S&P 500 Index 1755
By Steve Blumenthal
February 5, 2014
Fear is clearly rising and investor sentiment is moving from excessive optimism toward excessive pessimism. I share this Trade Signals with you today via email. Included are a few extra charts that look at what I believe are logical correction targets. We are at one of those technical support levels today.
I wrote on January 3, Time to Brace for a 20% Correction. The market is down just 6% from its recent high of 1850. I suggest some probable levels but, most importantly, feel that some form of disciplined approach that risk manages long-term equity exposure is mandatory.
Let’s take a look at the most recent Investor Sentiment readings and identify logical market correction targets (technical support levels).
As a quick aside, we have had a number of requests to send Trade Signals out via email every Wednesday so back by popular demand, here it is. On My Radar will continue to be emailed on Friday’s. I hope you find the information helpful.
Included in this week’s update:
- Sentiment Charts – Crowd Sentiment is now neutral: Hedge
- S&P 500 Index – Logical Correction Targets
- Don’t Fight the Tape or the Fed
- Cyclical Equity Market Trend Charts -Both Trend Charts Remain Bullish
- Cyclical Bond Market Trend Charts – Both Trend Charts Remain Bearish
Investment Sentiment charts 2-4-2014:
Sentiment Chart 1 – NDR Crowd Sentiment Poll – Neutral Optimism: Better but still Protect/Hedge long-term focused equity portfolio exposure.
Investor sentiment most recently peaked at 73.9. This is the second highest reading ever recorded – data 1995 to present. I mentioned a few weeks ago, “To shout caution is an understatement.” I continue to favor hedging long-term equity exposure.
Consider removing hedges and adding to or rebalancing to your targeted equity exposure when pessimism moves to extreme. We are nearing that point. I reflect several logical technical market support levels below shown in the S&P 500 Correction Targets chart.
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).
Sentiment Chart 2 – NDR Daily Trading Sentiment Composite – Now reading Extreme Pessimism. Aggressive traders might consider removing hedges and adding to positions especially given the market support at 1730 (see S&P 500 Correction Targets chart below). Personally, I favor the slower moving NDR Crowd Sentiment Poll.
S&P 500 Correction Targets
Several things to note:
- Support was broken at 1770 marking the end to a series of higher highs and higher lows (see small red line upper right of chart)
- Testing the next level of logical support at 1729.86 today (top of large blue box)
- A 38.2% retracement of the cyclical trend low to recent high at 1850 takes the market to 1585.64 (red box)
- A 50% correction of the cyclical bull trend takes the market to 1503.62.
- I like to see what investor sentiment looks like when corrections near or are at logical levels of technical price support. See a summary of my thoughts on this in concluding comments below.
The most logical level of technical support, from my viewpoint, is 1600 plus or minus 30 points. That would be a correction of nearly 15%. I wrote a piece on January 3, 2014 titled “Time to Brace for a 20% Correction”. I’m not sure if it is going to be 6%, 10%, 15% or 20% but to get a feel for what those levels might look like I share the following:
If you are wondering how long this cyclical bull has traveled without a 10% correction. Here is a great look:I will recommend removing hedges when the NDR Crowd Sentiment Poll moves to Extreme Pessimism. I especially like extreme readings tied to levels of logical technical support.
Source: (BespokeInvest)
While I favor the Crowd Sentiment data, I also look at a few other sentiment charts each week. The following Investors Intelligence Survey of Advisory Services shows the most optimism since 1987 (NOT A TYPO).
As for the major cyclical trend for equities, the trend remains higher. Here are the two charts I watch each week:
Cyclical Equity Market Trend Charts – Both Trend Charts Remain Bullish
Cyclical Trend Chart 1 – 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.
Cyclical Trend Chart 2 – The Big Mo Multi-Cap Tape Composite continues to signal a bullish uptrend for the market. Note the 84.6% Profitable Long Trades and the Gain/Annum when “Bullish” investing in the S&P 500 Index and the “Switch” to cash on Bearish readings. While no process is perfect, this is a chart I have favored for many years. Keep an eye on Big Mo.
Don’t Fight the Tape or the Fed
It is still a buy the dip correction in my view (and I do agree with all the really bad data out there. I believe profit margins have peaked, the markets are overpriced, the developed countries are in a debt crisis and the global economy is weak. However, my additional two cents is to stay with the primary trend and remain more focused on active risk management and broad asset diversification vs. calling tops. It is just nearly impossible to do).
Cyclical Bond Market Trend Charts – Both Trend Charts Remain Bearish (interest rates are rising)
10-Year Government Bond Chart
The current 10-year Treasury Note yield is 2.667% (red arrow above). For some reason StockCharts shows it as 26.67. That really means 2.667%. The 13-week EMA is the blue line and the 34-week EMA is the red line. Trend change occurs when the lines cross. Rates are in a rising uptrend. This is bearish for bonds. Upside target is 3.30% then 3.75%. Downside target is 2.25%.
30-Year Government Bond Chart
The current 30-year Treasury Bond yield is 3.653% (red arrow). The 13-week EMA is the blue line and the 34-week EMA is the red line. Trend change occurs when the lines cross. Rates are in a rising uptrend. This is bearish for bonds. Upside target is 4.20% then 4.75%. Downside target is 3.40%.
Conclusion
Consider a broadly diversified Strategic Asset Allocation plan that includes an overweight to equities, a significant underweight to fixed income and an overweight to tactical investment strategies. Hedge the equity exposure from time to time. I favor a collared option strategy for hedging purposes and feel investor sentiment is one of the most optimal ways to determine when to enter and exit such hedge (see below).
Emotion plays a significant role in investment success. The best way to avoid emotional mistakes is by putting a strategic plan in place and sticking to a discipline. It is my hope that you find our research insights helpful. Wishing you much long-term investment success!
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
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