S&P 500 Index 2084
By Steve Blumenthal
December 31, 2014
The weight of evidence continues to support the continuation of the current cyclical bull market trend. Risk is high as the equity market remains overvalued and the cyclical trend aged. Investor sentiment has once again reached Excessive Optimism (suggesting a pause or near-term correction).
Seasonal trends are favorable, years ending in 5 have done exceptionally well historically and 2015 marks the third year in the presidential election cycle (the most bullish in the four year cycle with the first two quarters historically providing most of the gains).
We’ll take a look at the most recent valuation metrics in this coming Friday’s On My Radar to see what the reasonable upside reward looks like relative to downside risk in 2015.
Wishing you a very happy and prosperous New Year!
If you haven’t had a chance to read my recent piece in Forbes, click here for a look at the probabilities for 2015.
Included in this week’s Trade Signals:
- Cyclical Equity Market Trend: Cyclical Bullish Trend for Stocks Remains Bullish
- Volume Demand Continues to Better Volume Supply – Remains Bullish for Stocks
- Weekly Investor Sentiment Indicator:
- NDR Crowd Sentiment Poll: Extreme Optimism (Short-Term Bearish for Stocks)
- Daily Trading Sentiment Composite: Extreme Optimism (ST Bearish 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
Following is a look at the S&P 500 index 13-Week (blue line) vs. 34-Week (red line). Bull and Bear market cycles are clearly defined. Bullish trend when blue line is above red line. EMA or exponential moving average is used. EMA is a type of moving average that is similar to a simple moving average, except that more weight is given to the latest data.
Following is a closer look at the S&P 500 via the ETF “SPY” 2006 to present.
13/34-Week EMA – Note the blue 13-Week EMA line remains above the red 34-Week EMA line. Also note how well this simple, tactical trend indicator has historically captured the cyclical bull and bear market trends. Signals occur when the lines cross.
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 (extreme pessimism) and own equities (but hedged).
Volume Demand Continues to Better Volume Supply – Remains Bullish
Investor Sentiment 12-31-2014:
NDR Crowd Sentiment Poll: Extreme Optimism (Bearish for Stocks)
If you are a new reader, the gray area highlights the historical market performance when Investor Sentiment, as measured by Ned Davis Research, moves into the Extreme Optimism (Bearish) Zone (above the dotted black line or a reading of 66).
The weekly NDR Crowd Sentiment Poll (one of my favorite sentiment indicators) is in the Extreme Optimism zone – bearish for stocks. Note the red arrow and the poor historical equity market performance when the majority of investors are bullish.
“The secret to my success is that I buy when everyone else is selling and I sell when everyone else is buying. Sounds easy to do yet it will be one of the hardest things for an investor to master.” Sir John Templeton, the Union League, Philadelphia 1985
Note that the average value of the indicator at Extreme Optimism (1995 to present) is approximately 68. The idea here is that one wants to be a buyer when everyone else is selling (Extreme Pessimism) and a seller or equity hedger when everyone is extremely optimistic. Big opportunities present infrequently and often happen quickly (typically in periods of panic selling).
Daily Trading Sentiment Composite: Extreme Optimism (Bearish 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.
Given the historically low yield on bonds, it is important to understand what happens to bonds when interest rates rise. However, for now, the weight of evidence continues to support being positioned in longer-term bonds, bond fund ETFs and/or bond mutual funds.
Here is Why Having a Risk Focused Process is Important: Interest Rate Gain/Loss Per Every 1% Interest Rate Move
*Think about the above chart as it relates to trading bond fund ETFs tied to the Zweig Bond Model signals as well as the current high risk environment tied to ultra low interest rates.
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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