By Steve Blumenthal
December 29, 2021
S&P 500 Index — 4,793
Market trends persist over time and stem from changes in risk premiums (the return investors demand to compensate them for the risks they take.) Risk premiums vary over time in response to new market information. Investors react to the changes gradually and this creates trends.
Rules-based trend following strategies don’t predict, they react to what price is signaling in terms of supply and demand. With more buyers than sellers, the price moves higher. More sellers than buyers, price moves lower. The long-term objective of trend-following is to participate in secular bull market gains while minimizing the losses associated with secular bear market declines.
Trade Signals is organized into three sections:
- Market Commentary
- Trade Signals — Dashboard of Indicators
- Charts with Explanations
For informational purposes only. Not a recommendation to buy or sell any security.
Notable this week:
The investment picture going into 2022 is the relatively high probability the global economy will slow dramatically from the stimulative-driven pace we are now exiting. Equity market valuations are at record highs, U.S. household ownership is at an all-time high, foreign ownership of U.S. equities is at an all-time high, and never before has so much money been concentrated into the same few names (FAANG stocks). Perhaps most concerning is the high level of leverage in the system: margin debt has exceeded the insane levels reached at the prior two bubble peaks (see orange line, center section below) in 2000 and 2007.
The challenge with margin debt is not when it is going up, it’s when it is going down. Ned Davis Research has a great chart that looks at Margin Debt relative to a 15-week Rate of Change. Technical sell signals are triggered when margin debt reverses from a high (“Excessive Speculation”) level. Buy signals are the opposite. Note the “S” sell signal in the chart below that fired at the end of last month. The last time this indicator generated a sell signal was in 2007.
Get your mind around this piece of data: In the last 12 months, in-flows to U.S. equities total $1.1 trillion. That compares to in-flows over the last 19 years totaling $1.1 trillion combined. More buyers than sellers and prices go up. (Source: BofA Global Investment Strategy, EPFR.)
Corporate Share Buybacks
We’ll be talking about this some day in the future and shaking our heads. A consequence of the Fed’s zero-interest-rate policy. Courtesy of Lance Roberts at RIA Advice, “The surge in the repurchase of shares over the last decade remains one of the more significant supports to the financial markets. (Such is because it is mostly the major market-cap-weighted names that can afford multi-billion share buybacks.)
The chart below via Pavilion Global Markets shows the impact of buybacks on the market over the last decade. The decomposition of returns for the S&P 500 breaks down as follows:
- 21% from multiple expansion,
- 31.4% from earnings,
- 7.1% from dividends, and
- 40.5% from share buybacks.
In other words, in the absence of share repurchases, the stock market would not be pushing record highs of 4700 but instead levels closer to 2800. The risk to stocks is a reversal of that support from the Fed.”
This helps explain some of the record in-flows into U.S. equities. With individuals, foreigners, and corporations all in, one has to wonder where the future buying demand will come from.
The salient point is the market is priced to perfection, euphoria is at an epic high, leverage has never been greater, and too few see the risks. Following are my fundamental views on the year ahead. No guarantees, I could be wrong.
- A difficult first half of 2022 with potential for a 30 percent or greater market decline.
- Fed responds aggressively and the equity market bottoms. Strong second half 2022.
- Similar to inflation cycles of the past, some moderation in inflation into mid-year. Inflation picks back up in the second half with the return of Fed Quantitative Easing (QE).
- Bullish outlook for 10-year and 30-year Treasury bonds. The 10-year yield may decline from 1.5% to 1% in the first half of 2022.
As we enter 2022, inflation is calling the Fed’s hand. The Fed is pulling liquidity from the system and anticipates raising rates three times next year. If I’m correct in my view that inflation, rising rates, and debt will lead to a meaningful economic slowdown (“stagflation”), then the first half of 2022 will surprise investors. A -30% market decline into mid-year is a real threat. If correct, I suspect the Fed will reinstate QE, we’ll bottom and we’ll be off to the races again.
- Bullish dollar first half of 2022, as the global slowdown and market turmoil favors a strong dollar. Longer-term, bearish view on the dollar but I wonder relative to what other currency. The developed world is collectively debasing its currencies.
- The outlook for gold is the opposite of the dollar. Long-term very bullish on gold with a target of greater than $5,000.
- Bullish on commodities, agriculture, uranium (nuclear fuel), and oil for the foreseeable future.
This is all a big “if” because there are many unknowable pieces. We don’t know what role the Covid virus will play or what inflation will look like. You and I can’t control the geopolitical risks: China/Taiwan, Russia/Ukraine, Iran’s apparent pursuit of nuclear weapons. And we can never know for sure what big liquidity guns the Fed may fire next. The risk-on party may have more euphoria left in its run.
Time to Hedge
But just in case, buying at-the-money put options three months out is not a bad idea. Think of it like homeowners insurance. There is a cost, but it is small relative to the potential savings. Of course, this is not a recommendation for you to engage in any securities transaction. Talk to your advisor.
I see “fair value” in the S&P 500 Index around 2,800. Forward returns from that entry point should be close to the historical long-term returns for equities. Give or take 10% per year before inflation is factored in (no guarantees). My downside target on the S&P 500 is 3,000. Much depends on the degree of leverage unwinding and the reaction from the Fed. I suspect the Fed will aggressively come back into play.
Finally, with all that said, the technical picture remains moderately bullish as you’ll see in the Trade Signals – Dashboard of Indicators next. I’ve added “Dr. Copper” to the Economic Indicators section. Historically, it has been a useful early indicator warning of a downturn in the economy. Dr. Copper is insider lingo used in the commodities markets to explain price trends in copper’s ability to predict the overall health of the economy. When copper prices decline, it may indicate sluggish demand and an imminent economic slowdown. You’ll also see overall liquidity in the system remains positive, the risk of recession is currently low and the economy in general looks to be in good shape. We are exiting 2021 on a high note and I hope you are as well.
Trade Signals zeros in on the equity and fixed income markets. If you are most invested in cap-weighted index funds (unhedged) and bonds, my view is you are in for a bumpy ride over the coming years. However, there are so many ways to find a good return. In our multi-family office business, we are investing in well collateralized short-term private credit funds yielding in the mid-to-high single digits. Because of the network Mauldin and I and our team have built over the years, we have access to certain select opportunities that others may not. We believe in defending our CORE wealth in a way that enables us to position very risk-on (we call it EXPLORE) with select late-stage private credit investments. If you are a qualified investor with a net worth of more than $5 million, email me at email@example.com if you’d like to learn more. If your net worth is smaller, and you’d like some ideas about how to hedge we’d be happy to speak with you.
Wishing you a successful 2022!
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.
Trade Signals — Dashboard of Indicators
(Green is Bullish, Orange is Neutral, and Red is Bearish)
Equity Trade Signals
- Ned Davis Research CMG U.S. Large Cap Long/Flat Index: Buy Signal – 100% U.S. Large Cap Equity Exposure
- Long-term Trend (13/34-Week EMA) on the S&P 500 Index: Buy Signal – Bullish for Equities
- Volume Demand (buyers) vs. Volume Supply (sellers): Buy Signal – Bullish for Equities
- S&P 500 Index 200-day Moving Average Trend: Buy Signal – Bullish for U.S. Large Cap Equities
- S&P 500 Index 50-day vs. 200-day Moving Average Cross: Buy Signal – Bullish for US Large Cap Equities
- NASDAQ Index 200-day Moving Average Trend: Buy Signal – Bullish for U.S. Large Cap Technology Equities
- S&P 500 Index Daily MACD Indicator: Buy Signal – Short-term Bullish for U.S. Large Cap Equities
- Don’t Fight the Tape or the Fed: Indicator Reading = +1 (Bullish Signal for Equities)
- Value vs. Growth Factor Model: Favors Growth Over Value
Investor Sentiment Indicators
- NDR Crowd Sentiment Poll: Extreme Optimism (S/T Neutral for Equities)
- NDR Daily Trading Sentiment Composite: Neutral Pessimism (S/T Bullish for Equities)
Fixed Income Trade Signals
- CMG Managed High Yield Bond Program: Buy Signal – Bullish High Yield Corporate Bond Trend
- Zweig Bond Model: Buy Signal – Bullish on High Grade Corporate and Long-Term Treasury Bonds
- 10-Year Treasury Weekly MACD: Buy Signal – Declining Rates: Bullish on Bonds
- Extended Duration Treasury ETF: Buy Signal – Declining Rates: Bullish on Bonds (12-1-21)
- Global Recession: Low Global Recession Risk
- U.S. Recession: Low U.S. Recession Risk
- Inflation Timing Indicator: High Inflationary Pressures
- Dr. Copper –Long-term Bullish Buy Signal
- U.S. Dollar Price Trend – Medium-term (Weekly MACD) Buy Signal
Select Recession Watch Indicators
- Global Recession Probability Indicator: Low Global Recession Risk
- The Economy Based on the Stock Market Indicator: Low U.S. Recession Risk
- Recession Probability Based on Employment Trends: Low U.S. Recession Risk
- Credit Conditions – Favorable, Low U.S. Recession Risk
- U.S. Economy vs. Yield Curve: Low U.S. Recession Risk
- Trend Indicator – 13-week EMA vs. 34-week EMA: Sell Signal
Charts with Explanations
Equity Market Charts
1. Ned Davis Research CMG U.S. Large Cap Long/Flat Index – Buy Signal – 100% U.S. Large Cap Equity Exposure
The Ned Davis Research (NDR) CMG U.S. Large Cap Long/Flat Index measures “market breadth.” Market breadth is simply market activity, such as advances and declines, new highs and new lows, advancing and declining volume and price momentum and trend based upon the number of stocks in uptrends and downtrends. Technicians like “breadth” measurements for two main reasons:
- Breadth thrusts are often present at the start of major bull markets.
- Breadth nearly always weakens before prices do at major peaks.
(Source: Ned Davis Research)
The NDR CMG U.S. Large Cap Long/Flat Index process measures market breadth by analyzing the overall technical strength of the market across 24 Industry Groups (GICS), as measured by three types of priced-based, industry-level indicators: trend-following, volatility, and mean-reversion. Trend-following primary indicators include momentum and moving average measures that evaluate the rate of change in price in each of the 24 Industry Groups (GICS) over short-term, intermediate, and long-term time frames to assess the current direction of the markets. Mean-reversion indicators are applied in each of the 24 Industry Groups (GICS) measuring the deviation in price movement above and below the historic long-term price trend. Mean-reversion is based on the theory that prices and returns eventually move back towards their historical mean (or average). The model applies these primary and secondary indicators across the S&P 500 industry groupings to ultimately produce trade signals that are either bullish (meaning prices increasing over time) or bearish (meaning prices decreasing over time). The final market breadth composite is the scaled aggregation of these indicators across the S&P 500 industries to determine the breadth composite score (between 0 and 100). A high score means that there is broad positive up-trending participation across the 24 Industry Groups.
Generally, scores above 50 (bold red dotted line in the middle section of the chart) indicate a strong market environment, and scores below 50 indicate a weak market environment.
The most important line to follow in the chart below is the blue “model equity line” in the middle section of the chart. It is the combined total score across the 24 sub-industry sectors. Think of the model equity line as a rolling “market breadth” measurement. The model moves to short-term Treasury Bills when the reading drops below 50%. Such readings low readings signal the majority of stocks across the 24 sub-industry sectors are breaking down. When below the 50% line, and the trend has turned higher, the model moves to 50% invested U.S. Large Cap equity exposure if the model equity reading is higher than it was 21-days ago. When the index reading is above the 50% line, the index is 100% invested. The enhanced version removes the scaling out of the market from 100% to 80% (model equity line trending down when reading between 70 and 60) to 40% (model equity line trending down when reading between 60 and 50) to 0% (model equity line below 50).
Up Arrows with “B” Label = Buy Signal (100% long)
Down Arrows = Reduce Market Exposure to Model Target Weights
S&P Dow Jones Index Data, 1995 to present
Source: S&P Dow Jones Indices and Ned Davis Research.
Note: CMG Large Cap Long/Flat Strategy performance may differ
from index performance due to trade dates/times, types of U.S. ETF large-cap exposures, and costs.
Next is a Long/Short version of the Index. The model goes from 100% invested in U.S. Large Cap market exposure to 100% short U.S. Large Cap market exposure on readings below 50%. 50% long and 50% Treasury Bills when the trend reading is below 50% but rising above its 21-day smoothed moving average. The model is fully invested in readings above 50%.
- Here’s the data (note in the lower left-hand chart the model returns – a several hundred basis point improvement in model return):
Source: Ned Davis Research (1992 to present).
Note: S&P Dow Jones Indices does not calculate the Long/Short Index.
2. S&P 500 Large Cap Index – 13/34–Week EMA Trend Chart: Buy Signal – Bullish for Equities
The process measures the intermediate-term trend in the S&P 500 Index. A bullish trend is identified when the blue 13-week smoothed moving average (“MA”) trend line rises above the 34-week smoothed MA trend line. A bearish trend is signaled when the blue line drops below the red line. You can see that this trend process has done a pretty good job at identifying the major cyclical (short-term) bull and bear market trends (note small red and blue arrows). In terms of risk management, a good stop-loss level may be at the point when the 13-week drops below the 34-week EMA with re-entry at the point the 13-week crosses above.
Click here to see “How I think about the 13/34-Week Exponential Moving Average.”
Bottom line: The 13-week shorter-term trend line has crossed the 34-week longer-term trend line = bullish signal for equities.
3. Volume Demand vs. Volume Supply: Buy Signal – Bullish for Equities
When there are more buyers than sellers, prices move higher. When there are more sellers than buyers, prices decline. Supply and demand dynamics work that way in all things – real estate, oil, stock prices, and all goods in a free market.
The Volume Demand vs. Volume Supply process looks at a smoothed total volume of declining issues versus a smoothed total volume of advancing issues using a broad market equity index. The performance, reflected in the chart below, is better when Vol Demand is better than Vol Supply. More buyers than sellers. This is a relatively slow-moving but important indicator.
4. S&P 500 Index vs. 200-Day Moving Average Trend: Buy Signal – Bullish for US Large Cap Equities
Here is how to read the chart:
- Focus on the dotted line (200-day moving average) and the two boxes at the bottom of the chart.
- Buy signals are when the 200-day moving average line is rising and sell signals are when the 200-day moving average is falling. Specifically, a sell signal occurs when the 200-day MA price line drops from a high point by 0.5% or more. A buy signal occurs when the 200-day MA price line rises from a low point by 0.5% or more.
- The current trend signal is shaded grey.
- Bottom line: Returns are best when the 200-day MA trend line is rising.
5. S&P 500 Index vs. 50-Day & 200-Day Moving Average Cross: Buy Signal – Bullish for US Large Cap Equities
Next is a look at what is known as the “Golden Cross.” Sell signals occur when the 50-day shorter-term moving average trend line drops below the longer-term 200-day moving average trend line. Please refer to the circles in the lower part of the chart. This trend-following process is also in a buy signal.
6. NASDAQ Composite vs. 200-Day Moving Average Trend: Buy Signal – Bullish for Equities
Read this chart in the same way as the S&P 500 200-day MA rule explained immediately above. 200-day MA line is the dashed yellow line. The solid blue line is the NASDAQ Composite. Focus on the upper right in the chart and data box below. The current “mode regime” is shaded in the data boxes (bottom of the chart).
7. S&P 500 Index Daily MACD Indicator: Buy Signal – Short-term Bullish for U.S. Large Cap Equities
Focus on the moving average lines at the bottom of the chart. Buy signals occur when the black line crosses above the red line. Sell signals occur when the black line crosses below the blue line. Green arrows indicate buy signals and red arrows indicate sell signals. You can learn more about MACD here.
8. Don’t Fight the Tape or the Fed – Indicator Reading = +1 (Bullish Signal for Equities)
Current readings are highlighted below.
- The indicators that comprise this reading are a combination of NDR’s Big Mo and the 10-Year Treasury yield. It highlights just how important Fed activity is to market performance. Readings range from +2 to -2.
- Bottom line: when both the trend in interest rates (lower yields) and the trend in the overall market (the tape) are bullish, the market has historically performed best.
- +2 readings have occurred about 12% of the time since 1980.
- +1 readings have occurred approximately 25% of the time since 1980.
- -2 readings have occurred approximately 6% of the time since 1980 and the performance during those periods, as shown in the chart is poor. “Watch out for -2!”
- Data from 1980 to present and 1999 to present.
8. Value vs. Growth Factor Model: Buy Signal – Bullish on Long-Term Treasury Bonds (11-4-21)
The middle section of the next chart plots a relative strength ratio comparing the S&P 500-Citigroup Growth Index to the Citigroup Value Index. When the line is rising, growth is outperforming value. When falling, value is outperforming growth. Note the longer-term uptrends and downtrends. The bottom section features the NDR Asset Allocation model (scaled 0-100). When the model is between the two brackets, the model is considered neutral (i.e., no clear tendency for outperformance by either market). The data box in the top left corner shows the annualized performance based on the signal. Grey shades the current signal. The long-term model tends to produce one trade per year to one trade every few years.
NDR Crowd Sentiment Poll: Extreme Optimism (S/T Neutral for Equities)
The current weekly sentiment reading is 68. It was 66 last week. The current regime is highlighted in yellow.
NDR measured 92 incidences of Crowd Sentiment extremes since 1996. There have been 92 extremes since 1996. The crowd was right just one time and wrong 91 times. Had one followed the crowd at the time at those extremes, one would have lost over 12,000 S&P 500 points (according to NDR). The last Extreme Pessimistic was reached on December 24, 2018, and the last Extreme Optimistic was reached in early April 2019.
It is important to note, the most attractive Extreme Pessimism buy signals have historically occurred with readings below 47. The most attractive sell signals have historically occurred with readings above 70. Call them super extreme “extremes.” These are the most important levels I am keeping my eye on when it comes to investor sentiment.
Here is how to read the next data box:
- Best buying opportunities occur at “Extreme Pessimism” readings below 57.
- Gain/Annum for the S&P 500 Index (data from December 1, 1995, to present).
- Current indicator score highlighted in yellow:
NDR Daily Trading Sentiment Composite: Neutral (S/T Bullish for Equities)
The current regime is highlighted in yellow below.
- The current daily sentiment reading is 46.67. It was 40 last week.
- Buying opportunities occur at “Extreme Pessimism” readings below 41.5. Selling/trading opportunities occur at “Extreme Optimism” readings above 62.5.
- Note: The most attractive buying opportunities have historically occurred with readings below 25 (faded red arrow). While the strongest sell signals have occurred with readings above 75.
- 1994-to-Present and 2006-to-Present. Data boxes in the bottom section of the chart (current indicator zone shaded grey below):
Fixed Income Trade Signals
The Zweig Bond Model: Buy Signal – Bullish on High Grade Corporate and Long-Term Treasury Bonds
Current indicator score highlighted in yellow (bottom right section):
- The bottom section of the above chart details the drawdown (“Max DD %”) history and a few other statistics. For example, if your $100,000 investment declines 10% to $90,000 before it again moves higher, your drawdown is 10%.
- Barclays Aggregate Bond Total Return has a max drawdown of -14.12% vs. a max drawdown for the Zweig Bond Model of -5.06%.
- You can compare the Barclays Aggregate Bond Index Total Return Max DD to the Model’s Max DD. Hoped for is a higher return and a lower DD. Also listed is the hypothetical growth of $1,000.
- GPA% shows the hypothetical comparison of the Zweig Bond Model and the Barclays Agg Total Return index. The Model outperformed buying and holding the index by a wide margin.
- Finally, you can calculate the model on your own – detailed in the upper left section of the chart. How to Track the Zweig Bond Model.
- Click here for more info about the Zweig Bond Model
10-Year Treasury Weekly MACD: Buy Signal – Declining Rates: Bullish on Bonds
Extended Duration Treasury ETF: Buy Signal – Declining Rates: Bullish on Bonds (12-1-21)
- Global Recession – Low Global Recession Risk
- U.S. Recession – Low Probability of U.S. Recession Risk (Next Six Months)
- Inflation Watch – High Inflationary Pressures
- Dr. Copper –Long-term Bullish Buy Signal
- U.S. Dollar Price Trend – Short-term (Daily MACD) Sell Signal
- U.S. Dollar Price Trend – Medium-term (Weekly MACD) Buy Signal
Dr. Copper: Long-term Bullish Buy Signal
“Dr. Copper” is insider lingo used in the commodities markets to explain price trends in copper’s ability to predict the overall health of the economy. When copper prices decline it may indicate sluggish demand and an imminent economic slowdown. The following chart looks at monthly price data.
U.S. Dollar Price Trend: Short-term (Daily MACD) Sell Signal
U.S. Dollar Price Trend: Medium-term (Weekly MACD) Buy Signal
Select Recession Watch Indicators:
The average decline in the S&P 500 is approximately 37% during recessions. The last two recessions have given us greater than -50% each. I believe, given the fact that we have tripled up on the very same thing that caused the last recession (debt/leverage/Fed policy), the next recession will be equally or more challenging than the last two. Thus, my recession obsession. Following are my favorite recession watch indicators.
Bottom line: We are likely in a global recession.
Global Recession Probability Indicator – Low Global Recession Risk
- First, focus on the blue model line. It plots the probability of recession based on leading indicators from 35 different countries (non-U.S.). The current reading is 4.89, meaning there is a 4.89% probability that we are in a global recession. Bottom line: High Global Recession Risk.
- Note the dotted lines that market three zones: High Recession Risk to Low Recession Risk. The grey shaded bars that show periods in which the OECD said there was a global recession (something that is only known more than six months after the fact).
- The model line crossed above 70 in mid-2018. About six months later, the OECD confirmed the global recession. You can see that this indicator is not perfect as recessions sometimes started before the cross above the 70 line or after the cross. For U.S. investors, since business is global, this model can be an early warning indicator for U.S. recession.
- Finally, focus on the data box in the lower right section of the chart. When the reading is ‘Above 70’ recession has occurred 93.02% of the time. When the reading is ‘Below 30’ recession has occurred just 17.65% of the time.
The Economy Based on the Stock Market Indicator – Low U.S. Recession Risk
- Focus on the up and down arrows. Economic expansion signals (up arrows) are generated when the S&P 500 Index rises by 3.8% above its five-month smoothed moving average line. Economic contraction signals are generated when the S&P 500 Index falls by 4.8% below its five-month smoothed moving average line.
- Current signal = Contraction
- Note the 77% “Correct Signals” in the top left corner of the chart. This process has done a good job at signaling prior to recessions. Not perfect but pretty good.
- SIGNAL ALERT – MOVED TO AN “EXPANSION” SIGNAL ON 7-31-2020
Recession Probability Based on Employment Trends – Low U.S. Recession Risk
- Focus in on the up and down arrows. Down is a recession signal. Up is an expansion signal.
- Expansion signals are generated when the Employment Trends Index rises by 0.4% from a low point.
- Contraction signals are generated when the index falls by 4.8% from a high point.
- SIGNAL ALERT – MOVED TO AN “EXPANSION” SIGNAL ON 7-31-2020
Credit Conditions – Favorable, Low U.S. Recession Risk
- Focus on the lower section of the chart. A drop below the green dotted line has preceded the last three recessions. When lending tightens up “Credit Conditions Unfavorable,” companies have a hard time funding. Recession tends to follow when lending conditions become unfavorable.
- The vertical grey bars indicate past recessions.
- Updates monthly by the 15th.
- Bottom line: Lending conditions are currently favorable.
Here is a look at the NDR Credit Conditions Index and its components:
U.S. Economy vs. Yield Curve – Low U.S. Recession Risk
- Watch for a drop below the green dotted line (red rectangles). Recessions are identified in grey (horizontal bars).
- Such drops below 0 are what is known as an inverted yield curve. Inversion happens when the 6-month Treasury Bill yield is higher than the 10-year Treasury Note yield.
- An inverted yield curve has preceded every recession since 1958 (lower section of chart) with a “mean lead time” of 14 months prior to the recession’s start.
- Since recessions are only known in hindsight, it is important to have a high probability to know in advance. All the bad stuff happens in recessions.
- Bottom line: Once the yield curve inverts, recession follows about a year later.
13-week EMA vs. 34-week EMA: Sell Signal
Buy signals occur when the 13-week moving average trendline (blue line) crosses above the 34-week moving average trendline (red line). Sell signals occur when the 13-week moving average trendline (blue line) crosses below the slower moving 34-week moving average trendline (red line).
Green arrows indicate buy signals, red arrows sell signals.
Why risk management?
Asset Classes Move Through Periods of Bull and Bear Market Cycles Over Time: This next chart shows the BULL market Secular Trend for Stocks (top section), the direction in Long-Term Government Bond Yields (middle section) and Commodities (bottom section). The best gains are made in Secular Bull market cycles.
Investing is a probability game. Limit downside: In the long run, it’s about the math. This next chart shows the “The Merciless Mathematics of Loss”. A 10% decline only requires an 11% subsequent return to get back to even. A 30% decline requires a 43% subsequent return to get back to even. A 50% decline requires a 100% subsequent return to get back to even. You can read more about it here.
I hope you find this information helpful. Thank you for your interest. It is appreciated.
♦ To receive Steve’s free weekly On My Radar e-newsletter, subscribe here. ♦
With kind regards,
Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
10 Valley Stream Parkway, Suite 202
Malvern, PA 19355
Advisor/Investor Education Materials and White Papers
Several client educational pieces:
- When Beating the Market Isn’t the Point
- Trend Following Works!
- Correlation, Diversification and Investment Success
- The Merciless Math of Loss (this is about how compound interest works for you and significant loss against you)
CMG is committed to setting a high standard for ETF strategists. And we’re passionate about educating advisors and investors about tactical investing. If you’re looking for the CMG white paper, Understanding Tactical Investment Strategies, you can find that here.
Ned Davis Research:
For years, I have subscribed to Ned Davis Research. They are an independent research firm. Their clients are institutional (professional) investor clients like CMG. They are one of the most respected research firms in the business.
They offer several levels of subscription. You can contact them directly at Ned Davis Research at 617-279-4878 to learn more. Please know that neither I nor CMG are compensated in any form. I’m just a big fan of their research and their way of thinking. As a side, Ned Davis authored one of my favorite books, Being Right or Making Money. A great book full of sound, practical advice.
Trade Signals History:
Trade Signals started after a colleague asked me if I could share my thoughts (trade signals) with him. A number of years ago, I found that putting pen to paper has really helped me in my investment management process and I hope that this research is of value to you in your investment process.
Every week, I share with you research I find valuable. No one indicator is perfect, but we believe risk can be assessed and should be managed. Some of this research helps to shape our thinking around risk management and it helps us think about how we might size various risks within the construct of a total portfolio. For example, overweight or underweight equities/fixed income and how much one should consider allocating to tactical/liquid alternative exposures (such as managed futures, global macro, long/short equity). When and what to hedge? Shorten or lengthen bond maturity exposure? We believe such risks can be managed and, to us, broad portfolio diversification is important. If you’d like to talk to us about how we use some of these indicators within our various investment strategies, please email me or email our sales team.
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.
For hedging, I favor a collared option approach (writing out-of-the-money covered calls and buying out-of-the-money put options) as a relatively inexpensive way to risk protect your long-term focused equity portfolio exposure. Also, consider buying deep out-of-the-money put options for risk protection.
Please note the comments at the bottom of this Trade Signals discussing a collared option strategy to hedge equity exposure using investor sentiment extremes is a guide to entry and exit. Go to www.cboe.com to learn more. Hire an experienced advisor to help you. Never write naked option positions. We do not offer options strategies at CMG.
Visit http://www.theoptionsguide.com/the-collar-strategy.aspx for more information.
Diversification – Suggested Client Talking Points:
A diversified investment portfolio is designed to meet pre-defined investment goals. It is often hard to stay the course when stress presents. That is when many investors make mistakes. Diversification means that not all investment risks perform at the same time. For example, managed futures and long/short funds have underperformed the last several years but are outperforming recently. We’d all like to be in the best performing areas all the time, but that is just not possible.
Major market events tend to present one or two times per decade. It is for this reason that a longer-term view can provide a useful perspective. We know that many investors incorrectly sold out of the markets during the tech bubble in 2000-2002 and again with record selling at the height of the 2008 great financial crisis. No one knows exactly how the current distress will play out.
For some time, I’ve been talking about the following: the issues in the high yield bond market, issues that can present post-QE and zero interest rate policy, issues with unmanageable debt in Europe, Japan and China and the issues a rising dollar may trigger as it relates to the $9 trillion in EM debt that was borrowed in dollars. As much as I’d like to think I do, I don’t know for sure which or how and when any of the above risks present and the degree to which they might play out.
What we can do is build portfolios that are diversified across a number of risk factors and market environments. We can identify periods in time to become more or less aggressively positioned (overweight when valuations are cheap and underweight when they are expensive). We can manage risk not only by the collections of ETFs and funds selected but also how we combine them together. Diversification brings meaningful improvement to portfolios designed to achieve a return objective over a long-term period of time.
I see the world of investing through a lens of risk and reward. Ultimately, it is far more important to minimize losses than to capture the best gains. Find me someone or some way to always capture the best gains – impossible, doesn’t exist. I’m friendly with some of the world’s greatest investors and none of them see themselves as perfect.
Over time, it’s really about understanding the power of compound interest. To this end, I wrote a paper entitled, The Merciless Math of Loss.
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