1. Dorsey, Wright & Associates Model Portfolio Training
Tom Dorsey
President
P: F:
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2. The information contained in this presentation represents the views of Dorsey, Wright & Associates (DWA), and not those of any First Trust exchange-traded fund or First Trust Advisors L.P. Nothing should be construed as investment advice in relation to any fund. This information is for informational purposes only and is not for public distribution. This information is not an offer to sell or the solicitation of an offer to buy any interest in any securities or investment services. The information in this presentation may not be reproduced or further disseminated without the express written consent of First Trust Advisors L.P. and DWA. This presentation has been prepared by DWA without taking into account any potential investors’ financial situation, objectives or needs, and should not be relied upon in evaluating the advisability of investing in any First Trust product. All opinions and views constitute judgments of DWA as of the date indicated and are subject to change without notice. First Trust Advisors L.P. believes the information provided in this presentation is reliable as of the date of this presentation but, to the extent permitted by law, First Trust Advisors L.P. does not warrant its accuracy or completeness and accepts no liability for errors or misstatements, negligent or otherwise, or for any loss or damage suffered by any person in relation to the information in this presentation.
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3. For Broker/Advisor Use Only. Not To Be Used With The Public

4. Game Plan
"What’s the worst thing that can happen to a quarterback? He loses his confidence." Terry Bradshaw
That’s right football. Think about your favorite football team for a moment. If they played offense 100% of the time, they would be marginal at best. It is the same way in the market. If you play offense 100% of the time, as most investors assume you must do, your investing will be marginal at best too.
In any football game, there are times when the offensive team will be on the field and times when the defensive team is on the field. The problem that most investors have is knowing which team is on the field.
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5. © Dorsey, Wright & Associates 2009
Supply and Demand
We all understand the basic forces of supply and demand.
The same forces that affect prices in the supermarket also affect prices in the stock market.
Stocks, sectors, and asset classes move in and out of favor just like produce in the supermarket.
We all understand the basic law of supply and demand; we have all experienced these forces at the supermarket. We know why in the winter tomatoes don’t taste very good, don’t have a very long shelf live, and are expensive. We inherently understand why there are lemonade stands in the summer and hot chocolate stands in the winter. Stocks, sectors and asset classes move in and out of favor just like produce in the supermarket.
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© Dorsey, Wright & Associates 2009 5

6. Original Point & Figure Chart
Dates back to the late 1800’s
Depicts the battle between supply & demand
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7. Double Top & Double Bottom
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8. Point & Figure Basics X’s = Price is rising O’s = Price is falling
Alternate columns of X’s and O’s
Minimum of 3 X’s or O’s in a column
Time = First action in month use number. (1 for January, etc.)
Use daily high & low for charting price action.
This is a modern day Point & Figure chart of Deere. The numbers have moved to the vertical axis and the prices have been replaced with X’s and O’s. X’s represent demand O’s represent supply. You’ll notice that from September 2008 to December 2008, the stock was making lower X’s and lower O’s meaning that demand was getting weaker and supply was getting stronger. That started to change in December. Now we see that Deere is showing demand getting stronger by the X’s going higher and supply getting weaker by the O’s not pulling back as far each time. You’ll also notice two lines – red and blue. The Blue line is called the Bearish Resistance Line or I like to refer to it as I-95 South. As long as the stock is below the blue line, it’s “trend” is negative. Conversely, the red line is the Bullish Support Line or I-95 North. As long as the stock is above the red line, it’s “trend” is positive and I consider it a solid citizen. 8
© Dorsey, Wright & Associates 2009 8

9. A Top-Down Approach This University of Chicago study, published
in Investor’s Business Daily, suggests that
sector and market risk control about
80% of the price action.
Yet, the average investor spends the vast majority of resources analyzing company risk, i.e. fundamentals
Source: Investors Business Daily, "Check Out Industry Rankings Before You Purchase a Stock" by Nancy Gondo 9

10. A Tactical Approach to Asset Allocation10

11. Relative Strength Calculation
All major sports have a ranking system. The Point & Figure Relative Strength tool is the ranking system we use for ETF’s.
Daily Calculation:
Index X 100 = Relative Strength
Index Reading
This reading is plotted on a Point & Figure chart which then tells us whether we can expect that ETF to outperform or underperform the base index. 11

12. Relative Strength Example
When RS Chart is on a buy signal, it suggests outperformance of the numerator
Start Date
End Date
Signal
EFA
AGG
7/16/02
7/7/03
Sell
3.59%
9.23%
1/15/08
Buy
101.34%
1.08%
5/29/09
-35.77%
-.90%
9/28/09
15.89%
2.70%
Buy and hold EFA:
55.24%
Buy and Hold AGG:
12.36%
Switching:
152.6%
RS Signal: Buy = Outperformance of EFA to Bonds
Sell = Underperformance of EFA to Bonds 12

13. Constructing DALI Level One
Domestic Equities
International Equities
Commodities
Foreign Currencies
Fixed Income
Cash 13

14. Historical Correlations14

15. DALI Guidance in 15

16. 16

17. Expanding DALI: Best in Class
Do You Want…. or 17

18. Domestic Equity Exposure: Where to Go?
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19. Relative Strength Calculation
All major sports have a ranking system. The Point & Figure Relative Strength tool is the ranking system we use for ETF’s.
Daily Calculation:
ETF X 100 = Relative Strength
Index Benchmark Reading
This reading is plotted on a Point & Figure chart which then tells us whether we can expect that ETF to outperform or underperform the base index.
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20. First Trust Materials AlphaDex (FXZ) vs. S&P 500 (SPX)
Start Date
End Date
Column
FXZ
SPX
9/29/2008
12/17/2008 O
-22.73%
-18.25%
10/05/2009 X
38.84%
15.04%
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21. FirstTrust Sector Rotation
Invest in only those sector ETFs from FirstTrust whose RS charts are in X’s versus the S&P 500
Equally weight among positive RS ETFs from the potential inventory
Only re-balance the portfolio when an issue moves in or out based upon the RS chart
Turnover can vary based upon volatility in the markets.
Because the average relative strength column change (X’s or O’s) lasts over a year, we find the portfolio to be very tax efficient; typically selling the losers for short term losses and holding the big winners for long term gains.
While the portfolio remains 100% invested at all times there is risk management with the sell discipline (RS reversal into O’s).
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22. FirstTrust Sector Model: Domestic Equity Exposure
DWA RS SCREEN:
X’s = In
O’s = Out
First Trust Sector Rotation Portfolio
Equal-Weighted Portfolios, Re-Balance When a Change Occurs
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23. FirstTrust Sector ETF Model (FTRUST)
April, 2009
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24. Dorsey, Wright First Trust Sector Rotation Strategy Or
Dorsey, Wright Tactical Asset Strategy
Leg #1 & #2: Two of the Following
(Level One of DALI)
Domestic Equities
International Equities
Commodities
Foreign Currencies
Fixed Income
Cash
In my three legged stool approach to managing equities in the portfolio there are different components the portfolio can have exposure to. In the first leg, we will look at having equity exposure or not based upon the Point & Figure charts we have briefly looked. For the remaining two legs of the stool, we look at the strength of different things you could be invested in like Domestic Equities, International Equities, Commodities, Foreign Currencies, Fixed Income and cash to determine which two are the strongest. Approaching risk management this way allows the portfolio to fluctuate from being 100% invested down to no exposure to equities. As we learned from 2008, sometimes raising just a little cash means we hit the wall going 45 mph instead of 65 mph but we still end up in the ER. This approach allows me to go from just letting up on the gas to coming to a complete stop and anywhere in between. Let’s take a closer look at how each leg is determined.
Leg #3:
Domestic Equity Exposure
The Playbook 24 24 24

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26. Country vs. Country Relative Strength
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27. DALI Guidance in 27

28. Advisor Type: SMA Advisor
Goals / Objectives:
Augment the SMA portfolios with a tactical, relative strength approach which is typically uncorrelated to most SMA managers.
Provide a way to hedge when the market is declining. 28 28 28 28

29. Core – Satellite Approach: Advisors Looking to Add a Tactical Satellite
$150,000
$150,000
$200,000
Positions would be based on the 2 favored asset classes in DALI
$100,000
Dollar vs. Foreign Currencies 29
$400,000

30. Why Relative Strength is Central to Our Evaluation Process
Focus on implementation of a known factor - price
Clean data / Point-in-time data
100% Systematic processes
More complexity doesn’t make it better
Test everything (many “truths” don’t work)
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31. Why Everyone Doesn’t Do It
Forces us to do what is unnatural
Hold onto the Winners – Sell the Losers - Don’t stay wrong
Makes us think about the portfolio as a whole – not position by position
Tough to hold course at the turning points
Requires us to remain disciplined – go to the gym everyday
Choppy markets are very frustrating
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32. "Make yourself necessary to someone." -- Ralph Waldo Emerson
Developing a Game Plan: A Method of Analysis
"Make yourself necessary to someone."               --  Ralph Waldo Emerson