S&P 500 Index 1831
By Steve Blumenthal
January 3, 2014
There have been just three times since 1995 that Investor Crowd Sentiment (overall investor confidence in the stock market) has registered a higher bullish reading than today. To shout caution would be an understatement.
In this shortened holiday week, I combine “On My Radar” with “Trade Signals”. We’ll be back on schedule next week. Wishing you a fun filled weekend, although that might be challenging if you were in the path of winter storm Hercules as were we!
Included in this week’s update:
- Barron’s Interview with Ned Davis: “Time to Brace for a 20% Correction”
- Sentiment Charts – Extreme Optimism Remains: Protect/Hedge Equity Portfolio Exposure
- Cyclical Bull or Cyclical Bear Market Trend Charts – Both Trend Charts Remain Bullish
- The Cyclical Trend for Bonds – Both Trend Charts Remain Bearish
- Ten Year Bond Yields Rising to 3.75% Probable
- My Two Cents – 2014 Investor Game Plan
Barron’s – Ned Davis Interview “Time to Brace for a 20% Correction”
Barron’s: “You’ve warned that a correction is near. Why?”
Davis: “Right now, about 78% of the industry groups are in healthy uptrends. That would have to fall to about 60% for us to say the market had lost upside momentum. We also focus on the Federal Reserve, and it’s still in a very easy mode, despite all the talk about tapering. So, those two indicators are bullish. However, we’ve looked at all the bear markets since 1956 and found seven associated with an inverted yield curve [in which short-term interest rates are higher than long ones] – a classic sign of Fed tightening. Those declines lasted well over a year and took the market down 34%, on average. Several other bear markets took place without an inverted yield curve, and the average loss there was 19% in 143 market days. We don’t see an inverted yield curve anytime soon. So, whatever correction we get next year is more likely to be in the 20% range.”
Click here for the full interview.
Investment Sentiment charts 1-1-2014:
Sentiment Chart 1 – NDR Crowd Sentiment Poll – Extreme Optimism: Protect/Hedge Long Equity Portfolio Exposure
At a current reading of 72.9 (see yellow circle), investor sentiment remains in the Extreme Optimism zone. Note the market movement at past peak readings (red arrow). A correction remains highly probable.
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 –Extreme Optimism
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 indicator has historically captured the cyclical bull and bear market trends. Signals occur when the lines cross.
Cyclical Trend Chart 2 – Big Mo 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 this chart.
The Cyclical Bond Market Trend Charts – both trend charts are bearish (interest rates are rising)
10-Year Government Bond Chart
The current 10-year Treasury Note yield is 3.006% (red arrow above). 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. 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 Note yield is 3.946% (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. Bearish for bonds. Upside target is 4.20% then 4.75%. Downside target is 3.40%.
Ten Year Bond Yields Rising to 3.75% Probable
This from John Murphy at StockCharts.com:
- “A BOND YIELD RISE TO 4% WOULD STILL BE WITHIN MAJOR DOWNTREND AND RETURN YIELDS TO MORE NORMAL 2010 LEVEL…” The monthly bars in Chart 3 shows the downward trend of the 10-Year T-Note yield since 2000 (when it peaked near 7%). A down trendline drawn over that 2000 peak and the one in 2007 (just above 5%) is currently sitting near 4%. That means that a rise in the 10-year yield to 3.75% would still be within a 14-year downtrend in yields. Yields would have to exceed 4% to reverse that downward trend. When looked at from that perspective, a rise to 3.75% appears relatively modest.
My Two Cents – 2014 Investor Game Plan:
I’m expecting a meaningful correction in 2014, call it 15% to 20%. A buy-the-correction opportunity will likely present itself as well. Beyond this, I believe a significant equity market peak occurs in mid to late 2015. It will be important to remain in a financially healthy position to take advantage of that opportunity. If I am wrong, I believe the small cost to hedge will still be worth the expense. Of course, there is no guarantee that my view is correct though the backdrop of low dividend yields, low inflation and low interest rates does point to a low forward 10-year expected return. That means risk is higher today, not lower.
Be mindful of how money compounds over time. Hedge at points of investor bullish sentiment extremes. This tends to happen just a few times each year. Now is one of those periods. Hedge your long-term focused equity exposure. If you hold tactical investments, let the tactical strategies make the moves for you.
The big elephant in the room remains the developed world mired in unmanageable levels of debt and unmanageable entitlements. To combat this, the global central banks, led by the Fed, have embarked on an extraordinary path of money creation and unprecedented market manipulation. We are in a debt deleveraging cycle. Government reach is expanding through regulation and tax reach. Such cycles are different than releveraging cycles.
Make no mistake: Global central bank liquidity (QEs) has fueled the equity markets higher. The Fed has been extraordinarily inventive. There is a limit.
We are in a Sir John Templeton “sell when everyone else is buying” moment in time today. It never feels like risk after a great period of gain. It never feels like a buying opportunity after a significant decline. To be successful, go against your every instinct. My advice is to go against the crowd at points of extreme optimism and extreme pessimism. Individual investors did not buy the low in 2009. They are buying back in today.
For now, the cyclical bull market trend remains positive and it is important to stay with the trend. Given this trend, I currently favor hedging equities vs. selling equities. Hedges initiated at points of optimistic extremes and removed at points of pessimistic extremes. Put options are an inexpensive way to hedge while still giving you the upside potential.
We could certainly go higher. Individual investors and pension managers may accelerate allocations away from bonds and into equities. Foreign investors could and likely will rush away from sovereign debt investments, oppressive tax (i.e. France’s 75% tax rate), potential country bail ins (Cyprus like) and find U.S. equities to be the store of safety. That would be bullish for the U.S. dollar and likely fuel a speculative move higher in U.S. equities.
High priced equity markets can become even more expensively priced. Timing? It really is just a best guess; but when the cyclical bull changes to cyclical bear, I believe we are in for a correction that equals the last two major corrections (2002 and 2008). Another recession? Yes. This year is a maybe. Next year is highly probable. Recessions happen – they are an important, healthy part of the business cycle.
This is an unusual experimental period of time – history will ultimately be decided by the current central bank activity. I think they are way out over their skis. Stay vigilant and construct portfolios that are broadly allocated to a diverse set of risks.
Tactically trade bonds or simply shorten your maturities and be patient. Rates will reset higher and it will be choppy along the way. With yields so low, the risk of loss is great. Tactically trade bond funds/ ETFs using trend following and/or relative strength based trading strategies. There are some excellent strategies – find them. Search the ETF Strategists section on the Morningstar website.
I am attending Index Universe’s 7th Annual ETF Conference in Hollywood, Florida on January 26-28. It is the world’s largest ETF conference. Look for my CMG team members. We will be located in the ETF Strategist section in the sponsor area.
Send me an email if you are attending. I’d enjoy getting together and talking shop with you over a good beer.
It’s time to break out the shovels and the sleds. Wishing you a wonderful weekend and an outstanding 2014!
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
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.
Certain portions of the content may contain a discussion of, and/or provide access to, opinions and/or recommendations of CMG (and those of other investment and non-investment professionals) as of a specific prior date. Due to various factors, including changing market conditions, such discussion may no longer be reflective of current recommendations or opinions. Derivatives and options strategies are not suitable for every investor, may involve a high degree of risk, and may be appropriate investments only for sophisticated investors who are capable of understanding and assuming the risks involved. Moreover, you should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice from CMG or the professional advisors of your choosing. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisors of his/her choosing. CMG is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.
This presentation does not discuss, directly or indirectly, the amount of the profits or losses, realized or unrealized, by any CMG client from any specific funds or securities. Please note: In the event that CMG references performance results for an actual CMG portfolio, the results are reported net of advisory fees and inclusive of dividends. The performance referenced is that as determined and/or provided directly by the referenced funds and/or publishers, have not been independently verified, and do not reflect the performance of any specific CMG client. CMG clients may have experienced materially different performance based upon various factors during the corresponding time periods.
CMG SR Tactical Bond FundTM , CMG Global Equity FundTM and CMG Tactical Equity Strategy FundTM: Mutual Funds involve risk including possible loss of principal. An investor should consider the Fund’s investment objective, risks, charges, and expenses carefully before investing. This and other information about the CMG SR Tactical Bond FundTM, CMG Global Equity FundTM and CMG Tactical Equity Strategy FundTM is contained in each Fund’s prospectus, which can be obtained by calling 1-866-CMG-9456. Please read the prospectus carefully before investing. The CMG SR Tactical Bond FundTM, CMG Global Equity FundTM and CMG Tactical Equity Strategy FundTM are distributed by Northern Lights Distributors, LLC, Member FINRA. NOT FDIC INSURED. MAY LOSE VALUE. NO BANK GUARANTEE.
Hypothetical Presentations: To the extent that any portion of the content reflects hypothetical results that were achieved by means of the retroactive application of a back-tested model, such results have inherent limitations, including: (1) the model results do not reflect the results of actual trading using client assets, but were achieved by means of the retroactive application of the referenced models, certain aspects of which may have been designed with the benefit of hindsight; (2) back-tested performance may not reflect the impact that any material market or economic factors might have had on the adviser’s use of the model if the model had been used during the period to actually mange client assets; and, (3) CMG’s clients may have experienced investment results during the corresponding time periods that were materially different from those portrayed in the model. Please Also Note: Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that future performance will be profitable, or equal to any corresponding historical index. (i.e. S&P 500 Total Return or Dow Jones Wilshire U.S. 5000 Total Market Index) is also disclosed. For example, the S&P 500 Composite Total Return Index (the “S&P”) is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the stock market. Standard & Poor’s chooses the member companies for the S&P based on market size, liquidity, and industry group representation. Included are the common stocks of industrial, financial, utility, and transportation companies. The historical performance results of the S&P (and those of or all indices) and the model results do not reflect the deduction of transaction and custodial charges, nor the deduction of an investment management fee, the incurrence of which would have the effect of decreasing indicated historical performance results. For example, the deduction combined annual advisory and transaction fees of 1.00% over a 10 year period would decrease a 10% gross return to an 8.9% net return. The S&P is not an index into which an investor can directly invest. The historical S&P performance results (and those of all other indices) are provided exclusively for comparison purposes only, so as to provide general comparative information to assist an individual in determining whether the performance of a specific portfolio or model meets, or continues to meet, his/her investment objective(s). A corresponding description of the other comparative indices, are available from CMG upon request. It should not be assumed that any CMG holdings will correspond directly to any such comparative index. The model and indices performance results do not reflect the impact of taxes. CMG portfolios may be more or less volatile than the reflective indices and/or models.
In the event that there has been a change in an individual’s investment objective or financial situation, he/she is encouraged to consult with his/her investment professionals.
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).