S&P 500 Index 1860
By Steve Blumenthal
March 19, 2014
Surprisingly, given the global stress, sentiment remains at extreme optimism. The cyclical bull market trend continues to be the dominant trend and the story supporting the market remains Fed policy (and global central bank liquidity). I update the “Don’t Fight The Tape Or The Fed” chart in this week’s piece.
Included in this week’s update (the usual weekly charts):
- Sentiment Charts – Crowd Sentiment is Extremely Optimistic: Hedge
- Sentiment Indicator Based on Forecasts Gathered From 130 Stock Market Newsletters
- Cyclical Equity Market Trend Charts – Both Trend Charts Remain Bullish
- Don’t Fight The Tape Or The Fed – Bullish
- Provided are several links to learn more about the use of options to hedge
Investment Sentiment charts 3-18-2014:
Sentiment Chart 1 – NDR Crowd Sentiment Poll – Extreme Optimism:
We have quickly moved back to Extreme Optimism (Bearish) in this chart. Investor sentiment most recently peaked at 73.9. This is the second highest reading ever recorded – data 1995 to present. I continue to favor hedging long-term equity exposure until extreme pessimism is reached.
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 – Neutral
Sentiment Chart 3 – Sentiment Indicator Based on Forecasts Gathered From 130 Stock Market Newsletters
The following Investors Intelligence Survey of Advisory Services shows we are experiencing the most optimism since 1987 (NOT A TYPO).
The chart is centered on the concept that the stock market tends to be a manifestation of group psychology in motion, as highs coincide with extreme group enthusiasm and lows coincide with excessive crowd fear. This sentiment indicator uses forecasts gathered from 130 stock market newsletters. Such information can be useful at opinion extremes, because at those extremes the stock market majority is usually wrong. Almost by definition, a top in the market is the point of maximum optimism and a bottom is the point of maximum pessimism.
This is concerning from an extreme sentiment standpoint; however, I will really get concerned when either of the following cyclical trend charts turns bearish. For now, the major cyclical trend for equities remains higher and I continue to lean in that direction.
Following are two of my favorite cyclical market trend charts:
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. The last “B” buy signal was in 2011. 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 to keep your eye on.
Don’t Fight The Tape Or The Fed
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
Conclusion
The conclusion remains the same (see prior Trade Signals here). The cyclical bull market trend for stocks remains in place; however, risk is elevated. A Median PE of 21 based on actual earnings puts the market approximately 20% above its 50 year fair value. Click here for PE and Profit Margin charts.
Sentiment may serve as a guide in determining when to put some form of risk protection in place. Think of it as inexpensive insurance. I will become much more concerned when the cyclical trend turns bearish.
A note on the cyclical trend in interest rates: Rates have been moving lower since the beginning of the year. Here is the most recent trend chart.
While there can be no guarantees in our business, I continue to note a shift towards bond ETFs in our tactical strategies. We continue to hold mostly long equity exposure in our CMG Opportunistic All Asset Strategies as well as our CMG Tactical Rotation Strategy. The CMG Managed High Yield Bond Program moved to a sell signal last week.
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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