Using Point & Figure Relative Strength

Tom Dorsey

Dorsey, Wright & Associates

www.dorseywright.com

Are you prepared to be an

Army of One?

Your Target Market … Baby Boomers

People aged 50 and older…..

– Control $7 trillion in wealth – Comprise 70% of all US wealth– Have $2 trillion in annual income– Account for 50% of all discretionary spending– Spend $610 billion in healthcare spending– Are targeted with only 5% of all advertising dollars

(Source: Ken Dychtwald; Age Power: How the 21st Century Will Be Rulled by the New Old)

S&P 500 Point & Figure Chart

1998 2004

Mr. Jones is exactly wherehe was in 1998, almost 6 years later, if he invested in the S&P 500 !

Your Clients Want Risk Management

4 Step Process to Investing

• Market Indicators - Is risk high or low?

• Sector Indicators - Opportunities

• Inventory – ETF’s, Stocks, Mutual Funds, etc.

• Point & Figure Chart – When to Buy & Managing the Trade

DOUBLE TOP & DOUBLE BOTTOM

Double Top Double Bottom

45 O 45 X XO X O X OO X O X OO X O OO X X S

40 O X 40 X OO X X OO X X OO X X OO X X O

35 O B 35 X OO X X X O X O X X O X O X X O O X

30 30

RS tools allow us to capture large winners and avoid large losers.

Large Losers Most Trades Large Winners

80 – 20 Rule

RELATIVE STRENGTH

• The majority of relative strength changes will lie in the middle of the curve. However, all of the positive outliers will have given relative strength buy signals and all of the negative outliers have given relative strength sell signals.

• Signals last eighteen months to two years on average.

• 3 Main Types of Relative Strength:• Stock versus Market• Stock versus Peer Group• Sector or Asset Class versus Market

Stock RELATIVE STRENGTH

• RS Reading Formula:Stock Price / SPXEWI X 100

• Scale is uniform for all prices.

• RS Readings are done every evening.

• A double top signals a positive relative strength reading and a double bottom signals a negative relative strength reading. Signals are most important.

• Positive relative strength doesn’t mean the stock has to go up and vice versa.

RELATIVE STRENGTH

• RS Reading Stock Px / SPXEWI x 100

• For example:XYZ Corp: 81 / 1252 x 100 = 6.47

XYZ Corp: 74 / 931 x 100 = 7.95

• While the stock price has fallen and the market has fallen, the relative strength calculation has actually moved higher. This means the stock is performing better relative to the market.

R.S. combinations

RS on a Buy Signal RS on a Buy Signal RS on a Sell Signal RS on a Sell Signal

and in X's and in O's and in X's and in O's (Best) (Good) (Improving) (Very Weak)

X X X XX X O X O X O

X X X X O X X O X X OX O X X O X O X O X O X O X OX O X X O X X O X O X O X O

O X O X O X O X O X O X O O X O X OO X O O X O O X O O X O X O O O X O X O X O X O X O O X O X O X O X O X O O X O X O X O O X OO O O O

Worldcom R.S.

“Point & Figure Charting, 2nd Edition” by Tom Dorsey; Published 2001

Page 100: “Overall weak RS stocks that reverse back to O’s are dangerous, and in most cases should be avoided, or potentially shorted. A case in point is Worldcom (WCOM).

6 3

1 O

5 X O

X 8

X A 2

C 1 X O 7

4 X O X O X O

7 O 5 X O

6 O 8

7 3 O

3 6 O X 9

4 O X O

X 8 X O

X 9 A

2 2 B

O

O

1

1 2

O

9 9 9 9 0 0

4 6 7 9 0 1

WCOM

RS vs. DOW

XM Satellite Radio (XMSR)

XMSR RS ChartXMSR RS ChartXMSR Price ChartXMSR Price Chart

PEER RELATIVE STRENGTH

• How well is a stock doing relative strength to other stocks in its sector?

• Peer RS Reading Formula:Peer RS Reading Formula:(Stock Price / DWA Sector) X 100

• A buy signal on the Peer RS chart suggests the stock is likely to outperform others in the group. Conversely, a sell signal on the Peer RS chart suggests the stock is likely to underperform others in the group.

RELATIVE STRENGTH:Technical attributes

• RS Versus the Market Signal

• RS Versus the Market Column

• RS Versus Peer Group Signal

• RS Versus Peer Group Column

• Trend

Strong Stocks Have at Least 3 Positive Technical Attributes

SECTOR/ASSET CLASS RELATIVE STRENGTH

• We use Sector Relative Strength to determine which sectors are outperforming the market.

• Sector RS Reading Formula:Sector RS Reading Formula:

DWA Sector Index X 100 = Sector RS Reading SPXEWI

• For sector relative strength, we look at the column of the chart for guidance. When the Sector RS chart is in X’s it suggests that sector will outperform the market while a column of O’s suggests underperformance from that sector.

DWA Telephone Sector (DWATELE)

DWATELE SPXEWI

1/22/98 122.756 923.18 4/12/00 228.309 1157.76 + 86.0 % + 25.4 %

4/12/00 228.309 1157.7610/22/02 92.156 930.20 - 59.6 % - 19.7 %

10/22/02 92.156 930.2004/21/04 177,700 1393.96 + 92.15 % + 49.85 %

DWA Food Sector(DWAFOOD)

DWAFOOD SPXEWI

O’s 3/19/99 153.902 1068.74 4/03/01 147.964 1116.65 - 3.9 % + 4.5 %

X’s 4/03/01 147.964 1116.65 12/02/02 176.689 1039.21 + 19.4 % - 6.9 %

O’s 12/02/02 176.689 1039.21 04/21/04 211.15 1393.96 + 19.5 % + 34.13 %

99/00/01

01/02

02/03/04

You can observe a lot just by watching….

iShares Dow Jones Technology (IYW)

Internet HOLDRs (HHH)

2/22/00 4/14/00

iShares Dow Jones Telecom (IYZ) B-Bell

5/02/00

You can observe a lot just by watching….

iShares Dow Jones Technology (IYW)

Broad Based

Semiconductor HOLDRs (SMH)

iShares Goldman Sachs Networking (IGN)

11/04/0212/02/0211/01/02

iShares Dow Jones Real Estate (IYR)

RS Chart IYR IYY

O’s 10/30/95 48.50 26.11 5/10/00 67.85 63.68 + 39.9 % + 143.9 %

X’s 5/10/00 67.85 63.68 4/21/04 94.15 53.51 + 38.76 % - 15.9 %

iShares Dow Jones Utilities (IDU) RS Chart

IDU IYY

O’s 11/02/01 63.50 50.26 4/21/04 57.11 53.51 - 10.06 % + 6.46 %

Semiconductor Sector

DWASEMI Rel. Str. ChartReversal up to X’s on 7/9/03:

Which stock to buy??

Use Technical Attributes to stack the odds in your favor

DWASEMI: up 32% from RS reversal up to 4/22/04

SPXEWI: up 21% from RS reversal up to 4/22/04

Note current reading is 16.37

Which Stock to Buy?

Microchip (MCHP) Technical Attributes:Microchip (MCHP) Technical Attributes:(2 for 5)(2 for 5)

Mkt RS Signal: Sell Mkt RS Signal: Sell Mkt RS Column: X Mkt RS Column: X Peer RS Signal: SellPeer RS Signal: SellPeer RS Column: OPeer RS Column: OTrend: PositiveTrend: Positive

Int’l Rectifier (IRF) Technical Attributes:Int’l Rectifier (IRF) Technical Attributes:(4 for 5)(4 for 5)

Mkt RS Signal: Buy Mkt RS Signal: Buy Mkt RS Column: X Mkt RS Column: X Peer RS Signal: SellPeer RS Signal: SellPeer RS Column: XPeer RS Column: XTrend: PositiveTrend: Positive

Stacking the Odds in Your Favor

DWA Semiconductor Sector RS Chart Reverses Up on 7/9/03:DWA Semiconductor Sector RS Chart Reverses Up on 7/9/03:

•Look to stocks to take positions in Semiconductor Stocks

•Microchip (MCHP) has 2 for 5 Positive Technical Attributes•International Rectifier (IRF) has 4 for 5 Positive Technical Attributes

7/9/03 to 4/22/04:

DWASEMI: + 31.87 %SPXEWI: + 21.69 %

MCHP: + 5.51 %IRF: + 52.02%

S&P Smallcap (SML)RS Chart

SML SPX

1/04/89 58.36 279.43 1/13/92 75.11 414.34 28.7 % 48.3 % in O’s

1/13/92 75.11 414.342/26/97 145.96 803.69 94.3 % 93.9 % in X’s

2/26/97 145.96 803.692/17/00 209.87 1388 43.8 % 72.7 % in O’s

2/17/00 209.87 13884/21/04 285.95 1124.12 in X’s + 36.25 % - 19.01 %

X’s = SML – Small Cap OutperformO’s = SPX – Large Cap Outperform

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to

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92

to

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97

to

00

00

to

04

SPX: Equal Weight or Cap Weight?

SPXEWI SPX

12/23/96 747.10 746.92 5/24/99 1154.73 1306.65 54.6 % 74.9 % in O’s

5/24/99 1154.73 1306.6511/18/99 1138.52 1424.94 1.4 % 9.1 % in X’s

11/18/99 1138.52 1424.94 5/23/00 1147.98 1373.86 .8% - 3.6 % in O’s

5/23/00 1147.98 1373.86 4/21/04 1393.96 1124.12 in X’s 21.4 % - 18.1 %

X’s = RSP – Equal Weight S&P 500O’s = SPY – Cap Weight S&P 500

SPX Cap Weight

SPXEWI

iShares Lehman 20+ Bond Fund (TLT)

Dates TLT SPXEWI 9/07/01 78.44 1139.047/15/03 87.75 1157.11TLT on Buy 11.9% 1.6%   7/15/03 87.75 1157.114/21/04 84.09 1393.96TLT on Sell -4.17% + 20.4%

iShares MSCI Brazil Index (EWZ)

vs.iShares Latin Am 40

Index (ILF)

iShares MSCI Mexico Index (EWW)

vs.iShares Latin Am 40

Index (ILF)

5/9/03 Rev Dn.

EWW: + 50.03 %ILF: + 37.8 %

10/31/02 Rev Up.

EWZ: + 110.44 %ILF: + 69.01 %

Game plan

Offensive Only Play Book

Beginning of 2000: Age: 45 Expected Retirement Age: 65 Account Value: $ 500,000 Expected Annual Rate of Return: 11% Average Annual Contribution: $ 15,000 Fee to the Broker: 1.25% fee ($ 6250) Projected Account Value at 65: $ 4,000,000 Annual Withdrawal of 3%: $ 120,000 At Retirement

Fee to the Broker: $ 50,000 (at 1.25%)

Offensive Only Play Book Beginning of 2004:

You performed with the S&P 500 over the last three years; losing 10.13% in 2000, 13.04% in 2001 and 23.37% in 2002 before rallying 26.4% in 2003.

Age: 49 Expected Retirement Age: 65 Account Value (includes $60,000 in contributions): $ 460,297 Expected Annual Rate of Return: 11% Average Annual Contribution: $ 15,000 Fee to the Broker: 1.25% fee Projected Account Value at 65: $ 2,345,263 Annual Withdrawal of 3%: $ 70,358 At Retirement

Fee to the Broker (1.25%): $ 29,316

Realistic Choices ……

As the Client… To get back to $4,000,000 at Retirement:

1. Increase your annual contribution to $60,000 a year from $15,000

2. Increase the annual rate of return to 15% (versus 11%)

3. Increase your retirement age to 71, 6 years less of retirement

Employ risk management strategies to preserve wealth along the way.

S&P 500 Point & Figure Chart

1998 2004

Mr. Jones is exactly wherehe was in 1998, almost 6 years later, if he invested in the S&P 500 !

4 Step Process to Investing

• Market Indicators - Is risk high or low?

• Sector Indicators - Opportunities

• Inventory – Fundamentals or fund families

• Point & Figure Chart – When to Buy & Managing the Trade

NYSEBullish Percent

4/2/03

2002

0

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