February 25, 2021
By Steve Blumenthal

A very brief OMR post this week. Good friend Jonathan D.T. Ward, author of China’s Vision of Victory, was in the press this morning, and I thought I’d share the interview with you. With the Ukraine-Russia conflict in mind and the recovery rally in equities from yesterday’s low underway, for investors, while geopolitical risks remain large, the further deterioration in the market technicals is concerning. In the Trade Signals section, I argue for three potential downside targets and believe 3,300 is the most probable. Of course, no guarantees, I could be wrong.

Grab a coffee and no need for the chair, this week’s post is a quick read. I share several photos from Western Canada in the personal section with an excellent extra hot oat milk latte in hand. I know, high maintenance… but happy!

If you are not signed up to receive the free weekly On My Radar letter, you can sign up here.

---

Ward: “China is Putin’s ‘Greatest’ Supporter”

Please click below to watch Fox Business’ interview today of Jonathan D.T. Ward, author of China’s Vision of Victory.

Courtesy of Fox Business

---

Trade Signals – Cyclical Bear Market Targets

February 23, 2022

Posted each Wednesday, Trade Signals looks at several of my favorite equity markets, investor sentiment, fixed income, economic, recession, and gold market indicators.

For new readers – Trade Signals is organized into three sections:

• Market Commentary
• Trade Signals — Dashboard of Indicators
• Charts with Explanations

Market Commentary

Notable this week:

Earnings don’t move the overall market; it’s the Federal Reserve Board…
focus on the central banks, and focus on the movement of liquidity…
most people in the market are looking for earnings and conventional measures.
It’s liquidity that moves markets.

– Stan Druckenmiller,
Former Chairman and President of Duquesne Capital

I landed late last night in Vancouver, British Columbia, Canada. As the plane touched down, I saw the news that Russia had invaded Ukraine. Futures are down over 2.5% heading into Thursday’s (2-24-22) trading. Our prayers are for a peaceful outcome. The news is moving the markets. From an investment perspective, our starting conditions going into the year were not good.

U.S. equity markets are over-valued, over-leveraged (margin debt), and investors are fully invested (historical stock ownership as a percentage of household assets). Over long periods of time, it is growth in earnings that drive stock prices higher. But it has not been an earnings story over the last handful of years; it’s been a central bank-driven liquidity story that has pushed prices to all-time highs vs. earnings. With inflation spiking, the Fed is forced to pull liquidity from the system.

The geopolitical events are real and concerning; however, remember it is liquidity that moves markets. Investment conditions have changed and we are seeing it in the continued deterioration in market breadth.

Now is a good time to set some cyclical bear market targets. Let’s take a look at three charts.

Chart 1: S&P 500 Long-Term Trend

The orange line in the center of the chart plots the Real S&P 500 Index vs. its dotted long-term trend line (red arrow). The bottom section in the chart plots a blue line that tells us how far above and below the market is from its long-term trend.

Note how the market moves above and below the line over long periods of time. I marked the dates of prior secular bull market highs. At some point, the next secular bear market will take us back down near or below the dotted blue long-term trend line. One target to consider is 2,700 (my guess for where that long-term trend line sits today).

For what it’s worth, I don’t believe we get there anytime soon. A 30% market decline, as you’ll see in Chart 2, will take the S&P 500 to 3,300. My best guess is the pain will be too great and the Fed to “pivot.” In late 2018, the market was down just 20% before the now-famous Powell Pivot that arrested the decline. Unlike then, the Fed is looking at 7.5% inflation. The word “transitory” is no longer in play. To fight inflation, they are pulling liquidity from the system. I believe they pivot at  -30%, not -20%. Logic points to a cyclical bear market correction in the 30% range putting the downside target at 3,300.

Chart 2: Monthly S&P 500 Index with MACD

Minus 30% takes S&P 500 Index down to approximately 3,300. It’s also where the 50-month 200-day moving average sits (red line in chart) and where the 200-day moving average sits (approx. chart not shown). Note the red 50-month moving average line.

Note too, that all corrections since 2011 have come back to the 50-month MA trend line. If you can’t see how far the market is above the 50-month moving average trend line, call your eye doctor. It’s also important to note that the MACD cross just signaled sell (bottom section of chart). The last time the black line crossed below the red line (lower section in the chart) was in 2018.

Chart 3: Median Price-to-Earnings (P/E) Suggests Fair Valuation at ~3,052

Early next month, I’ll share with you my favorite valuation charts. One of my favorites is Ned Davis Research’s Median P/E, which looks at monthly P/E ratios going back to 1964. The 57.9-year median P/E is 17.4. This suggests Median Fair Value should be 3,052. With near-zero percent interest rates, many argue (correctly, in my view, assuming interest rates don’t rise) median fair value should be higher. That would put a target somewhere between Fair Value and Overvalued.

Chart 4: S&P 500 Index vs. Margin Debt as a Percentage of GDP

The short-term signals are bearish, the intermediate-term signals are bearish or nearing sell signals (i.e., NDR CMG Long/Flat) and the long-term signals are nearing sell signals as well. And speaking of liquidity, the trend in margin debt vs. GDP just signaled sell. Orange line vs. the dotted black line. Note recent cross lower. Such crosses tend to happen infrequently.

The seat belts should already be on. Use rallies to hedge and/or lighten up. A peaceful outcome in Ukraine would likely provide the market with a good relief rally. The most logical downside target to me is between Fair Value at 3,052 and 3,300.

The Zweig Bond Model remains in a sell signal. While it is all about probabilities in the investment business and no process is perfect, the sell signal has been spot on. I’m watching for it to line up with my slowing economy 2022 fundamental view and turn bullish. That would be a go-point for me to consider trading into long-duration Treasury bonds.

Not a recommendation for you to buy or sell any security. For information purposes only. Please talk with your advisor about needs, goals, time horizon, and risk tolerances.

---

Personal Note – Photos from Banff, British Columbia

Thanks for reading and have a great week!

With kind regards,

Steve

Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.

Consider buying my newly published Forbes Book, described as follows:

With On My Radar, Stephen Blumenthal gives investors a game plan and the advice they need to develop a risk-minded and opportunity-based investment approach. It is about how to grow and defend your wealth.

If you are interested in the book, you can learn more here.

---

Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Executive Chairman and CIO. Steve authors a free weekly e-letter entitled, “On My Radar.” Steve shares his views on macroeconomic research, valuations, portfolio construction, asset allocation and risk management.

Click here to receive his free weekly e-letter.

Follow Steve on Twitter @SBlumenthalCMG and LinkedIn.

---

IMPORTANT DISCLOSURE INFORMATION

This document is prepared by CMG Capital Management Group, Inc. (“CMG”) and is circulated for informational and educational purposes only. There is no consideration given to the specific investment needs, objectives or tolerances of any of the recipients. Additionally, CMG’s actual investment positions may, and often will, vary from its conclusions discussed herein based on any number of factors, such as client investment restrictions, portfolio rebalancing and transactions costs, among others. Recipients should consult their own advisors, including tax advisors, before making any investment decision. This material is for informational and educational purposes only and is not an offer to sell or the solicitation of an offer to buy the securities or other instruments mentioned. This material does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors which are necessary considerations before making any investment decision. Investors should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, where appropriate, seek professional advice, including legal, tax, accounting, investment or other advice.

Investing involves risk. Past performance does not guarantee or indicate future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by CMG), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CMG. Please remember to contact CMG, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. CMG is neither a law firm, nor a certified public accounting firm, and no portion of the commentary content should be construed as legal or accounting advice.

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.

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. See in links provided citing limitations of hypothetical back-tested information. Past performance cannot predict or guarantee future performance. Not a recommendation to buy or sell. Please talk to your advisor.

Information herein has been obtained from sources believed to be reliable, but we do not warrant its accuracy. This document is a general communication and is provided for informational and/or educational purposes only. None of the content should be viewed as a suggestion that you take or refrain from taking any action nor as a recommendation for any specific investment product, strategy, or other such purpose.

In a rising interest rate environment, the value of fixed income securities generally declines and conversely, in a falling interest rate environment, the value of fixed income securities generally increases. High-yield securities may be subject to heightened market, interest rate or credit risk and should not be purchased solely because of the stated yield. Ratings are measured on a scale that ranges from AAA or Aaa (highest) to D or C (lowest). Investment-grade investments are those rated from highest down to BBB- or Baa3.

NOT FDIC INSURED. MAY LOSE VALUE. NO BANK GUARANTEE.

Certain information contained herein has been obtained from third-party sources believed to be reliable, but we cannot guarantee its accuracy or completeness.

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 professional.

Written Disclosure Statement. CMG is an SEC-registered investment adviser located in Malvern, Pennsylvania. 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, or exclusively determines any internal strategy employed by CMG. 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 www.cmgwealth.com/disclosures. CMG is committed to protecting your personal information. Click here to review CMG’s privacy policies.