S&P 500 Index 2063
By Steve Blumenthal
August 12, 2015
I believe China’s surprise Yuan devaluation keeps the Fed on hold. Raising rates will further strengthen the dollar. A stronger dollar may ultimately be our greatest market risk – triggering crisis in the $9 trillion EM U.S. dollar denominated debt.
While the U.S. economy looks ok, the global economy is at or near recession. We are in a debt driven deflationary spiral. So as market stress intensifies, we collectively hope and pray for Fed support. Watch for the Fed signaling that September is off the table. All about that Fed – until it’s not.
Sentiment is again reading extreme pessimism. Historically, such readings are bullish for the market. Big Mo and the13/34-Week EMA trend charts remain in buy signals. The Zweig Bond Model’s buy signal, triggered several weeks ago, continues to look good. The 10-year Treasury yield has declined from 2.45% to 2.10%.
Following a defined process is important. For me, the overall trend, while weakening, remains bullish. Risk remains high. I continue to favor hedging equity exposure, allowing tactical processes and other alternative strategies to further portfolio diversification.
Included in this week’s Trade Signals:
- Cyclical Equity Market Trend: The Primary Trend Remains Bullish for Stocks
- Volume Demand is greater than Volume Supply: Buy signal for Stocks
- Weekly Investor Sentiment Indicator:
- DR Crowd Sentiment Poll: Extreme Pessimism (short-term Bullish for stocks)
- Daily Trading Sentiment Composite: Extreme Pessimism (short-term Bullish for stocks)
- Don’t Fight the Tape or the Fed: Modestly Bearish – Watch Out for Minus Two
- U.S. Recession Watch – My Favorite U.S. Recession Forecasting Chart: Signaling No Recession
- The Zweig Bond Model: The Cyclical Trend for Bonds is Bullish
Cyclical Equity Market Trend: The Primary Trend Remains Bullish for Stocks
The active signal is highlighted in yellow. The historical performance statistics are highlighted in orange. See important disclosures at the bottom of this report.
Big Mo follows a weight of evidence approach to determine the market’s cyclical trend.
Click here to see “How I Think About Big Mo”. NDR disclosure information.
13/34–Week EMA Trend Chart: Cyclical Bullish Trend for Stocks
Following is a closer look at the S&P 500 via the investable/tradable ETF “SPY” 2006 to present. Note the test of the 200-day MA line. It held yesterday.
Click here to see “How I think about the 13/34-Week Exponential Moving Average”.
In summary, both price momentum indicators, Big Mo and the 13/34-Week EMA, remain on “buy” signals – signaling a cyclical bull market (up trending) state.
However, one of my favorite demand vs. supply indicators moved to a sell signal on June 30, 2015. Returns when “On Sell” are highlighted in yellow. The data dates back to1982.
Volume Demand Vs. Volume Supply – Buy signal (Buy signal triggered on 7-30-2015)
- The yellow highlight in the upper left shows the S&P 500 Index % Gain/Annum when the model is on a buy signal. Also noted is the market’s % gain per annum when the model is on a sell signal and gain/annum with 89.5% profitable long trades (orange arrows).
While no single indicator will ever be perfect, the long-term historical buy and sell signals based on measuring volume demand minus volume supply has done a pretty good job at identifying market turning points.
Combined with positive trend and investor sentiment, this recent buy signal has caused me to lean more bullish.
Investor Sentiment 8-12-2015:
NDR Crowd Sentiment Poll: Extreme Pessimism from Below (Short-Term Bullish for Stocks)
Click here to see “How I Think About Investor Sentiment”.
Daily Trading Sentiment Composite: Neutral (short-term Bullish for stocks)
Don’t Fight the Tape or the Fed
The indicators that comprise this next chart are a combination of NDR’s Big Mo and the 10-year Treasury yield. I did a piece recently titled “Watch Out For Minus Two”. Look at the historical returns when trend turns negative along with an up move in interest rates. I’ll continue to post this chart each week as we are near a minus number 2 (orange arrow points to -1).
U.S. Recession Watch – My Favorite U.S. Recession Forecasting Chart: Signaling No Recession
Because the largest equity market declines occur during periods of recession, it is important to monitor for the probability of recession. Wall Street economists have a very poor track record in correctly timing recession. The next chart is my favorite recession watch chart. It is systematic (rules based) and looks to the stock market as its leading indicator. 79% of its signals, dating back to 1948, have been correct. Here is how it works:
Note the up and down arrows in this next chart.
- The down arrows occur when the S&P 500 index falls below its 5-month smoothed moving average line by 3.6% or more.
- The up arrows occur when the S&P 500 index rises above its 5-month smoothed moving average line by 4.8% or more.
- The idea here is that the stock market is a good leading indicator of future economic activity.
- You can also see +1, -5, -1, etc. above several of the down arrows. For example, a +1 means that the recession signal occurred 1 month after the actual recession started. Note that recessions are only known in hindsight. A -5 means that the recession signal was 5 months early.
- All in all I think it has a pretty good historical track record in predicting recession. Let’s keep an eye on this chart as the stock market tends to decline 30% to 40% or more during recessions.
What you can do is reduce your equity exposure on sell signals. There are also a number of ways you can hedge your downside risk exposure. Remember that it requires a 100% return to overcome a 50% loss. The largest losses tend to come during times of recession.
Finally, as we do each week, let’s take a look at the bond market. Following is my favorite process to identify when to shorten high quality bond maturities and when to lengthen maturities. ETFs can be used to position into short-term exposure (examples like “BIL”) or long-term bond market exposure (examples like “TLT”, “LQD” and “AGG”). Please note that this is not a specific recommendation for you as I have no understanding of your personal financial situation.
The Zweig Bond Model: “BUY” – Signaling a Switch to Long-Term Bond Exposure: The Model is Bullish on Bonds
Click here to see how you read the above chart.
Click here for notes on “How To Track The Zweig Bond Model” on your own.
Thank you for your interest in this weekly post. It is appreciated! This is a process that has helped me over the years to better stay in line with the market’s primary trend(s). It helps me avoid the many daily distractions (commentator, analyst, CNBC, etc.) and stay disciplined in my investment process. I hope you find it helpful in your investment and advisory work with your clients.
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With kind regards,
Steve
Stephen B. Blumenthal
Chairman & CEO
CMG Capital Management Group, Inc.
Philadelphia – King of Prussia, PA
steve@cmgwealth.com
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610-989-9092 Fax
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A Note on Investment Process:
From an investment management perspective, I’ve followed, managed and written about trend following and investor sentiment for many years. I find that reviewing various sentiment, trend and other historically valuable rules based indicators each week helps me to stay balanced and disciplined in allocating to the various risk sets that are included within a broadly diversified total portfolio solution.
My objective is to position in line with the equity and fixed income market’s primary trends. I believe risk management is paramount in a long-term investment process. When to hedge, when to become more aggressive, etc.
Trade Signals History: Trade Signals started after a colleague asked me if I could share my thoughts (Trade Signals) with him. A number of years ago, I found that putting pen to paper has really helped me in my investment management process and I hope that this research is of value to you in your investment process.
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).