S&P 500 Index 2032
By Steve Blumenthal
February 4, 2014
My college soccer coach used to always teach us that “soccer is a game of opposites”. Fake left to move right. That part everyone knows. Where it got complicated (and frustrating for a coach) was tactical positioning in response to the ongoing activity in the game. We respond to patterns and to be successful movement often needed to be opposite of what at first seemed logical. Such response opened space and created opportunity.
I think many of the rules to successful investing appear opposite of what one might think at first glance. “Buy when everyone else is selling” is a pretty good “opposite” rule to follow. Simply, we should be wary at crowd extremes.
The bull market is aged, valuations are high and both daily and weekly investor sentiment are neutral. This week I post a special chart that measures consumer comfort (here, too, the evidence says to be cautious – hedged).
- Note that when consumers are “Excessively Optimistic” the annual gain for the S&P 500 Index is a negative 0.90% (orange arrow).
- When “Extreme Pessimism,” the S&P 500 gains 12.3% per annum. Evidence that investing is indeed a game of opposites.
As you see in the following chart, we sit at the highest level of optimism dating back to 1986 (yellow circle).
Special Chart #1 – Bloomberg Consumer Comfort Index and the S&P 500 Index
Another concern is that investors are largely all in on equities. We may see a pickup in foreign flows as well as some additional buying from the creative global central bankers; however, in special chart #2, the evidence is not bullish when investors are fully invested in equities. Investors are just 3% away from the equity ownership highs reached in 2000 and 2007. Also concerning is the record low level of cash (bottom clip in red).
Special Chart #2 – Bloomberg Consumer Comfort Index and the S&P 500 Index
Included in this week’s Trade Signals (the usual weekly charts):
- Cyclical Equity Market Trend: Cyclical Bullish Trend for Stocks Remains
- Volume Demand Continues to Better Volume Supply – Remains 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)
- The Zweig Bond Model: The Cyclical Trend for Bonds Remains Bullish
Cyclical Equity Market Trend: Cyclical Bullish Trend for Stocks Remains
Big Mo follows a weight of evidence approach to determine the market’s cyclical trend.
Click here to see “How I Think About Big Mo”.
13/34–Week EMA Trend Chart: Cyclical Bullish Trend for Stocks Remains In Place
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. Buy the dips (on extreme pessimism) 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 – Remains Bullish
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 as well in 2015.
Investor Sentiment 2-4-2015:
NDR Crowd Sentiment Poll: Neutral Reading (Neutral for Stocks)
Click here to see “How I Think About Investor Sentiment”.
Daily Trading Sentiment Composite: Neutral Reading (Neutral for Stocks)
The Zweig Bond Model: “BUY” Signal – Cyclical Bull Trend for Bonds Remains Bullish
Historical performance is summarized in the table on the bottom right. The yellow highlight shows the current buy signal for the strategy and historical performance on signal (the model was established in the 1980s – the data is hypothetical). The blue line shows the growth of $100 since April 1, 1967 in comparison to the black line which is the Barclays Aggregate Total Return index. The table at the bottom left compares the two.
Click here for notes on “How To Track The Zweig Bond Model” on your own.
Following is for new readers:
Given the historically low yield on bonds, I believe it is important to understand what happens to bonds when interest rates rise. Bonds simply do not provide the same yield benefit to portfolios and the risk that rates normalize (move higher) is real. The next chart shows the risk and return benefit.
This is why I believe bond allocations should be tactically managed today. The Zweig Bond Model may help you stay in sync with the major trend. Shorten maturities on sell signals and lengthen maturities on buy signals. Also consider relative strength based tactical fixed income strategies that have the ability to move to various fixed income ETFs.
Today, the weight of evidence continues to support being positioned in longer-term bonds, bond fund ETFs and/or bond mutual funds.
Why Having a Risk Focused Process is Important:
Interest Rate Gain/Loss Per Every 1% Interest Rate Move
Thank you for your interest in this weekly post. It is appreciated!
With kind regards,
Stephen B. Blumenthal
Founder & CEO
CMG Capital Management Group, Inc.
Philadelphia – King of Prussia, PA
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.
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