S&P 500 Index 1917
By Steve Blumenthal
August 6, 2014
Along with each week’s equity and fixed income trade signal charts, this week I include a chart showing low available cash and a one showing high margin debt.
Big Mo remains in a cyclically bullish buy signal for equities and the Zweig Bond Model remains in a cyclically bullish buy signal for bonds. Investor sentiment is eased from extreme optimism yet remains in a zone that has historically resulted in poor returns.
Don’t Fight the Fed remains in play and the cyclical trend evidence remains bullish. I lean cautiously long. Overall, risk remains high. I favor hedging your equity exposure and having broad portfolio exposure that includes tactical, managed futures and other alternative strategies.
Included in this week’s Trade Signals:
- Cyclical Equity Market Trend: Cyclical Bullish Trend for Stocks (as measured by Big Mo)
- Investor Sentiment: NDR Crowd Sentiment Poll is Neutral (but in a negative trend)
- Zweig Bond Model: Cyclical Bullish Trend for Bonds (supporting bond investment exposure)
- Low Cash – High Margin Debt
- Stock Mutual Fund Cash to Asset Ratio
- Margin Debt Record High
Cyclical Equity Market Trend: The Cyclically Bullish Trend for Stocks Remains
Click here to see “How I Think About Big Mo”.
Investor Sentiment 8-5-2014:
Sentiment Chart – NDR Crowd Sentiment Poll: Extreme Optimism (Bearish)
Crowd Sentiment Poll (my favorite sentiment indicator) eased out of the Extreme Optimism (Bearish) zone this past week. Note the red arrow and the poor historical equity market performance when the majority of investors are bullish.
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 when everyone else is buying (Extreme Optimism).
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).
Zweig Bond Model: Remains in a Bullish Buy Signal for Bonds
Click here for notes on “How To Track The Zweig Bond Model”.
Low Cash – High Margin Debt
This is a measure of cash relative to margin at brokerage firms. When margin debt is high and cash is low, the amount of potential buying power to fuel the market higher is limited. Margin debt is more concerning for it gives little flexibility to the margined investor when markets correct, i.e., margin calls and forced selling. The latest figures show a more leveraged situation than in 2007.
Stock Mutual Fund Cash to Asset Ratio
Margin Debt Record High
Margin debt is higher than 1987, 2000, and 2007.
Additional Information along with Charts on Trend, Sentiment and Interest Rate Risk
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.
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.
Interest Rate Trend, as measured by 13/34-week EMA, is lower for both the 30-year Treasury Bond and the 10-year Treasury Note (see blue dotted lines). This supports the bullish trend for bond funds, bond ETFs and other intermediate- to longer-term bond exposure.
Concluding Thoughts
No change in commentary: The equity market trend remains positive, the bond market trend remains bullish (lower interest rate trend), our CMG Managed High Yield Bond Program remains in a sell 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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