S&P 500 Index 2115
By Steve Blumenthal
February 25, 2014
Trend evidence remains favorable yet sentiment has climbed back to Extreme Optimism. Such readings are short-term bearish for the market.
This week, along with the usual trend and sentiment charts, I include a special chart that tracks the amount of total equity market exposure of a group of professional traders. Note the current reading in the Extreme Optimism zone (yellow circle) and the historical 1.1% return per annum when excessive optimism is reached (orange arrow). Also note how much greater the returns are when the professionals are excessively bearish – underweight equities.
It is best to be bullish when the majority are bearish and vice versa.
Special Chart – NAAIM Sentiment Chart
Included in this week’s Trade Signal:
- Cyclical Equity Market Trend: The Primary Trend Remains Bullish for Stocks
- Volume Demand Continues to Better Volume Supply: Bullish for Stocks
- Weekly Investor Sentiment Indicator:
- NDR Crowd Sentiment Poll: Extreme Optimism (short-term BEARISH for stocks)
- Daily Trading Sentiment Composite: Extreme Pessimism (short-term BEARISH for stocks)
- The Zweig Bond Model: The Cyclical Trend for Bonds Remains Bullish
Cyclical Equity Market Trend: The Primary Trend Remains Bullish for Stocks
The active signal is highlighted in yellow.
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”.
13/34–Week EMA Trend Chart: Cyclical Bullish Trend for Stocks
Following is a closer look at the S&P 500 via the ETF “SPY” 2006 to present.
Click here to see “How I think about the 13/34-Week Exponential Moving Average”.
In summary, both Big Mo (Momentum) and the 13/34-Week EMA suggest that the market remains in a cyclical bull market (up trending) state. I believe trend is most important: therefore, buy the dips (on extreme pessimism) as long as the 13/34-Week Blue EMA line is above the Red EMA line and own equities (but hedged as valuations are high, the market bull is aged; thus, overall equity market risk is high).
Volume Demand Continues to Better Volume Supply – Bullish (last signal yellow circle)
- The yellow highlight in upper left shows the S&P 500 Index % Gain per annum when the model is on a buy signal. Also noted is the markets % gain per annum when the model is on a sell signal.
Demand continues to be stronger than selling supply. While no single indicator will ever be perfect, the long-term historical buy and sell signals based on measuring volume demand minus volume supply has done a pretty good job at identifying market turning points. Let’s watch this chart closely.
Investor Sentiment 2-25-2015:
NDR Crowd Sentiment Poll: Extreme Optimism (BEARISH for Stocks)
Click here to see “How I Think About Investor Sentiment”.
Daily Trading Sentiment Composite: Extreme Optimism (BEARISH for Stocks)
The Zweig Bond Model: “BUY” Signal – Cyclical Bull Trend for Bonds Remains Bullish
Historical performance is summarized in the table on the bottom right. The yellow highlight shows the current buy signal for the strategy and historical performance on signal (the model was established in the 1980s – the data is hypothetical). The blue line shows the growth of $100 since April 1, 1967 in comparison to the black line which is the Barclays Aggregate Total Return index. The table at the bottom left compares the two.
Click here for notes on “How To Track The Zweig Bond Model” on your own.
For new readers:
Given the historically low yield on bonds, I believe it is important to understand what happens to bonds when interest rates rise. Bonds simply do not provide the same yield benefit to portfolios and the risk that rates normalize (move higher) is real. The next chart shows the risk and return benefit.
This is why I believe bond allocations should be tactically managed today. The Zweig Bond Model may help you stay in sync with the major trend. Shorten maturities on sell signals and lengthen maturities on buy signals. Also consider relative strength based tactical fixed income strategies that have the ability to move to various fixed income ETFs.
Why Having a Risk Focused Process is Important (as it relates to your Fixed Income exposure):
Interest Rate Gain/Loss Per Every 1% Interest Rate Move
Process:
From an investment management perspective, I’ve followed and written about trend and investor sentiment for many years. I have found that going through the drill each week in a systematic way helps me stay balanced and in line with the market’s primary trend. I believe risk management is paramount in the investment process. When to hedge, when to become more aggressive, etc.
Trade Signals started after a colleague asked me if I could share my thoughts with him. I have 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.
Thank you for your interest in this weekly post. It is appreciated!
With kind regards,
Steve
Social Media Links:
CMG is committed to setting a high standard for ETF strategists. And we’re passionate about educating advisors and investors about tactical investing. We launched CMG AdvisorCentral a year ago to share our knowledge of tactical investing and managing a successful advisory practice.
You can sign up for weekly updates to AdvisorCentral here. This week’s update features the winner of the iPad contest from the Inside ETFs Conference. In case you missed last week’s AdvisorCentral weekly update devoted to the Inside ETFs conference, you can find that here. If you’re looking for the CMG White Paper Understanding Tactical Investment Strategies you can find that here.
AdvisorCentral is being updated with new educational resources we look forward to sharing with you in March. You can always connect with CMG on Twitter at @askcmg and follow our LinkedIn Showcase page devoted to tactical investing.
Stephen B. Blumenthal
Founder & CEO
CMG Capital Management Group, Inc.
Philadelphia – King of Prussia, PA
steve@cmgwealth.com
610-989-9090 Phone
610-989-9092 Fax
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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Written Disclosure Statement. CMG is an SEC registered investment adviser principally located in King of Prussia, PA. Stephen B. Blumenthal is CMG’s founder and CEO. Please note: The above views are those of CMG and its CEO, Stephen Blumenthal, and do not reflect those of any sub-advisor that CMG may engage to manage any CMG strategy. A copy of CMG’s current written disclosure statement discussing advisory services and fees is available upon request or via CMG’s internet web site at (http://www.cmgwealth.com/disclosures/advs).