S&P 500 Index 1491
By Steve Blumenthal
January 23, 2013
RISK OFF
Raise Cash and/or Hedge Long Equity Exposure.
See January 17, 2013 Trade Signals for Risk Off commentary.
Included are the usual Investor Sentiment charts (way too much optimism – bearish) as well as three charts on the intermediate term cyclical trend (bullish). I comment on likely support level targets. Of course, we’ll measure investor pessimism should we test those levels (which I believe is a high probability).
Investment Sentiment charts 1-23-13:
Chart 1. NDR Daily Trading Sentiment Composite. Excessive Optimism – RISK OFF (hedge).
Chart 2. NDR Crowd Sentiment Poll – Extreme Optimism – RISK OFF (hedge).
Cyclical Trend Remains Bullish:
While I comment above on risk management tied to investor sentiment extremes, I want to note that the current cyclical bullish trend remains intact. This is within the framework of what I believe is a long-term secular bear market trend.
One of the charts I review each week is the NDR’s Big Mo Composite chart. Over time it has done a pretty good job at identifying the markets’ intermediate term trend so I like to keep an eye on it.
Just recently, NDR rebuilt the Big Mo Multi-Cap Tape Composite and ran a test with bullish and bearish signals and the results are encouraging (below). I have always looked at Big Mo to get a feel on the cyclical trend and will continue to do so; however, I am having our research team do a deep dive to evaluate if a trading strategy built on these signals is of value to include on our platform of liquid tactical strategies.
For now, this chart shows that the cyclical trend remains bullish (S arrows equal Sell, B arrows equal Buy).
The next chart looks at the 13 week EMA compared to the 34 week EMA.
A trend change occurs when the 13 week moves above or below the 34 week. Today, the short-term cyclical trend remains bullish (red circle).
Lastly, to get a feel for important support and resistance levels, I find this next chart useful:
Look at the below chart with the blue line on the right (blue arrow)and it shows support near 1350. A correction from extremely overbought levels would likely correct the market back to 1422, then 1370 with strong support at 1350.
This chart shows the cyclical trend to be bullish. Note the drop below the mid (dotted) line that signaled the last cyclical bear market (red boxes).
Tactical Investments and other Trading – Alternative Strategies (important note)
Please note: Within your portfolio construction process, I do not recommend hedges against your tactical strategy allocations as they already offer a diversifying return stream to your overall portfolio. There is no need as the strategy should be considered within the framework of your total portfolio for its return and non-correlating risk benefits. If a manager has a process with edge and a proven history to execute his trading process, then ask yourself if the strategy can make money in both up and down trending markets and monitor accordingly. Make sure the manager is sticking to his process. I believe that transparency and liquidity are mandatory. Of course, past performance cannot predict or guarantee future performance.
30/30/40
I continue to favor a broadly diversified portfolio that includes allocations to three asset categories. To me, balanced today is 30% Equity (hedged from time to time), 30% Fixed Income (tactically managed) and 40% Tactical-Trading-Alternatives. You may allocate differently based on your risk level, age, needs, time horizon, etc.
I hope you find this information to be helpful. Please feel free to forward it to a friend or have them go to http://www.cmgwealth.com/ and subscribe to our free letter at the bottom of our home page.
With warm regards,
Steve
Stephen B. Blumenthal
Founder & CEO
CMG Capital Management Group, Inc.
1000 Continental Drive, Suite 570
King of Prussia, PA 19406
steve@cmgwealth.com
610-989-9090 Phone
610-989-9092 Fax
Active hedging strategy
Within the long-term secular bear environment I believe we are in, I favor hedging the long-term equity portfolio exposure tied to periods of Extreme Optimism and removing those hedges tied to periods of Extreme Pessimism. As you can see in the above charts, there are just a few times each year that the market moves into “Extreme”. I like put options and covered calls against long equity exposure. Never sell “naked” put or call options. Another idea is to budget a percentage of your long equity exposure to actively put on and take off exposure to a leveraged inverse index based ETF.
I believe that we are in a period of time which favors actively hedging long equity exposure. I like putting hedges on when investors are extremely optimistic and removing hedges when investors are extremely pessimistic. The focus on the long equity portion of your portfolio is to enhance return, reduce risk and preserve capital. Go to www.cboe.com to learn more about options. All investments involve risk.
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