Market Leadership Changes
International & Domestic Leadership 1996-2010

We looked back at how the ranks follow market leadership, as seen in the market’s shift from U.S. large cap stock leadership in the late 1990s to international stocks in the 2000s.

The chart, below, shows the returns of the S&P 500 Index, a measure of large-cap domestic stocks, the Europe Australasia and Far East (EAFE) Index, an index of international stocks from 12/31/1996- 7/31/2010.

For these years, the two indexes produced nearly the same total return – but they got there in different ways.

Each had distinct periods of outperformance within this time frame: for the first several years, the EAFE index performed much worse than the S&P 500 index, and from 2002 through 2007, the EAFE far outpaced the S&P 500.

Upgrading Tracks Changing Markets
NoLoad FundX Ranks Follow Market Leaders

Relative Strength Shows Market Trends

Changes in market leadership are difficult to see, except in hindsight. One way to identify leadership changes graphically is by measuring relative strength, shown below.

Relative strength is a calculation based on the ratio between the daily percent return of one index or security vs. that of another. In this case, we show the EAFE versus the S&P 500 index.

When the relative strength line turns up, the first index (EAFE) is outperforming the second (S&P 500). If the line moves down, the first index is under-performing the second. When the line is flat or horizontal, the two indexes are performing exactly the same.

In the chart below, EAFE is underperforming when the line slopes down (as in the late 1990s), and is beating the S&P 500 index when the line slopes up (as in the 2000s).

NoLoad FundX Ranks Follow Market Trends

The bars represent the percentage of the top ranked funds in NoLoad FundX’s Class 3 category that were foreign funds. You can see that the ranks led us to international funds when international stocks were outperforming, and to domestic funds when domestic stocks led.

When the S&P 500 outperformed in the late 1990s (black line sloping down), there were few, if any, international or global funds highly ranked. But as the EAFE outpaced the S&P 500 (when the yellow relative strength line is heading up) starting in 2002, the number of top ranked foreign funds increased – eventually reaching as high as 100% of the group by mid-2006.

We don’t have to know in advance which way the market is heading: the FundX ranks will lead us to the right mix of funds to successfully navigate ever-changing markets.

Upgrading Outperforms
NoLoad FundX vs. S&P 500 & EAFE

Following Market Trends is Profitable

By following market trends and investing domestically when U.S. funds were doing well, and investing in international funds when foreign funds were in favor, NoLoad FundX outperformed both the EAFE and S&P 500 index. The chart below shows the results of following the Upgrading strategy during this period.

Upgrading produced nearly twice the return of buying and holding the two indexes. Note that the Upgrading portfolio produced these higher returns despite underperforming the S&P 500 index for much of the late 1990s and underperforming EAFE for much of the past few years.

Market changes are only clear in hindsight, of course. In real-time, market leadership may not be evident. In July 2005, for example, we couldn’t have known that international funds would soon come to dominate the top ranks.

But we hope this example of how the system tracks and exploits changing markets gives you the conviction to participate in Upgrading’s longterm success.