decide what to do with cash when it is not invested in stocks

Page 67: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Buy & Replace To expand on the Tactical Method discussed

earlier we believe the use of Intermediate term treasuries provides a better hedge against market fears.

We’ve also shown that relative strength has provided increased returns over Buy & Hold during our test period.

Past history also clearly favors the intermediate term government bond, which sports a very low -1.11% average underperformance, excess return of 1.73% above the riskless 90 day T-bill and a gain to pain ratio of 1.56% as the preferred fixed-income vehicle.

Page 68: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Buy & Replace

When an asset class is above its long term moving average use monthly relative strength to determine sectors or countries to own and hold until the asset class falls below its long term moving average.

When an asset class falls below its long term moving average sell that asset class and replace it with intermediate term treasuries until the asset class rises back above its long term moving average.

Page 69: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Buy & Replace

S&P 500(2002-2012)

Buy & Hold Relative Strength

RS Buy & Replace

Average Return

3.95% 6.80% 14.80%

Standard Deviation

19.63% 19.06% 7.41%

Best Year 28.18% 30.85% 26.53%

Worst Year -36.81% -31.98% 3.40%

(Source Stockcharts.com, Yahoo Finance)Simulated historical returns may not be predictive of future performance.

Page 70: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Buy & Replace

MSCI EAFE(2002-2012)

Buy & Hold Relative Strength

RS Buy & Replace

Average Return

5.79% 10.15% 16.03%

Standard Deviation

23.08% 25.16% 13.94%

Best Year 39.79% 45.03% 36.73%

Worst Year -41.02% -36.82% 0.92%

(Source Stockcharts.com, Yahoo Finance)Simulated historical returns may not be predictive of future performance.

Page 71: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Buy & Replace

MSCI EM(2002-2012)

Buy & Hold Relative Strength

RS Buy & Replace

Average Return

13.89% 17.73% 19.33%

Standard Deviation

33.62% 37.93% 23.21%

Best Year 68.93% 80.59% 60.90%

Worst Year -48.88% -50.69% -4.34%

(Source Stockcharts.com, Yahoo Finance)Simulated historical returns may not be predictive of future performance.

Page 72: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Buy & Replace

GSCI(2007-2012)

Buy & Hold Relative Strength

RS Buy & Replace

Average Return

-3.28% 8.02% 13.46%

Standard Deviation

25.63% 24.62% 17.47%

Best Year 31.69% 38.39% 32.32%

Worst Year -45.75% -24.38% -16.24%

(Source Stockcharts.com, Yahoo Finance)Simulated historical returns may not be predictive of future performance.

Page 73: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

RS Buy & Replace(4 Asset Class equal weighted)

(SPY, EFA, EEM, IYR)

2002-2012 Buy & Hold Relative Strength

RS Buy & Replace

Average Return

9.11% 12.16% 18.99%

Standard Deviation

23.69% 25.15% 11.35%

Best Year 40.15% 44.63% 39.48%

Worst Year -41.19% -39.42% 6.65%

(Source Stockcharts.com, Yahoo Finance)Simulated historical returns may not be predictive of future performance.

Page 74: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Growth of a Dollar(4 Asset Class Portfolio)

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Relative Strength

Buy & Hold

Relative Strength Replacement

Page 75: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Relative Strength(5 Asset Class Equal Weighted)

(SPY, EFA, EEM, GSG, IYR)

2007-2012 Buy & Hold Relative Strength

RS Replacement

Average Return

1.74% 6.02% 16.37%

Standard Deviation

25.96% 27.64% 9.06%

Best Year 33.12% 44.39% 30.28%

Worst Year

-41.15% -36.26% 4.98%

(Source Stockcharts.com, Yahoo Finance)Simulated historical returns may not be predictive of future performance.

Page 76: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Growth of a Dollar(5 Asset Class Portfolio)

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

2006 2007 2008 2009 2010 2011 2012

Relative Strength

Buy & Hold

Relative Strength Replacement

Page 77: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Conclusion

Moving averages have been a good indicator of changes in market direction.

An equal weighted portfolio of diverse asset classes has provided investors better risk management as well as better long term returns.

The use of relative strength has provided extra alpha (return above the market) in different asset classes.

The use of Intermediate term treasuries to hedge fears in the market has markedly lowered volatility on a variety of asset classes and portfolios.

Page 78: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Disclosures The S&P 500, Morgan Stanley Capital International EAFE

(MSCI EAFE), Morgan Stanley Capital International Emerging Markets Index (MSCI EM) & DJ REIT Index returns exclude reinvested dividends and the three-, five-, and 10-year returns are annualized.

Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.

**Timing data provided by Yahoo Finance using the 200 day simple moving average. Performance data provided by Morningstar.com, iShares, and State Street Global Investors.

Relative Strength information provided by Stockcharts.com

Page 79: Wedbush Securities Chris Henderson/VP Investments Member NYSE/FINRA/SIPC

Chris Henderson AAMSVP/Investments

Wedbush Securities14851 N Scottsdale Rd. #201

Scottsdale, AZ 85254602-332-5252/480-778-8572

[email protected]

Member NYSE/FINRA/SIPC