S&P 500 Index 1420
By Steve Blumenthal
December 27, 2012
Included in this week’s Trade Signals are the following:
- Updated Sentiment Charts – sentiment is neutral. I cautiously favor “RISK ON”.
- High Yield Bond signal remains in a “buy”.
- Russell 2000 Index Chart – nearing resistance.
- S&P 500 Index daily chart June 2011 to present.
- S&P 500 Index monthly chart back to 1998.
- Cyclical bull remains in tact.
Investment Sentiment Charts 12-27-12:
Chart 1. NDR Daily Trading Sentiment Composite. For now I cautiously favor RISK ON (see additional commentary below).
Chart 2. NDR Crowd Sentiment Poll – remains in the neutral zone. This too favors RISK ON.
Active hedging strategy:
Within the long-term secular bear environment I believe we are in, I favor hedging the long-term equity portfolio exposure tied to periods of Extreme Optimism and removing those hedges tied to periods of Extreme Pessimism. As you can see in the above charts, there are just a few times each year that the market moves into “Extreme”. I like put options and covered calls against long equity exposure. Never sell “naked” put or call options. Another idea is to budget a percentage of your long equity exposure to actively put on and take off exposure to a leveraged inverse index-based ETF.
I believe that we are in a period of time which favors actively hedging long equity exposure. I like putting hedges on when investors are extremely optimistic and removing hedges when investors are extremely pessimistic. The focus on the long equity portion of your portfolio is to enhance return, reduce risk and preserve capital. Go to www.cboe.com to learn more about options. All investments involve risk.
IWM – Russell 2000 Small Cap Chart:
Note that the majority of the year-to-date gain occurred from January into early February (green box). The blue dotted line marks overhead resistance while the solid blue line marks support. Given recent Excessive Optimism in the Daily Sentiment Charts and the resistance overhead, the 84 to 85 price area on IWM seems to me the probable point to buy put options to hedge long equity exposure. I would like to see the Crowd Sentiment Poll in the Extreme Optimism zone but there is no guarantee it reaches Extreme in the next few weeks. I believe it is best to put an option hedge in place into a rally as opposed to a sell off. MACD has turned negative – a short term warning for the markets trend.
I am waiting for Sentiment to reach Extreme in both of the above Sentiment Charts; however, you may wish to hedge sooner. I am simply sharing my personal game plan. I’ll update my thinking again next week.
Sentiment – Outlook – Risk Management Summary
My broader view is that I continue to believe we are in a long-term secular bear environment and that the equity market upside will be constrained as we struggle with the weight of excessive debt, excessive regulation, increased taxation, irresponsible spending and unmanageable entitlements.
I believe there will be a recession in 2013 and a painful period for the equity markets. Too much debt constrains growth; and today’s low yields and modestly high valuations simply don’t support attractive forward 10-year return expectations.
Finally, here are 3 different charts on the S&P 500 Index:
The first looks at the last 18 months and shows little net progress in the S&P 500 (+4.72%). The second looks back at the last 13 years (speaks for itself). The third is my favorite chart identifying the cyclical bull and bear market periods. For now, the cyclical trend remains bullish. I’ll show this chart frequently as we progress through 2013. A trend change occurs when the week 13 MA crosses below the week 34 MA (or visa versa). Note the red circle on last chart.
(Note the gain from 1356 to 1420 – a gain of just 4.72% over the last 1.5 years.)
Cyclical bull and bear market periods:
Happy New Year!
With warm regards,
Steve
Stephen B. Blumenthal
Founder & CEO
CMG Capital Management Group, Inc.
1000 Continental Drive, Suite 570
King of Prussia, PA 19406
steve@cmgwealth.com
610-989-9090 Phone
610-989-9092 Fax
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