S&P 500 Index 1949
By Steve Blumenthal
September 2, 2015
Since last week’s post the S&P 500 Index has rallied 77 points bounce off of last week’s Investor Sentiment Extreme Pessimism low. A gain of 4.11%. Following are several charts that look at the 2011 correction and today. Let’s see if we can get a sense for reasonable bounce targets (levels to either raise cash or re-establish hedges).
Sentiment remains Extremely Pessimistic which is short-term bullish for stocks. The overall trend is bearish for equities. I also note that the Zweig Bond Model is back to a sell signal which is bearish for bonds.
Along with the usual weekly charts, I share the following on S&P 500 Index near term upside and downside targets:
Two logical downside price targets:
1) This first chart looks at the S&P 500 Index rally from the 2011 correction low to present. The yellow area highlights 38.2% Fibonacci retracement target of 1724. It will be important for the 2014 low at 1820.66 to hold. The recent correction bottomed at 1867. If 1820.66 breaks, the next logical target is between 1575 and 1650 (a 50% retracement of the 2011 to 2015 gain is a correction to 1600). Interestingly, Median PE valuations over the last 51 years says the S&P 500 Index is fairly priced at approximately 1600. That would be an attractive re-entry point. Be prepared to over-weight equities should we see a move to 1600.
2) This next chart looks at the rally from the 2009 crisis low to present. I mark several levels of logic support numbers 1,2,3 and 4. A 38.2% retracement of the 2009-2015 gain puts the market at 1571. Near the 1600 level in the chart above. Again, a point where the market would be fairly valued.
Let’s next look at near term upside targets:
The trend has shifted. I mentioned last Wednesday to expect an Extreme Pessimism bounce. We are seeing that bounce. So what might you do? Underweight and hedge your equity exposure. I continue to like 30% equities (hedged), 30% fixed income (tactically managed do to ultra low rates) and 40% alternatives (defined as anything other than traditional buy-and-hold). Of course, this is not a specific recommendation for you as we know little of your needs, time horizon, risk level and goals. I remain in a “sell the rallies” (or hedge) mindset.
The next chart notes some bounce targets. Note the 2014 low at 1972 and the February 2015 low at 1981. We rallied to those levels and fell back down (orange line). You’ll see this week that investor sentiment remains extremely pessimistic so a rally makes sense. I like hedges in place on rallies to 1980 to 2000 area. There remains heavy resistance between 2030 and 2044 (dotted red line).
Included in this week’s Trade Signals:
- Cyclical Equity Market Trend: Sell Signal
1. CMG NDR Large Cap Momentum Index: Sell Signal
2. 13/34-Week EMA on the S&P 500 Index: Sell Signal
3. NDR Big Mo: Neutral – Nearing a Sell Signal
- Volume Demand is greater than Volume Supply: Sell signal for Stocks
- Weekly Investor Sentiment Indicator:
NDR 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: Neutral signal
- U.S. Recession Watch – My Favorite U.S. Recession Forecasting Chart: Signaling No Recession
- The Zweig Bond Model: The Cyclical Trend for Bonds is Bearish
Cyclical Equity Market Trend: The Primary Trend Is Bearish for Stocks
1. CMG NDR Large Cap Momentum Index – Sell Signal
N = a sell signal or get neutral on your equity exposure.
B = a buy signal
Performance attributions are in the bottom of the chart. Tested is the period from 1991 to present.
2. 13/34–Week EMA Trend Chart: Cyclical Sell Trend for Stocks
Following is a closer look at the S&P 500 via the investable/tradable ETF “SPY” 2006 to present. Note the dotted red line (far right): It marks the point where the 13-week moving average dropped below the longer-term 34-week moving average. This is confirming a major change in trend to a new Cyclical Bear market trend.
Sell rallies with a target price on the SPY at just below 196.03. That is now immediate overhead resistance. For now, the October 2014 low of 179.25 has held. That level marks important support.
Click here to see “How I think about the 13/34-Week Exponential Moving Average”.
3. Big Mo Multi-Cap Tape Composite Model – The Signal Remains a Buy (noted is significant deterioration in trend evidence) 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.
Volume Demand Vs. Volume Supply – Remains on a SELL signal
Volume Demand Vs. Supply is in a “sell” signal. You can view past archived posts to see what the chart looks like.
Investor Sentiment 9-1-2015:
NDR Crowd Sentiment Poll: Extreme Pessimism from Below (Short-Term Bullish for Stocks)
- Sentiment readings below 57 are considered to be Extremely Pessimistic
- Historically such readings are bullish for equities
- Last week, sentiment was at 55. The reading yesterday was 49.7
- To put this into prospective, the lowest reading in 2013 was 55.2 and the lowest reading in 2014 was 53.3. It hit a low of 38.8 in 2011. The lowest recorded reading was 30.9 in 2009 at the market low point in early 2009
- In summary, the current extreme pessimism reading is in an area that has led to market rallies
- Expect a rally
Daily Trading Sentiment Composite: Bullish (short-term Bullish for stocks)
- Sentiment readings below 41.5 are considered to be Extremely Pessimistic
- Historically such readings are bullish for equities
- The reading on 8-26-15 was a near record low of 8.9. It remains in the Extreme Pessimism zone reading 16.9 as of yesterdays close.
- THIS IS THE SECOND LOWEST READING DATING BACK TO 1995. THE LOWEST WAS IN EARLY 2009. WE ARE NEAR THAT LEVEL
- It has been below 10 on only two other occasions since 1995. To say extreme is an understatement
- Expect a rally
Don’t Fight the Tape or the Fed – Neutral Reading
The indicators that comprise this reading 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”.
The tape is negative, yet the Fed remains on hold. Neutral Reading here.
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.
One of my favorite recession watch charts is NDR’s Economy – Index of Coincident Economic Indicators. 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.
It is currently signaling NO Recession.
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 25% return to overcome a 20% loss and 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: “SELL” – Signaling a Switch to Long-Term Bond Exposure: The model is currently bearish 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.
In summary, hedge and raise cash on rallies.
Include liquid alternative strategies (defined as anything other than traditional equity and bond market buy and hold) in your portfolios. I continue to favor the following mix: 30% equities (hedged), 30% fixed income (tactically managed) and 40% alternatives.
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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Finally, NDR has politely asked me not to sho several of their charts. This blog has become well followed and with the viral aspect of the internet and social media, the request is with respect to the thousands of other paying clients of NDR. I understand this and am going to work with them to see if we can find a solution that works for both them and us (you and me).
With kind regards,
Steve
Stephen B. Blumenthal
Chairman & CEO
CMG Capital Management Group, Inc.
Philadelphia – King of Prussia, PA
steve@cmgwealth.com
610-989-9090 Phone
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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