S&P 500 Index 1893
By Steve Blumenthal
May 14, 2014
I’ve updated the charts and please note that the commentary remains largely unchanged from last week’s post.
Included in this week’s Trade Signals:
- Investor Sentiment: Crowd Sentiment Poll is Nearing Extreme Optimism
- Cyclical Equity Market Trend: Big Mo Remains Bullish
- Zweig Bond Model: Remains a Bullish Signal for Bonds
Investment Sentiment 5-14-2014:
Sentiment Chart – NDR Crowd Sentiment Poll: Nearing Extreme Optimism
Crowd Sentiment Poll (my favorite sentiment indicator) is once again nearing Extreme Optimism (Bearish). Note red arrow and the poor historical equity market performance when the majority of investors are bullish.
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).
Cyclical Equity Market Trend: Big Mo Remains Bullish
How to think about using Big Mo:
I like to think of Big Mo as a risk-timing tool. This is far different than market timing. The idea is to hedge the portion of your portfolio invested in equities against periods of major market risk. While no indicator is perfect and past performance guarantees you nothing in this business, Big Mo has done a good job identifying the major market trends. It is my favorite stock market trend indicator.
The orange box highlights historical performance. The yellow circle marks the last Big Mo trade signal.
The NDR Big Mo Multi-Cap Tape Composite Model was created to give a composite reading on the technical health of the broad equity market. The model uses trend and momentum indicators based on a broad array of our NDR Multi-Cap cap-weighted sub-industry group price indices. Trend indicators are based on the direction of a sub-industry’s moving average, while the momentum indicators are based on the rate of change of the sub-industry’s price index. By including many indicators together in the composite model, the process quantitatively analyzes the “weight of the evidence” regarding the market’s trend and momentum rather than relying on only one or a few indicators.
Additional favorable trend support can be seen in the following 13/34-week trend chart.
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.
Zweig Bond Model: Remains a Bullish Signal for Bonds
This is something you can track and follow yourself. The process is highlighted in the large orange box above. There are five steps as listed. The data goes back to the 1960s and I’ll share more detailed data in the near future. Over that stretch of time, the model has done a good job at enhancing return and reducing risk in rising rate environments (highlighted orange rectangle). It is risk of rising rates we need to be most concerned with today.
The bottom section of the chart shows the combined score of the model’s five measurements. A buy is generated on scores > 0 and a sell on scores < 0. The model remains in a buy signal. ETFs such as BND can be used to express the view.
I received a larger than normal number of emails asking if we can run this strategy in a SMA (managed account). The answer is that while I believe it is a solid investment process, we run several strategies on our managed platform that I believe are superior.
As a quick aside: If you choose to trade following the Zweig model or any other process for that matter, there are several important questions to ask yourself: Do you have the time to follow the model every day? Do you have the infrastructure in place to trade across multiple accounts? Do you have the conviction and belief necessary to follow the process through both losing trades and winning trades? Can you stick to the process over time?
I have traded our high yield trend following strategy for more than 20 years. I can honestly say there were a few times I thought I was smarter than the process. Emotion and ego are strong forces. You have to eliminate them and stick to the process. No small thing. I frequently say that half the battle is having a sound process and the other half is having the discipline to stick to the process.
So if you don’t have the time and/or infrastructure, then find some flexible bond funds and/or managed bond strategies.
The Seasonally Challenging May to October Period Immediately Ahead
Click here for Seasonal Tendencies http://www.cmgwealth.com/ri/trade-signals-seasonal-tendencies/
Concluding Thoughts
No major changes:
The cyclical trend remains positive as measured by Big Mo, investor sentiment is mixed and the Fed is supportive for now. The seasonally challenged May to October period has arrived. I believe that putting hedges in place remains the prudent thing to do. Risk is so significantly elevated due to Fed manipulation. The system is more leveraged than it was in 2008 and this cyclical bull is aged. Tactical strategies can further your portfolio diversification in important ways.
CMG Tactical Strategies Update
We have seen a momentum shift in favor of energy, emerging markets and fixed income in our CMG Opportunistic All Asset Strategies. Our CMG Tactical Rotation Strategy moved from an April position of 50% TLT (iShares Treasury Bonds) and 50% VNQ (Vanguard REIT) to 50% DBC (Commodities) and 50% VNQ (Vanguard REIT) for May. High yield bond prices have flattened but the strategy remains in a buy signal.
With kind regards,
Steve
Stephen B. Blumenthal
Founder & CEO
CMG Capital Management Group, Inc.
Philadelphia – King of Prussia, PA
steve@cmgwealth.com
610-989-9090 Phone
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:
http://www.theoptionsguide.com/the-collar-strategy.aspx
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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Written Disclosure Statement. CMG is an SEC registered investment adviser principally located in King of Prussia, PA. Stephen B. Blumenthal is CMG’s founder and CEO. Please note: The above views are those of CMG and its CEO, Stephen Blumenthal, and do not reflect those of any sub-advisor that CMG may engage to manage any CMG strategy. A copy of CMG’s current written disclosure statement discussing advisory services and fees is available upon request or via CMG’s internet web site at (http://www.cmgwealth.com/disclosures/advs).