MARKETS ARE EFFICIENT, BUT...

At Olivia Wealth Management we fundamentally believe that markets are efficient in the long run (think 10+ years). However, in the short to medium term, anomalies exist that conflict with this hypothesis.

The efficient market hypothesis predicts that an investor should not be able to outperform a random basket of securities after adjusting for risk because prices reflect all publicly available information. Yet factors such as momentum, which we refer to as “relative strength”, is not supposed to exist according to this hypothesis, yet it does indeed .

Nobel laureate Professor Eugene Fama, who developed the Efficient Market Hypothesis, acknowledges momentum as the foremost anomaly and the biggest challenge to his theory of market efficiency.

MOMENTUM MEASURED BY RELATIVE STRENGTH

Momentum, as an investment strategy, seeks to take advantage of market volatility and human behavior utilizing technical analysis. It is based on the assumption that market trends once established have a high probability to continue.

Of course, it's true that market trends will reverse, but this statistically occurs less often than a continuation of the trend.

One of the best explanations of momentum is that it is a behavioral bias in which investors systematically under-react to good news. This under-reaction causes the market to price the news in slowly, leading to a trend of outperformance for the security. This is good news for investors, as behavioral biases are rooted in human nature, making them less likely to change over a period of time.

Given that there is more than one way to measure relative strength it is crucial to understand that we measure momentum using a process called Relative Strength.

Measuring momentum using relative strength is done by ranking a security by how it performs in price and rate of change of that price in comparison to other securities (relative momentum), and how it compares to our selected market benchmark (absolute momentum). An absolute measurement is used to limit downside. A purely relative approach leaves you exposed when everything is moving down at the same time.

Although implied, the basis for relative strength to exist is that a company or environment will have a good fundamental landscape. When a good fundamental backdrop exists, a market that supports higher prices and showis that demand is in control, tends to continue its upside trajectory.

HOW DOES IT WORK?

Our main investment strategy blends a Relative Strength based “sleeve”, that we call our dynamic rotation portfolio, and a diversified core portfolio together. We call this complete strategy the Core + Dynamic Rotation Portfolio.

A complete portfolio utilizing both the “core” allocation and the “dynamic rotation” strategy is an adaptive risk management strategy each with the primary objective of pivoting between wealth accumulation strategies (i.e. offense), and wealth preservation strategies (i.e. defense). The methodology used is rules-based, and designed to allocate to the strongest asset class, sector, and individual stock trends within a broad array of investment options.