S&P 500 Index 2120
By Steve Blumenthal
June 18, 2015
Short-term Investment Sentiment has reached Extreme Pessimism – suggesting a bullish equity investment posture. Interestingly, investor sentiment, as measured by NDR’s Daily Trading Sentiment Composite, has been in the extreme pessimism zone about 26% of the time. During which the S&P 500 Index has gained 33% per annum (12-30-1994 to present. Note data in the chart below). During periods of extreme optimism (about 28% of the time) the S&P 500 Index declined nearly 11% per annum. Data that shows the crowd is usually wrong at sentiment extremes.
I like combining investor sentiment with trend evidence. My favorite measure Big Mo, while weakening, remains in a buy signal. Also, the 13/34-Week EMA remains bullish as you’ll see in the following charts. Further, volume demand continues to be stronger than supply. This too supports a bullish view.
Yet overall, risk remains high. Though short-term bullish, it is important to keep in mind that the cyclical bull is aged, overvalued and we are near a change in Fed policy. Hedge your equity exposure and look to trend evidence to help you mitigate downside loss.
As for bonds, it has been a wild few months. The Zweig Bond Model (a trend based process) remains in a “SELL” – continuing to suggest that short-term bond maturities are favored over long-term maturities.
Included in this week’s Trade Signals:
- Cyclical Equity Market Trend: The Primary Trend Remains Bullish for Stocks
- Volume Demand Continues to Better Volume Supply: Bullish for Stocks
- Weekly Investor Sentiment Indicator:
- NDR Crowd Sentiment Poll: Neutral Optimism (short-term Neutral for stocks)
- Daily Trading Sentiment Composite: Extreme Pessimism (short-term Bullish for stocks)
- Recession Watch – My Favorite Recession Forecasting Chart: Currently signaling No Recession
- The Zweig Bond Model: The Cyclical Trend for Bonds is Bearish
Cyclical Equity Market Trend: The Primary Trend Remains Bullish for Stocks
The active signal is highlighted in yellow. The historical performance statistics are highlighted in orange. See important disclosures at the bottom of this report.
Big Mo follows a weight of evidence approach to determine the market’s cyclical trend.
13/34–Week EMA Trend Chart: Cyclical Bullish Trend for Stocks
Following is a closer look at the S&P 500 via the ETF “SPY” 2006 to present.
Click here to see “How I think about the 13/34-Week Exponential Moving Average”.
In summary, both Big Mo (Momentum) and the 13/34-Week EMA suggest that the market remains in a cyclical bull market (up trending) state. I believe trend is most important; therefore, buy the dips (on extreme pessimism) as long as the 13/34-Week Blue EMA line is above the Red EMA line and own equities (but hedged as valuations are high, the market bull is aged; thus, overall equity market risk is high).
Volume Demand Continues to Better Volume Supply – Bullish (last signal yellow circle)
- The yellow highlight in the upper left shows the S&P 500 Index % Gain per annum when the model is on a buy signal. Also noted is the market’s % gain per annum when the model is on a sell signal and gain/annum with 89.5% profitable long trades (orange arrows).
Volume demand continues to be stronger than selling supply. While no single indicator will ever be perfect, the long-term historical buy and sell signals based on measuring volume demand minus volume supply has done a pretty good job at identifying market turning points. Let’s watch this chart closely.
Investor Sentiment 6-17-2015:
NDR Crowd Sentiment Poll: Neutral Signal from Extreme Optimism (Short-Term Neutral for Stocks)
Click here to see “How I Think About Investor Sentiment”.
Daily Trading Sentiment Composite: Neutral Signal (short-term Neutral for stocks though nearing Excessive Optimism)
Recession Watch – My Favorite Recession Forecasting Chart
Note the up and down arrows in this next chart.
- The down arrows occur when the S&P 500 index falls below its 5-month smoothed moving average line by 3.6% or more.
- The up arrows occur when the S&P 500 index rises above its 5-month smoothed moving average line by 4.8% or more.
- The idea here is that the stock market is a good leading indicator of future economic activity.
- You can also see +1, -5, -1, etc. above several of the down arrows. For example, a +1 means that the recession signal occurred 1 month after the actual recession started. Note that recessions are only known in hindsight. A -5 means that the recession signal was 5 months early.
- All in all I think it has a pretty good historical track record in predicting recession. Let’s keep an eye on this chart as the stock market tends to decline 30% to 40% or more during recessions.
Finally, as we do each week, let’s take a look at the bond market. Following is my favorite process to identify when to shorten high quality bond maturities and when to lengthen maturities. ETFs can be used to position into short-term exposure (examples like “BIL”) or long-term bond market exposure (examples like “TLT”, “LQD” and “AGG”). Please note that this is not a specific recommendation for you as I have no understanding of your personal financial situation.
The Zweig Bond Model: “SELL” Signal – Switch to Short-Term Bond Exposure: Model is Bearish
Here is how you read the above chart:
Historical performance is summarized in the table on the bottom left. The Model Equity gain per annum percent (GPA%) is nearly 2.5% higher than the Barclays Aggregate Total Return Bond Index. The gain of $1,000 becomes greater than $80,000 vs. nearly $27,000 over the full back tested period and it did so with a Sharpe Ratio of 0.88 vs. 0.30 (a meaningful improvement). The Sharpe ratio uses standard deviation to measure a fund’s risk-adjusted returns. The higher the Sharpe ratio, the better the returns relative to the risk taken.
The yellow highlight shows the current Signal (orange arrow) for the strategy and the historical performance when on that signal (the model was originally established by Martin Zweig and Ned Davis from Ned Davis Research in 1986 – performance reflected is hypothetical).
The signal process is explained in the upper left section of the chart “Model Indicators”. The original model had four rules. A fifth rule was added post 2008 to capture the fact that corporate bonds could decline even in a declining interest rate environment (the 2008/09 credit crisis). It is a 50-day moving average trend indicator that may help capture such risk.
We worked with NDR to create a daily / tradable version of the model that we could share with our advisor clients. Given the growth in ETFs, we took the buy and sell signals and ran our performance analysis using the Barclays Aggregate Bond Total Return Index (which serves as a broad proxy for the U.S. bond market).
The blue line in the chart shows the growth of $100 since April 1, 1967 in comparison to the black line which is the growth of the Barclays Aggregate Bond Total Return Index. The table at the bottom left compares the performance of the model to buying and holding the Barclays Aggregate Bond Market Total (TR) Return Index.
A proxy for the Aggregate Bond Index is the iShares Barclays Aggregate Bond Fund ETF symbol “AGG”. AGG seeks to track the Aggregate Bond Market TR Index. On sell signals, a short-term bond ETF may be used to reduce the interest rate risk. It is a pure tactical trend following model. This is not a recommendation to buy any security or invest following this strategy as I have no knowledge of your personal investment goals, risks tolerances and objectives. The idea is to show there are ways which may help you protect against a period of sharply rising interest rates (an environment that is unfavorable to bond holdings).
Of course, past performance guarantees cannot predict or guarantee future performance. See important disclosures at the bottom of this research letter.
Click here for notes on “How To Track The Zweig Bond Model” on your own.
Thank you for your interest in this weekly post. It is appreciated! I hope you find it helpful in your investment and advisory work with your clients.
With kind regards,
Stephen B. Blumenthal
Chairman & CEO
CMG Capital Management Group, Inc.
Philadelphia – King of Prussia, PA
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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.
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.
Provided are several links to learn more about the use of options:
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.
Several other links:
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy (including the investments and/or investment strategies recommended and/or undertaken by CMG Capital Management Group, Inc (or any of its related entities-together “CMG”) will be profitable, equal any historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. No portion of the content should be construed as an offer or solicitation for the purchase or sale of any security. References to specific securities, investment programs or funds are for illustrative purposes only and are not intended to be, and should not be interpreted as recommendations to purchase or sell such securities.
Certain portions of the content may contain a discussion of, and/or provide access to, opinions and/or recommendations of CMG (and those of other investment and non-investment professionals) as of a specific prior date. Due to various factors, including changing market conditions, such discussion may no longer be reflective of current recommendations or opinions. Derivatives and options strategies are not suitable for every investor, may involve a high degree of risk, and may be appropriate investments only for sophisticated investors who are capable of understanding and assuming the risks involved. Moreover, you should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice from CMG or the professional advisors of your choosing. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisors of his/her choosing. CMG is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.
This presentation does not discuss, directly or indirectly, the amount of the profits or losses, realized or unrealized, by any CMG client from any specific funds or securities. Please note: In the event that CMG references performance results for an actual CMG portfolio, the results are reported net of advisory fees and inclusive of dividends. The performance referenced is that as determined and/or provided directly by the referenced funds and/or publishers, have not been independently verified, and do not reflect the performance of any specific CMG client. CMG clients may have experienced materially different performance based upon various factors during the corresponding time periods. Mutual Funds involve risk including possible loss of principal. An investor should consider the Fund’s investment objective, risks, charges, and expenses carefully before investing. This and other information about the CMG Global Equity FundTM, CMG Tactical Bond FundTM and the CMG Tactical Futures Strategy FundTM is contained in each Fund’s prospectus, which can be obtained by calling 1-866-CMG-9456 (1-866-264-9456). Please read the prospectus carefully before investing. The CMG Global Equity FundTM, CMG Tactical Bond FundTM and CMG Tactical Futures Strategy FundTM are distributed by Northern Lights Distributors, LLC, Member FINRA.
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Hypothetical Presentations: To the extent that any portion of the content reflects hypothetical results that were achieved by means of the retroactive application of a back-tested model, such results have inherent limitations, including: (1) the model results do not reflect the results of actual trading using client assets, but were achieved by means of the retroactive application of the referenced models, certain aspects of which may have been designed with the benefit of hindsight; (2) back-tested performance may not reflect the impact that any material market or economic factors might have had on the adviser’s use of the model if the model had been used during the period to actually mange client assets; and, (3) CMG’s clients may have experienced investment results during the corresponding time periods that were materially different from those portrayed in the model. Please Also Note: Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that future performance will be profitable, or equal to any corresponding historical index. (i.e. S&P 500 Total Return or Dow Jones Wilshire U.S. 5000 Total Market Index) is also disclosed. For example, the S&P 500 Composite Total Return Index (the “S&P”) is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the stock market. Standard & Poor’s chooses the member companies for the S&P based on market size, liquidity, and industry group representation. Included are the common stocks of industrial, financial, utility, and transportation companies. The historical performance results of the S&P (and those of or all indices) and the model results do not reflect the deduction of transaction and custodial charges, nor the deduction of an investment management fee, the incurrence of which would have the effect of decreasing indicated historical performance results. For example, the deduction combined annual advisory and transaction fees of 1.00% over a 10 year period would decrease a 10% gross return to an 8.9% net return. The S&P is not an index into which an investor can directly invest. The historical S&P performance results (and those of all other indices) are provided exclusively for comparison purposes only, so as to provide general comparative information to assist an individual in determining whether the performance of a specific portfolio or model meets, or continues to meet, his/her investment objective(s). A corresponding description of the other comparative indices, are available from CMG upon request. It should not be assumed that any CMG holdings will correspond directly to any such comparative index. The model and indices performance results do not reflect the impact of taxes. CMG portfolios may be more or less volatile than the reflective indices and/or models.
In the event that there has been a change in an individual’s investment objective or financial situation, he/she is encouraged to consult with his/her investment professionals.
Written Disclosure Statement. CMG is an SEC registered investment adviser principally located in King of Prussia, PA. Stephen B. Blumenthal is CMG’s founder and CEO. Please note: The above views are those of CMG and its CEO, Stephen Blumenthal, and do not reflect those of any sub-advisor that CMG may engage to manage any CMG strategy. A copy of CMG’s current written disclosure statement discussing advisory services and fees is available upon request or via CMG’s internet web site at (http://www.cmgwealth.com/disclosures/advs).