S&P 500 Index 2070
By Steve Blumenthal
December 3, 2014
Volatility is picking up in high yield. The decline in the price of oil has heightened concern for the survivability of energy related high yield bonds. Our high yield bond strategy hit its stop-loss level and we moved to short-term treasury and money market exposure. In my 20-plus years of trading the trends in the high yield market, I have never traded this much in such a short period of time. A warning? We’ll see.
Ahead, I believe, is a major high yield bond and sovereign debt default cycle (2015-2016). The high yield market is a pretty good forecaster of economic and market cyclical trends. Stay defensive and risk focused with high yield. I believe it will enable a 2009-like trading opportunity at some point within the next several years.
As for the equity market, the cyclical trend remains positive. I continue to suggest equity exposure (but hedged due to the age of the bull move and current overvaluation).
A quick aside: I was recently asked what we are seeing in our various tactical equity – all asset strategies. Our global tactical rotation ETF strategy remains invested in the S&P 500 Index ETF (SPY) and the Vanguard REIT ETF (VNQ). Those two ETFs are showing the strongest relative strength over commodities (DBC), international equities (EFA), aggregate bonds (BND) and treasury bills (BIL). Within our various tactical equity strategies, we are seeing favorable sector momentum in healthcare, pharmaceuticals, technology and REITs. Large cap continues to outperform small caps.
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 – This Too Remains Bullish
- Weekly Investor Sentiment Indicator:
- NDR Crowd Sentiment Poll: Extreme Optimism (Caution)
- Daily Trading Sentiment Composite: Extreme Optimism (Caution)
- The Zweig Bond Model: 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 and measures a number of market internals to determine 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 look at the S&P 500 via the SPDR ETF SPY 2006 to present.
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.
In summary, both Big Mo (Momentum) and the 13/34-Week EMA suggest that the market remains in a cyclical bull market (uptrending) state. Sentiment (as seen in the next few charts) remains optimistic (which is bearish).
As long as Big Mo and the 13/34-Week EMA remain bullish, buy the dips and own equities (but hedged). The current cyclical bull move is aged.
Volume Demand Continues to Better Volume Supply – This Too Remains Bullish
Investor Sentiment 12-3-2014:
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 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 Optimism (Bearish)
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.
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.
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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