S&P 500 Index 1935
By Steve Blumenthal
October 8, 2014
All but a few sectors of the stock market are under pressure. Many are below their 50 and 200 day moving averages and more stocks are declining than advancing. The health of the market is in decline; however, the overall trend evidence remains positive and Don’t Fight the Fed remains an important theme.
Big Mo remains in a buy signal and the S&P 500 index’s 13-week EMA remains above its 34-week EMA. Investor sentiment has become more pessimistic which is short-term bullish for the equity market. Those are the positives.
What concerns me most is how the market will react to a Fed QE exit. With Europe, Japan and China in economic decline (if not triple dip recession in both Europe and Japan) coupled with an overpriced (“bubble territory” as mentioned last week) and excessively margined equity market (this week’s special chart) the risk needle remains pointed to the far right. Own equities but hedge.
As for the bond market, after a pretty healthy sell-off, our high yield strategy has moved back into a “buy” signal. The Zweig Bond Model is also back in a “buy” signal reflecting a bullish environment for longer-term treasury and corporate bond exposure.
Included in this week’s Trade Signals:
• Cyclical Equity Market Trend: Cyclical Bullish Trend for Stocks Remains Bullish (as measured by NDR’s Big Momentum indicator and separately by the 13/34-Week EMA S&P 500 Index Trend Chart)
• Weekly Investor Sentiment Indicator – NDR Crowd Sentiment Poll: Neutral (Bearish for the Market)
• Daily Trading Sentiment Composite: Extreme Pessimism (ST Bullish for the Market)
• Excessive Margin Debt is Another Concern
• The Zweig Bond Model: Cyclical Bull Trend for Bonds (supporting longer-term treasury and Corporate bond exposure)
Cyclical Equity Market Trend: Cyclical Bullish Trend for Stocks Remains
Click here to see “How I Think About Big Mo”.
13/34-Week EMA Trend Chart: Cyclical Bullish Trend for Stocks Remains
Favorable trend support can also be seen in the following 13/34-week trend chart. 1900 looks to be the current support level (simply estimating where the current trend may cross lower).
13/34-week EMA – The cyclical bull market’s uptrend remains in place. 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.
The next chart shows the market’s first technical support at 1900. 1850 is the next followed by 1737, 1662 and 1560.
Investor Sentiment 10-7-2014:
NDR Crowd Sentiment Poll: Neutral Optimism – Moving Closer to Excessive Pessimism
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 Neutral 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 68.2. 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.
Daily Trading Sentiment Composite: Extreme Pessimism (ST Bullish for the Market)
Of the above two sentiment indicators, the Daily Trading Sentiment has been the better performing indicator the last 18 months.
Excessive Margin Debt is Another Concern
Higher than 2000 and 2007.
The Zweig Bond Model: “BUY” Signal – Cyclical Bull Trend for Bonds
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.
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.
Concluding Thoughts – CMG Tactical Strategies
The equity market trend remains positive as measured by Big Mo and 13/34-week EMA. Daily sentiment is in the Extreme Pessimism zone (a bullish counter indicator) and weekly sentiment is nearing Extreme Pessimism. As I mentioned in last week’s post, there is good technical support at S&P 500 Index 1900 area.
As for the bond market, the Zweig Bond Model signaled a “BUY” this week and our CMG Managed High Yield Bond Program turned to a bullish HY “BUY” signal.
There is no significant change in our tactical equity strategies: the global asset allocation CMG Tactical Rotation Strategy switched from 50% SPY (S&P 500 Index ETF) and 50% BND (Vanguard Total Bond Market). CMG Opportunistic All Asset Strategy remains overweight equities (approximately 70% equities and 30% fixed income) – notable is that a number of the positions are set to trade over the next two months.
Overall, risk remains elevated, the market remains overvalued and some form of risk protection, in my view, simply makes sense. In regards to total portfolio construction, I favor 30/30/40 with the 30% to equities hedged, 30% to fixed income flexibly managed due to low interest rates and 40% to tactical and alternative strategies. Within that last category, I favor a 10% allocation to precious metals.
More aggressive accounts might overweight equities (something in the order of 70% equities and 30% tactical). I recommend putting in place an “always on” hedge for your long-term focused core equity exposure. It’s a small expense relative to the downside protection it may provide you. When valuations become more attractive and forward return potential is higher, the need to hedge will decrease. (See important disclosures below.)
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.
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.
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