S&P 500 Index 2032
By Steve Blumenthal
January 21, 2014
Don’t Fight the Tape or the Fed evidence remains favorable (following chart) as do my two favorite cyclical trend indicators (Big Momentum and 13/34-Week EMA). Daily Investor Sentiment is reading Extreme Pessimism – a short-term bullish signal for stocks.
Looking at bonds, the Zweig Bond model as well as our tactical fixed income relative strength strategies remain bullish on bonds. High Yield Bonds remain in a “buy” signal according to my 20+ year managed HY bond strategy.
A handful of economists are now calling for a 1% 10-year Treasury yield (currently 1.85% after touching 1.77% on January 15). Most continue to sit in the higher interest rate camp. With rates so low (risk high), I favor a rules based tactical approach to bond exposure.
Tomorrow will likely be an exciting day for the markets as ECB’s Mario Draghi steps to the stage. He is expected to announce aggressive QE accommodation. We may finally see what “what-ever-it-takes” means. The road block to action has been the Germans – fasten your seat belts. Also, let’s keep a close eye on the Fed.
Special Chart – Don’t Fight The Tape Or The Fed
Included in this week’s Trade Signals:
- Cyclical Equity Market Trend: Cyclical Bullish Trend for Stocks Remains
- Volume Demand Continues to Better Volume Supply – Remains Bullish for Stocks
- Weekly Investor Sentiment Indicator:
- NDR Crowd Sentiment Poll: Neutral Optimism (short-term neutral for stocks)
- Daily Trading Sentiment Composite: Extreme Pessimism (short-term bullish for stocks)
- The Zweig Bond Model: The Cyclical Trend for Bonds Remains Bullish
Cyclical Equity Market Trend: Cyclical Bullish Trend for Stocks Remains
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”.
13/34-Week EMA Trend Chart: Cyclical Bullish Trend for Stocks Remains In Place
Following is a closer look at the S&P 500 via the ETF “SPY” 2006 to present.
Click here to see “How I think about the 13/34-Week Exponential Moving Average”.
In summary, both Big Mo (Momentum) and the 13/34-Week EMA suggest that the market remains in a cyclical bull market (up trending) state. Buy the dips (on extreme pessimism) and own equities (but hedged as valuations are high, the market bull is aged; thus, overall equity market risk is high).
Volume Demand Continues to Better Volume Supply – Remains Bullish
Demand continues to be stronger than selling supply. 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. Let’s watch this chart closely as well in 2015.
Investor Sentiment 1-14-2015:
NDR Crowd Sentiment Poll: Neutral (Neutral for Stocks)
Click here to see “How I Think About Investor Sentiment”.
Daily Trading Sentiment Composite: Extreme Pessimism (short-term bullish for stocks)
The Zweig Bond Model: “BUY” Signal – Cyclical Bull Trend for Bonds Remains Bullish
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, I believe it is important to understand what happens to bonds when interest rates rise. Bonds simply do not provide the same yield benefit to portfolios and the risk that rates normalize (move higher) is real. The next chart shows the risk and return benefit.
This is why I believe bond allocations should be tactically managed today. The Zweig Bond Model may help you stay in sync with the major trend. Shorten maturities on sell signals and lengthen maturities on buy signals. Also consider relative strength based tactical fixed income strategies that have the ability to move to various fixed income ETFs.
Today, the weight of evidence continues to support being positioned in longer-term bonds, bond fund ETFs and/or bond mutual funds.
Why Having a Risk Focused Process is Important:
Interest Rate Gain/Loss Per Every 1% Interest Rate Move
Thank you for your interest in this weekly post. It is appreciated!
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
610-989-9092 Fax
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
https://www.trademonster.com/marketing/upcomingWebinarEvents.action?src=TRADA2&PC=TRADA2&gclid=CKna3Puu6rwCFTRo7AodRiQAlw
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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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