S&P 500 Index 1775
By Steve Blumenthal
January 29, 2014
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 1-28-2014:
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. I mentioned a few weeks ago, “To shout caution is an understatement.” I continue to favor hedging 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 – Now Neutral. Watch for a move to Extreme Pessimism to signal a better equity environment.
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 2.693% (red arrow above). For some reason StockCharts shows it as 26.95. That really means 2.693%. 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 3.633% (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 themselves. 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 putting 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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