S&P 500 Index 2100
By Steve Blumenthal
February 18, 2014
Every once in a while I post a chart on “margin debt”. Like available cash, margin debt can be used to buy stocks. Such demand can fuel stock prices higher. Problems tend to occur when you reach extreme. Evidence suggests we have reached such point.
Today, overall margin debt is higher than it was at the 2000 and 2007 peaks. What I’m watching for is a turn lower from its peak. Chart 1 shows the current level of margin debt. Chart 2 looks at where margin debt is relative to a 15-month trend. Concerning is the recent drop below that trend.
Special Chart #1– Margin Debt
Special Chart #2– Margin Debt vs. 15-Month Smoothing
The orange lines (red arrows) mark previous periods in time when margin debt as a percentage of GDP dropped below its 15-month moving average line. Except for a head fake in 2011 and 2012, it has done a pretty good job at calling the prior market peaks.
Think about this in the context of an overvalued market. However, trend remains positive, the Fed supportive and sentiment neutral. I’m keeping a very close eye on my trend indicators (Big Mo and 13/34-Week EMA) as risk remains high. Following are the usual weekly charts.
Included in this week’s Trade Signals:
- Cyclical Equity Market Trend: Cyclical Bullish Trend 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)
- 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
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 (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.
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 2-18-2015:
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.
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.
Why Having a Risk Focused Process is Important:
Interest Rate Gain/Loss Per Every 1% Interest Rate Move
What relative strength is telling us about market leadership: As a quick note, our tactical all asset strategies are mostly long equity funds and ETFs. Recent trades have favored large cap value and technology. Our tactical HY strategy remains invested in HY funds/ETFs and our tactical fixed income strategy, after being invested in longer-term Treasury bonds and International Sovereign bonds, is now showing leadership to HY and emerging market debt.
Thank you for your interest in this weekly post. It is appreciated!
With kind regards,
Social Media Links:
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.
You can sign up for weekly updates to AdvisorCentral here. This week’s update features the winner of the iPad contest from the Inside ETFs Conference. In case you missed last week’s AdvisorCentral weekly update devoted to the Inside ETFs conference, you can find that here. If you’re looking for the CMG White Paper Understanding Tactical Investment Strategies you can find that here.
AdvisorCentral is being updated with new educational resources we look forward to sharing with you in March. You can always connect with CMG on Twitter at @askcmg and follow our LinkedIn Showcase page devoted to tactical investing.
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.
Several other links:
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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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