S&P 500 Index 1828
By Steve Blumenthal
February 19, 2014
Trade Signals is a weekly piece that looks at investor sentiment and identifies levels of both extreme optimism and extreme pessimism. Those extremes may provide a path towards a proactive risk management process. I favor establishing put option hedges when crowd sentiment becomes excessively optimistic and removing put option hedges when Crowed Sentiment becomes exceedingly bearish. Given today’s Crowd Sentiment Poll neutral reading, I remain in the hedged camp.
Included in this week’s update:
- Sentiment Charts – Crowd Sentiment is neutral: Hedge
- Don’t Fight the Tape or the Fed – Bullish
- Cyclical Equity Market Trend Charts -Both Trend Charts Remain Bullish
- Cyclical Bond Market Trend Charts – Both Trend Charts Remain Bearish
Investment Sentiment charts 2-18-2014:
Sentiment Chart 1 – NDR Crowd Sentiment Poll – Neutral Optimism: I continue to favor hedging long-term focused equity portfolio exposure until Extreme Pessimism is reached.
Investor sentiment most recently peaked at 73.9. This is the second highest reading ever recorded – data 1995 to present. I continue to favor hedging long-term equity exposure until extreme pessimism is reached.
Consider removing hedges and adding to or rebalancing to your targeted equity exposure when pessimism moves to extreme. We may have missed that point for now. Upside for now is preferable to the small cost to hedge.
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).
Sentiment Chart 2 – NDR Daily Trading Sentiment Composite – Neutral.
Nearing a Record High
While I favor the Crowd Sentiment data, I also look at a few other sentiment charts each week. The following Investors Intelligence Survey of Advisory Services shows the most optimism since 1987 (NOT A TYPO).
As for the major cyclical trend for equities, the trend remains higher. Here are the two charts I watch each week:
Cyclical Equity Market Trend Charts – Both Trend Charts Remain Bullish
Cyclical Trend Chart 1 – 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.
Cyclical Trend Chart 2 – The Big Mo Multi-Cap Tape Composite continues to signal a bullish uptrend for the market. Note the 84.6% Profitable Long Trades and the Gain/Annum when “Bullish” investing in the S&P 500 Index and the “Switch” to cash on Bearish readings. While no process is perfect, this is a chart I have favored for many years. Keep an eye on Big Mo.
Don’t Fight the Tape or the Fed
Because the cyclical trend is bullish, it is still a “buy the dip” correction in my view (yet I do think that another major correction similar to 2008 lies ahead). My additional two cents is to stay in line with the primary trend and remain focused on active risk management and broad asset diversification vs. calling tops. It is just so nearly impossible to do.
Cyclical Bond Market Trend Charts – Both Trend Charts Remain Bearish (interest rates are rising)
10-Year Government Bond Chart
The current 10-year Treasury Note yield is 2.705% (red arrow above). For some reason, StockCharts shows it as 27.05. That really means 2.705%. The 13-week EMA is the blue line and the 34-week EMA is the red line. Trend change occurs when the lines cross. Rates are in a rising uptrend. This is bearish for bonds. Upside target is 3.30% then 3.75%. Downside target is 2.25%.
30-Year Government Bond Chart
The current 30-year Treasury Bond yield is 3.682% (red arrow). The 13-week EMA is the blue line and the 34-week EMA is the red line. Trend change occurs when the lines cross. Rates are in a rising uptrend. This is bearish for bonds. Upside target is 4.20% then 4.75%. Downside target is 3.40%.
Conclusion
The cyclical bull market trend for stocks remains in place; however, risk is elevated. A Median PE of 21 based on actual earnings puts the market approximately 20% above its 50 year fair value. Click here for PE and Profit Margin charts.
Sentiment may serve as a guide in determining when to put some form of risk protection in place. Think of it as inexpensive insurance. I will become much more concerned when the cyclical trend turns bearish.
A note on the cyclical trend in interest rates – rates have been moving lower and are nearing a point that may turn the cyclical trend for bonds from bear to bull. While there can be no guarantees in our business, I note that we have begun to see a shift towards bond ETFs in our tactical strategies.
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
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