S&P 500 Index 1843
By Steve Blumenthal
January 22, 2014
I thought I’d highlight the Big Mo Cyclical Trend Chart this week. Despite all the macro economic noise (debt, currency manipulation, QE, political dysfunction, etc.), the market has moved higher. Certainly, the hardest part for investors is determining the primary trend and staying with that trend.
- “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.” – Warren Buffett
Based on the current investor sentiment readings, I believe Buffett’s quote captures where we are today. Yet the market can most certainly move higher. For me, I favor a disciplined process that keeps me in sync with the primary trend.
Each week I post two of my favorite cyclical equity market trend charts. Both charts continue to support the cyclical uptrend. I believe they can do a good job keeping you in trend and out of trouble. Today, I thought we’d take a closer look at Big Mo. It is a weight of evidence model based on price trend and momentum. Several things to note:
- The boxes in the chart’s upper clip show two perspectives on how the S&P 500’s returns have historically been associated with the model’s signals. One box shows the market’s returns based on going long when the model is above the upper bracket and going short when the model is below the lower bracket.
- The yellow highlighted box shows the results when switching to commercial paper instead of going short. (*More on Big Mo below.)
- Following this process, the S&P 500 Index gained 15.3% per year vs. a buy-and-hold gain of 8.7% per year from 1979 to present. (Hypothetical returns, of course. Past performance cannot predict or guarantee future performance.)
For now, the cyclical bull market trend remains in place and the Fed remains supportive; however, investor sentiment remains too bullish. Given this excessive optimism, I like the added protection of hedging long-term equity exposure when investor optimism becomes extreme and removing that protection when investor pessimism becomes extreme.
If you missed some of the market’s primary up move, consider a buy-the-dip mentality as long as the market’s cyclical trend remains bullish. A good re-entry may be when Investor Sentiment moves into the Excessive Pessimism zone on the NDR Crowd Sentiment Poll chart below.
The overriding idea is to find and follow a process that works best for you.
Included in this week’s update:
- Sentiment Charts – Extreme Optimism Remains: Hedge Equity Portfolio Exposure
- Cyclical Equity Market Trend Charts – Both Trend Charts Remain Bullish
- Cyclical Bond Market Trend Charts – Both Trend Charts Remain Bearish
Investment Sentiment charts 1-21-2014:
Sentiment Chart 1 – NDR Crowd Sentiment Poll – Extreme Optimism: Protect/Hedge Long Equity Portfolio Exposure
Investor sentiment most recently peaked at 73.9. This is the second highest reading since January 2004 and the second highest reading recorded since 1995. “To shout caution is an understatement.” A correction remains highly probable – hedge your long-term equity exposure.
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 –Extreme Optimism remains
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.
A short description of Big Mo:
- The Big Mo model uses trend and momentum indicators based on a broad array of NDR Multi-Cap cap-weighted sub-industry group price indices.
- The 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, it becomes a “weight of the evidence” indicator regarding the market’s trend and momentum rather than relying on only one or a few indicators.
- The specific signal-generation calculations for the model’s indicators were determined based on historical testing.
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 2.847% (red arrow above). For some reason StockCharts shows it as 28.47. That really means 2.847%. 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 3.751% (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
Consider a broadly diversified Strategic Asset Allocation plan that includes an overweight to equities, a significant underweight to fixed income along with an overweight to tactical investment strategies.
Allocation weightings can be adjusted as opportunities present. For example, if interest rates move higher an overweight to bonds may make sense. Should the cyclical bull market trend switch to a bear environment, adjust your equity exposure and/or hedge. Such environments are damaging to your net worth.
Emotion plays a significant role in investment success. The best way to avoid emotional mistakes is by setting a strategic plan in place and sticking to a discipline. It is my hope that you find our research insights helpful. Wishing you much success!
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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