Arrow Insights Relative Strength Turns T Identifying the “strongest” is based on measuring the performance over a predefined time horizon: short-term (one to three months); intermediate (six to nine months) and long-term (12 months or greater). The chart to the right compares the historical growth of short, intermediate and long-term relative strength models against the broad equity market S&P 500. Historically, over long time periods, each of these relative strength models outperformed the buy-and-hold equity index. Relative Strength (RS) Models Historical Performance: 1927 to 2012 1000000 10000 Thousands here is plenty of evidence among academia that supports the potential value of relative strength, also called momentum, as an investment factor. This research has shown that, over multiple decades, relative strength strategies have consistently outperformed the overall market during bull and bear market cycles. Relative strength is the measurement of an investment instrument’s performance relative to another instrument.

That performance can be measured against the market, some combination of securities (i.e., sectors) or across asset classes. A relative strength strategy is easy to understand: you simply buy only the strongest performing instruments. When an instrument slips enough so it’s no longer the strongest, sell it and replace it with whatever is the strongest among the instrument’s universe. 100 6/1927-9/2012 1 Year 3 Years 5 Years 10 Years Average 1 Market Short-Term RS Model Short-Term RS 4.11% 3.68% 3.64% 3.44% 3.72% Intermediate RS 5.41% 5.07% 5.13% 5.20% 5.20% Intermediate RS Model Long-Term RS 6.76% 6.28% 6.32% 6.31% 6.42% Long-Term RS Model Performance displayed represents past performance, which is no guarantee of future results.

Index performance assumes reinvestment of dividend, but does not include fees. Indexes are not available for direct investment. Source: Standard & Poor’s, calculated by Arrow. However, like many investment approaches, relative strength will sometimes underperform the market, and at other times it may outperform. Alpha refers to the amount of performance above or below an index.

In this case, the alpha of relative strength (i.e., RS Alpha) has shown long-term cyclical trends with significant tops followed by underperformance and bottoms followed by outperformance, as the chart below illustrates. Performance Cycles of Relative Strength (RS Alpha) vs. the Market 30.00% Rolling 3-Year Average Trendline From 1930 to 2012 RS Alpha Top Extremes 25.00% Recent Peak: June 2002 20.00% 15.00% 10.00% RS Alpha Average: 6.28% 5.00% 0.00% -5.00% -10.00% RS Alpha Bottom Extremes Recent Bottom: June 2011 Performance displayed represents past performance, which is no guarantee of future results. Index performance assumes reinvestment of dividend, but does not include fees.

Indexes are not available for direct investment. Relative Strength (RS Alpha) is represented by the 3-year rolling average performance for a long-term RS model versus the market (S&P 500 Index). Source: Standard & Poor’s, calculated by Arrow. Continues on back . What happens to relative strength when it makes the turn from its highest and lowest points? The relationship between the alpha that relative strength can generate and the overall market can become significant. Historically, a new bottom occurs every 11 years on average, but in between, relative strength historically turns and establishes a new top within 6 years after the bottom. Therefore, the longer you hold a relative strength strategy, the less the impact of tops and bottoms can be felt. In the tables below, we look at the alpha that a relative strength strategy generated for various time periods leading into these bottoms, turns and tops. In general, relative strength strategies often underperform in the near (1-3 years) term leading into a bottom, and have historically generated significant positive alpha once it turned from its bottom.

With relative strength bouncing off a low point in June 2011 and trending upward as of April 2012, today’s investors have the opportunity to take advantage of RS Alpha’s potential. RS Alpha During Down-Trends At a bottom, relative strength generally underperformed the market in the near term, yet performance improved with a longer time horizon. Periods Prior to Establishing a Bottom Bottom 5/31/1941 1/31/1953 3/31/1964 1/31/1973 7/31/1985 10/31/1998 6/30/2011 Average When the trend turned upward, it started long periods of time when relative strength outperformed the market. At the top, relative strength had generated significant “alpha” over the market. 1 Year (6.8%) (1.3%) 2.5% (4.1%) (0.4%) (9.4%) (2.1%) (3.1%) 3 Years (8.1%) (5.1%) (1.3%) (3.9%) (7.5%) (5.8%) (5.6%) (5.3%) 5 Years (2.2%) (1.8%) 6.5% 0.5% 0.6% (2.8%) 0.3% 0.1% 10 Years 2.1% 5.1% 6.2% 8.4% 7.3% 3.0% 5.5% 5.4% From the bottomAlpha Turning Periods table RS points looking back, the shows the After a Bottom and the Start of an Up-Turn overperformance or underperformance of Relative Strength versus the market for the 1, 3, Up-Trend 1 Year 3 Years 5 Years 10 Years 5,7/31/1941 year periods leading into the bottom. and 10 5.1% 13.6% 17.4% 6.8% 5/31/1953 2.8% 0.7% 5.7% 6.6% 1/31/1965 37.4% 24.9% 17.0% 10.6% 4/30/1973 21.5% 16.1% 14.4% 13.6% 4/30/1986 (2.4%) (2.7%) 0.1% 3.2% 9/30/1999 26.5% 25.8% 15.3% 9.5% 4/30/2012 ? ? ? ? Average 15.2% 13.1% 11.6% 8.4% This table shows the performance of Relative RS Alpha During Up-Trends Strength, above orPrior to Establishing a Topfor the 1, 3, Periods below the market, 5, and 10 year Year Top 1 periods immediatley following a 3 Years 5 Years 10 Years bottom once49.1% upward trend begins. 0.0% a new 2/28/1934 15.9% 7.0% 1/31/1946 40.7% 26.2% 17.7% 5.6% 9/30/1961 18.0% 15.0% 13.2% 6.7% 6/30/1968 31.7% 27.9% 17.4% 12.4% 10/31/1980 51.7% 26.2% 18.6% 12.5% 9/30/1993 23.3% 14.0% 9.3% 2.9% 6/30/2002 37.6% 26.4% 16.6% 10.2% Average 36.0% 21.6% 14.3% 7.2% From the bottom points looking back, the table Performance displayed represents past performance, which is no guarantee of future results. All investment methodologies shows the overperformance or underperformance have risks, both general and strategy-specific, including the risk of loss of principal investments.

Equity market returns are represented by the unmanaged Standard & Poor’s 500 Composite Index with reinvested dividends, used as a general the market benchmark. It is not of Relative Strength versus broad-market for the 1, 3, possible to invest in indexes which are unmanaged and do not incur fees and charges.The Relative Strength (RS)the top. discussed use 5, and 10 year periods leading into strategies market data and rank securities with hypothetical allocations across three different performance time periods (short, intermediate and long-term), as described in the article.

Alpha is the amount of performance that is attributed to a strategy, investment style, or manager skill compared to an index or benchmark. RS Alpha is represented by the 3-year rolling average performance difference between a longterm RS model versus the S&P 500 Index.The information provided here is intended to be general in nature and should not be construed as investment advice.This information is subject to change at anytime, based on market and other conditions, and should not be construed as a recommendation of any specific security. Source: Standard & Poor’s, calculated by Arrow. 0716-NLD-3/20/2013 .