April 19, 2019
By Steve Blumenthal
“Peace is its own reward.”
– Mahatma Gandhi
This week’s post is holiday-weekend short. Grab that coffee and find your favorite chair. You’ll find a simple chart that shows the history of cyclical bull and bear markets (with returns before and after inflation). It is easy to read and may be a good chart to share with your client(s).
The trend signals for equities, high yield and high quality fixed income remain bullish, as you’ll see Wednesday’s Trade Signals post (link below). Also, I share a few thoughts around the popular “Sell in May and Go Away” seasonal pattern.
Most importantly, wishing you a happy Easter, a happy Passover and a happy day.
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Included in this week’s On My Radar:
- DJIA – History of Bull and Bear Markets
- Technically Bullish, Fundamentally Bearish
- Trade Signals – Extreme Optimism, Resistance at Highs, Sell in May and Go Away?
- Personal Note – Happy Easter, Happy Passover and Much Peace to You and Those You Love Most
DJIA – History of Bull and Bear Markets
Here is how to read the following chart:
- Green bars highlight bull markets
- Red bars highlight bear markets
- The black line shows the “Nominal” (before inflation is factored in) Dow Jones Industrial Average price line over time
- The maroon line shows the “Real” (after inflation) DJIA price line over time
- In the upper left-hand side of the chart is the Secular Bull Market mode box, which shows returns and dates of the green bull market periods and the Secular Bear Markets (red and white bars)
- Bottom line: Markets cycle over time from Bull to Bear to Bull again. Inflation is an important consideration and did not present a problem in all bear market cycles. It was a big problem in the 1966-1982 bear market.
Source: Ned Davis Research
If you are a pre-retiree or retiree, the reason it is important to be aware of how equity markets cycle is that your retirement start date and need to live off of your savings really do matter. In this regard, investment positioning and game plan is critical.
I imagine that the coming sovereign debt crisis and the probable fix will set in motion an inflationary wave. But that is just my best guess and there is no sign of such inflationary risks at this time. For now, deflation rules…
Technically Bullish, Fundamentally Bearish
This was a good post from “Sentiment Trader,” by Jason Goepfert of Sundial Capital Research.
In recent weeks, Wall Street analysts have been raising price targets on stocks within the S&P 500. At the same time, they’ve been lowering their earnings estimates.
Usually, there is a positive correlation between the two. When there is a divergence like this, it has been a negative for the earnings season. When analysts were fundamentally bullish but technically bearish, though, stocks rose every time.
Growth stocks have been beating value for years, and there have been countless reasons to expect it to change, yet it hasn’t. The ratio of a global growth index to a value index is back to its prior peak.
Over the past 40 years, the other times it neared this level and rolled over, it was bad for the S&P, horrible for growth stocks, and “not too bad” for value.
[SBB here: It feels to me like 1999 all over again. As you can see in the last chart above, the last time growth beat value by this much was March 2000. The Tech Bubble high. Growth fumbled for the next two to 10 years and value was back in vogue. Humans tend to buy what they wish they had and sell what they are going to need. I think we are at a point in the cycle where value will not only be a defensive play it will likely make you money (aka 2000 to 2010). I have a pretty good growth vs. value signal. I’ll do some deeper research and share the indicator with you next week.]
Trade Signals – Extreme Optimism, Resistance at Highs, Sell in May and Go Away?
April 17, 2019
S&P 500 Index — 2,878
Notable this week:
Both the daily and weekly investor sentiment polls reflect “Extreme Optimism.” Such optimism is typically short-term bearish for stocks. As you see in the dashboard of indicators, all of the equity market trend signals remain bullish. “Sell in May and go away” is a well-known financial-world adage, based on the historical under performance of some stocks in the “summery” six-month period commencing in May and ending in October. Statistically, the best period for stocks is seasonally between the end of October to the end of April. Though that isn’t the case every year. Here are some facts from Investopedia:
- From 1950 to around 2013, the Dow Jones Industrial Average has indeed posted lower returns during the May to October period, compared with the November to April period—which would seem to bear out the “sell in May and go away” strategy.
- Statistics since 2013 suggest that this seasonal pattern may not be the case anymore, and those who “sell in May and go away” might actually miss out on significant stock market gains.
Here is a look at the S&P 500 Index testing its September 2018 high. Right-hand side of chart – yellow circle. The black line plots the trend line since the November 2016 Election. It broke below the uptrend line in the third quarter last year and is now challenging that uptrend line. With May around the corner and sentiment excessively optimistic, this may be another “Sell in May and Go Away” type of year. We’ll see. For now, the trend indicators remain bullish. Stay alert and risk minded.
The fixed income indicators remain bullish. The short-term gold trend signal has turned bearish while the long-term trend signal remains bullish. You’ll find the updated equity and fixed income charts below as well as the most recent recession watch charts. Europe is likely in recession. Economic conditions are weakening in U.S. but my favorite recession watch indicators, including the trend in the HY market, show little risk of recession in the next six months.
Click here for this week’s Trade Signals.
Important note: Not a recommendation for you to buy or sell any security. For information purposes only. Please talk with your advisor about needs, goals, time horizon and risk tolerances.
Personal Note – Happy Easter, Happy Passover and Much Peace to You and Those You Love Most
Now put down that coffee, put on your headphones on and get out for a long walk or jog. My kids have named my routine a “Jaawog,” which is a jog-walk-jog combination. Sadly more walk than jog. Our dog, Shiloh, seems to like it but both of us really do need to get back into better shape. I’ll be jaawoging with earphones in, soft music on and thinking about Gandhi’s words, “Peace is its own reward.” Amen to that. Shiloh will be thinking about marking every spot he can. 🙂
Wishing you and your family peace and much reward this holiday weekend!
Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
If you find the On My Radar weekly research letter helpful, please tell a friend … also note the social media links below. I often share articles and charts during the week via Twitter and LinkedIn that I feel may be worth your time. You can follow me on Twitter @SBlumenthalCMG and on LinkedIn.
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Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Executive Chairman and CIO. Steve authors a free weekly e-letter entitled, “On My Radar.” Steve shares his views on macroeconomic research, valuations, portfolio construction, asset allocation and risk management.
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A Note on Investment Process:
From an investment management perspective, I’ve followed, managed and written about trend following and investor sentiment for many years. I find that reviewing various sentiment, trend and other historically valuable rules-based indicators each week helps me to stay balanced and disciplined in allocating to the various risk sets that are included within a broadly diversified total portfolio solution.
My objective is to position in line with the equity and fixed income market’s primary trends. I believe risk management is paramount in a long-term investment process. When to hedge, when to become more aggressive, etc.
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