S&P 500 Index 1983
By Steve Blumenthal
August 20, 2014
The following commentary is unchanged from last week’s post – the charts are updated through today:
Despite my personal feelings that:
- the cyclical bull market is aged,
- profit margins have likely peaked (and will likely mean revert),
- the market is meaningfully overvalued and over-owned, and
- margin debt is high and cash low
… price momentum (as measured by Big Mo) remains bullish and don’t fight the Fed or the Tape remains the important theme.
Big Mo remains in a cyclically bullish buy signal for equities. The last buy signal was October 14, 2011 when the S&P 500 Index was at 1224.58. As for the bond market, the Zweig Bond Model remains in a cyclically bullish buy signal for bonds and our 20-plus year old high yield tactical bond strategy moved back to a “buy” signal early last week.
Note too, after the recent correction, that short-term Daily Investor Sentiment is now reading extremely pessimistic – which suggests a “buy”. While risk remains high, the weight of technical evidence supports a continuation of the current cyclical bull market in both stocks and bonds.
Included in this week’s Trade Signals:
- Cyclical Equity Market Trend: Cyclical Bullish Trend for Stocks Remains (as measured by Big Mo and 13/34-Week EMA S&P 500 Index chart)
- Weekly Investor Sentiment Indicator – NDR Crowd Sentiment Poll: Neutral (Not Yet Bullish)
- The Zweig Bond Model: Cyclical Bullish Trend for Bonds (supporting bond investment exposure)
Cyclical Equity Market Trend: Cyclical Bullish Trend for Stocks Remains
Click here to see “How I Think About Big Mo”.
13/34–Week EMA Trend Chart: Cyclical Bullish Trend for Stocks Remains
Favorable trend support can also 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.
Investor Sentiment 8-19-2014:
NDR Crowd Sentiment Poll: Neutral (Not Yet Bullish)
The weekly NDR Crowd Sentiment Poll (one of my favorite sentiment indicators) is in the neutral zone – not yet bullish for stocks. Note the red arrow and the poor historical equity market performance when the majority of investors are bullish. As the famous Sir John Templeton said, “the best time to buy is when everyone else is selling”.
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.
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).
Daily Trading Sentiment Composite: Extreme Pessimism (Bullish for Stocks)
Next let’s take a look at trend evidence in the bond market.
The Zweig Bond Model: Cyclical Bullish Trend for Bonds Remains
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.
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.
Concluding Thoughts
The equity market trend remains positive, the bond market trend remains bullish, our CMG Managed High Yield Bond Program recently moved to a buy signal, our CMG Tactical Rotation Strategy remains long SPY (S&P 500 Index ETF) and VNQ (Vanguard REIT ETF) and our CMG Opportunistic All Asset Strategy remains bullish on both equities and fixed income.
I continue to favor a 30-30-40 equity allocation mix. 30% allocated to various equity market exposure with some form of crisis risk protection process built in, 30% to fixed income (tactically managing bond exposure due to near record low interest rates, i.e.: Zweig Bond Model, trend following and price momentum based relative strength) and 40% to tactical equity strategies and other alternative strategies such as managed futures and long/short equity.
Please let me know if you have any questions. (See important disclosures below.)
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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