By Steve Blumenthal
August 17, 2016
S&P 500 Index 2174
“Because for any given level of return, if you diversify, you can generate that return with a lower risk; or for any given level of risk, if you diversify, you can generate a higher return. So it’s a free lunch. Diversification makes your portfolio better.”
— David Swensen, Chief Investment Officer,
Yale University Endowment
A quick summary of what we are seeing by investment category (equity markets, fixed income and liquid alternatives):
- Equity Markets: Investor sentiment remains extremely optimistic (short-term bearish for equities), Don’t Fight the Tape or the Fed moved from a +1 to 0 (now neutral on Equities). The 13/34-Week EMA trend indicator remains bullish. The CMG NDR Large Cap Momentum Index is nearing a buy signal. Neutral to positive on equities.
- Fixed Income: HY remains in a buy signal and the Zweig Bond model remains in a buy.
- Liquid Alternatives: The CMG Opportunistic All Asset ETF Strategy is taking on more risk. Recently, we increased allocations to technology and biotech. Yesterday, we sold out of short duration bonds (“MINT”) into Vanguard Total World Stock ETF (“VT”).
Due to high valuations and the aged nature of the cyclical bull market, for the moderate growth investor I favor a reduced portfolio exposure to equities (hedged). 30% equities, 30% fixed income (tactically managed), 40% to liquid alternatives (tactical all asset, managed futures, global macro via mutual funds and gold).
Following are the most recent Trade Signals:
Equity Trade Signals (Green is Bullish, Orange is Neutral and Red is Bearish):
- CMG Ned Davis Research (NDR) Large Cap Momentum Index: Sell Signal – Bearish for Equities. (Last signal on June 30, 2015, S&P 500 Index level 2063.11.)
- Long-term Trend (13/34-Week EMA) on the S&P 500 Index: Buy Signal – Bullish Cyclical Trend for Equities
- Volume Supply (selling) is greater than Volume Demand (buying): Buy Signal – ST Bullish for Equities
- NDR Big Mo: See note below (active signal: Buy signal on March 4, 2016 at 1999.99)
- Don’t Fight the Tape or the Fed: Indicator Reading = 0 (Neutral on Equities)
Investor Sentiment Indicators:
- NDR Crowd Sentiment Poll: Extreme Optimism (short-term Bearish for Equities)
- Daily Trading Sentiment Composite: Extreme Optimism (short-term Bearish for Equities)
Fixed Income Trade Signals:
- Zweig Bond Model: Buy Signal
- CMG Managed High Yield Bond Program: Buy Signal
- Global Recession Watch Indicator – High Global Recession Risk
- S. Recession Watch Indicator – Low U.S. Recession Risk
- 13-week vs. 34-week exponential moving average: Buy Signal – Bullish for Gold
Tactical/Relative Strength — CMG Opportunistic All Asset Strategy (update):
Relative Strength Leadership Trends: The portfolio is currently weighted (approximately) 62.5% to equities and 37.5% to fixed income ETFs.
The Strategy is a relative strength-driven process that evaluates approximately 100 different ETFs, including large-caps, mid-caps, small-caps, value and growth, sectors, various fixed income, international and emerging markets. It can be 100% allocated to equities or fixed income and can defensively position in cash. The objective is a diversified portfolio that invests in the ETFs mathematically demonstrating strong market leadership. The Strategy may be appropriate for a portion of an overall investment plan. PLEASE NOTE THIS IS NOT A RECOMMENDATION TO BUY OR SELL ANY SECURITY. We see this Strategy as a percentage weighting within the “liquid alternatives” portion of a total portfolio. Please speak with your advisor to discuss sizing and suitability.
Following is a more detailed review of the above Trade Signals:
- CMG NDR Large Cap Momentum Index – Sell Signal — The Momentum and Market Breadth Data is signaling Bearish for U.S. Equities (the last signal was generated on June 30, 2015 with the S&P 500 Index at 2063.11). This is my favorite risk-on/risk-off equity market indicator. How I use the CMG NDR Large Cap Momentum indicator.
- N = a sell or neutral signal on equity market exposure. B = is a bullish buy signal.
- The top section shows the model (hypothetical) performance of the model (moving to cash on N (neutral signals) and moving to the S&P 500 Index on B (buy) signals (blue line) vs. buying and holding the S&P 500 Index (red line).
- The middle section of the chart is the model line that tallies the momentum and breadth scores of the stocks in our 22 market sectors. (An up-trending line reflects a healthier market environment.)
- Performance attributions are in the bottom of the chart (red arrows).
- Tested is the period from 1991 to present.
- NDR Disclosure
We run several strategies here at CMG. In one of our strategies, we invest in a low-fee large-cap S&P 500 Index ETF on “B” buy signals and we switch to BIL (a short-term Treasury Bill ETF) on “N” sell signals. We also run a long/short strategy based on the same signal. Further, when the indicator is in a sell signal, it helps us identify periods where we should be more mindful of hedging our long-term focused equity holdings. At such times, out-of-the-money put options on an ETF, such as SPY, may be prudent.
Separately, we run several ETF tactical strategies (CMG Opportunistic All Asset Strategy and CMG Tactical Rotation Strategy). We are often asked if the CMG NDR Large Cap Momentum Index is used within these strategies. It is not. Our tactical equity strategies look at relative strength that compares stocks, bonds, sectors, cash, etc. and seek to position in the assets showing the strongest price leadership.
Such strategies tend to move away from areas of greater risk (like equities) to less risky areas (like bonds and cash) and do so based on the rules built within each strategy. On occasion, our CMG NDR Large Cap Momentum indicator may be in a sell signal, yet our tactical equity strategy may be overweight exposure to equity-oriented funds or ETFs.
As markets don’t typically tsunami overnight (though that can happen), historically, they tend to peak and change trend over months, not days. Most corrections are in the 5% to 10% range while the -20%, -30%, -50%, -60% corrections tend to occur during periods of recession.
Diversification: We believe that portfolios should be broadly diversified to include a number of potential return drivers (let’s call each one separately a risk). Thus, in our view, portfolios are a collection of various different and diverse sets of risks (we hope each to make money over the next five or so years but do so in entirely different and low-correlating ways… otherwise known as “diversification”).
- 13/34–Week EMA Trend Chart: Bullish Cyclical Trend for Stocks
Note (in the chart below – upper right-hand corner) that the 13-week EMA (blue line) recently crossed below the 34-week EMA trend (red line). The Cyclical Trend for Stocks is bullish by this measure. You can see that this trend process has done a pretty good job at identifying the major cyclical bull and bear market trends (note small red and blue arrows). A good stop-loss level may be at the point when the 13-week drops below the 34-week.
Click here to see “How I think about the 13/34-Week Exponential Moving Average.”
- Volume Demand vs. Volume Supply – Buy Signal (Bullish for Equities)
The 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 below is when Vol Demand is above or below Vol Supply. More buyers than sellers or more sellers than buyers. This is a relatively slow-moving indicator.
- S&P 500 Index Gain/Annum (12-31-1997 to present). The yellow highlight in the chart that follows shows the current regime, percent gain per annum and the amount of time since 1997 that the signal was above or below volume demand.
See important disclosure information below. NDR disclosure.
SB Comments: Similar to the 13/34-week EMA trend chart, we don’t use Volume Demand vs. Volume Supply in any of our investment processes. Personally, I like to note if there are more sellers than buyers or buyers than sellers, as it is ultimately supply and demand that moves prices in all things. Looking at this measure gives me another data point to get a feel for the level of potential risk. This is an indicator I have reviewed each week for many years.
4. Big Mo Multi-Cap Tape Composite Model – We have decided to remove this composite data. We believe the CMG NDR Large Cap Momentum Index is a better process and we’d like to avoid any potential confusion. However, if you would like a copy of the chart, please send me an email reminder each week and I’ll forward a copy to you. FYI: Last signal was a “buy” on 3-4-16 at S&P 500 Index level at 1999.99.
5. Don’t Fight the Tape or the Fed – Indicator Reading = 0 (Bullish for Equities). Current reading highlighted in yellow (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.
- Gain/Annum when the combined indicator reading (1999 to present. Current indicator score highlighted in yellow):
SB Comments: This data shows the historical risks and rewards that come with being in line with Fed activity and market trend. I use it to help me assess the level of market risk (high, low or neutral). You can see what the returns were like, historically, based on the reading of the indicator. To learn more about this indicator, please refer to a piece I wrote entitled, “Watch Out For Minus Two.”
Investor Sentiment — 8-16-2016
NDR Crowd Sentiment Poll: Extreme Optimism (short-term Bearish for Equities). Current reading highlighted below.
The current weekly sentiment reading is 68.4. It was 67.4 last week.
- Gain/Annum for the S&P 500 Index (data from December 1, 1995 to present. Current indicator score highlighted in yellow):
Daily Trading Sentiment Composite: Extreme Optimism (short-term Bearish for Equities). Current reading highlighted below.
- The current daily sentiment reading is 63.33. It was 65.56 last week.
- 1994 to Present (current indicator score highlighted in yellow):
The Zweig Bond Model: “Buy” – The model is Bullish on L/T Bonds
- Model indicators – process detailed in the upper left section of chart.
Current indicator score highlighted in yellow (bottom right section):
The Zweig Bond signal is one of my favorite processes to identify when to shorten high-quality bond maturities and when to lengthen maturities. ETFs can be used to position into short-term exposure (e.g., on Sell signals: favor “BIL”) or long-term bond market exposure (e.g., on Buy signals: favor ETFs such as “TLT,” “LQD” and “AGG”).
Please note that this is not a specific recommendation to buy or sell any security, as I have no information or understanding of your personal financial situation. See important disclosure information below. NDR disclosure information. CMG disclosure information.
Gold: 13-week vs. 34-week exponential moving average: Buy Signal – Bullish for Gold
Note the dotted red line on the right-hand side of the chart. The 13-week trend line crossed above the 34-week trend line. This signal indicates a new cyclical bull market trend for gold.
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Thank you for your interest in this weekly post. It is appreciated.
With kind regards,
Stephen B. Blumenthal
Chairman & CEO
CMG Capital Management Group, Inc.
Philadelphia – King of Prussia, PA
Facsimile: 610-989-9092 Fax
CMG AdvisorCentral – Educational Pieces 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)
- Here is a link to our Advisor Blog page
- Here is a link to our Advisor Resource page
CMG is committed to setting a high standard for ETF strategists. And we’re passionate about educating advisors and investors about tactical investing. We launched CMG AdvisorCentral a year ago to share our knowledge of tactical investing and managing a successful advisory practice.
AdvisorCentral is being updated with new educational resources we look forward to sharing with you. You can always connect with CMG on Twitter at @askcmg and follow our LinkedIn Showcase page devoted to tactical investing.
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.
IMPORTANT DISCLOSURE INFORMATION
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 Tactical All Asset Strategy FundTM, CMG Global Equity FundTM, CMG Tactical Bond FundTM, CMG Global Macro Strategy FundTM and the CMG Long/Short 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 Tactical All Asset Strategy FundTM, CMG Global Equity FundTM, CMG Tactical Bond FundTM, CMG Global Macro Strategy FundTM and CMG Long/Short FundTM are distributed by Northern Lights Distributors, LLC, Member FINRA.
NOT FDIC INSURED. MAY LOSE VALUE. NO BANK GUARANTEE.
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 manage 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 (e.g., S&P 500 Total Return or Dow Jones Wilshire U.S. 5000 Total Market IndexSM) is also disclosed. For example, the S&P 500 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. S&P Dow Jones 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.