June 22, 2018
By Steve Blumenthal

“The bottom line is that the wisdom of investing passively depends, ironically, on some people investing actively.
When active investing is dismissed totally and all active efforts cease, passive investing will become imprudent
and opportunities for superior returns from active investing will reemerge. At least that’s the way I see it.

– Howard Marks, Oaktree Capital Management, “Investing Without People”

“The one thing I’ve learned over the past 40 years, these price patterns,
it’s the same old story so often just with different characters, different times, different plots.”

– Paul Tudor Jones, Goldman Sachs Conference, comments on the next recession

My big break came in early June 1979 at Veterans Stadium (“the Vet”) in Philadelphia. I had tried for months to convince Penn State Soccer Coach Walter Bahr to come see me play.  My high school sat just a few miles down the road from Coach’s office. I sent notes to Coach with game times but no luck.  When he agreed to see me, he said, “Sorry son, you just don’t have enough experience.”  He offered up the try-out day with the walk-on boys in the fall. That was a polite way of saying no chance.

At the Vet in 1979, we were the pre-game to the Philadelphia Fury vs. New York Cosmos game.  The great Pelé had recently retired from the Cosmos but, another soccer legend, Franz Beckenbauer, was starting at center back.  Our game was up first: Pennsylvania vs. Virginia.

It was our first of several regional games. I played for Pennsylvania. Three of my teammates had already committed to Penn State and I wanted to prove to myself that I belonged.  Two goals and an assist later, I was happy.  After the game, it got better.  I learned that Coach Bahr was in the stands and in charge of selecting the MVP.  And he picked me!

The following Monday, Coach called me into his office and invited me to come out pre-season with the scholarship kids.  “No promises,” he said, but he promised to give me a good look.

It wasn’t until my sophomore year at Penn State that I learned the full story of that day at the Vet. “Who’s that left back?  And find out where he’s going to school.” Coach Bahr asked of his assistant.

“It’s Stevie Blumenthal,” Mike Ditchfield told Coach, “and he’s coming to Penn State.”  Ditchfield told me Coach sat back in his seat, puffed on his cigar and smiled.  Frankly, as I look back, I think I owe a great deal to the lazy Virginia player assigned to defend me. Absent that day, my soccer life may have gone a different path but wouldn’t have Coach.  The most important things I learned from him had nothing to do with soccer.  I am endlessly grateful.

This Monday afternoon I learned that Coach Bahr passed away peacefully at the age of 91.  I stopped what I was doing, quieted my mind and said a prayer, “Welcome home, Coach, and thank you.”   What an influence he had on my life.  He was an unassuming humble man, always deflecting praise and quick with a joke… what an impact he had on many lives.

As a self-absorbed young adult, it was not until my senior year that I learned the giant of a man that Walter Bahr was and forever will be in U.S. Soccer history.  I know… not good.  College, books, teammates, friends, beer and, of course, girls dominated my mind at the time. You remember those awesome years.  But great people in our lives have a way of knocking us on the head and guiding us down a higher path. Coach was that great. His greatest gift to me and everyone he touched had little to do with soccer and everything to do with creating success in life!

But great at soccer he most certainly was… An Olympian in 1948.  Captain of the 1950 U.S. World Cup team, Bahr assisted on the goal that defeated England 1-0.  That win is considered the greatest upset in World Cup history.

Bahr collected a throw-in from Ed McIlvenny on June 29, 1950, in Belo Horizonte, Brazil, and took a shot from about 25 yards that Joe Gaetjens deflected past goalkeeper Bert Williams with a diving header late in the first half. The U.S. held on for a 1-0 win, a triumph portrayed in the 2005 movie, The Game of Their Lives.

A team of soccer unknowns, the U.S. won the famous match against an England side that included Alf Ramsey and Tom Finney, who later earned knighthoods.

“Walter Bahr was one of the greatest people to ever be part of soccer in the United States,” former U.S. Soccer Federation President Sunil Gulati said. “Not only was he a pioneer and a fantastic ambassador for our game over many years, he was a true gentleman.”

Coach told us the story of the dinner the night before with the England team.  How the captain, with British wit, toasted to a 10-0 England thrashing.

We knew we weren’t in the same class as the English team,” Bahr said. “But anybody worth their salt when they go out onto the field, they always think there’s some possibility that something can happen, that they could steal a victory.

As much as we were very thrilled and pleased to win the game, most of us felt the same way: `How’s that English club going to go back home and face their fans?’ It was a lot easier for us to explain the victory than for them to go back and explain that defeat.

Then a knuckleheaded young adult, I’m embarrassed to say I had no idea as to his fame.  And that was part of what I appreciated most about Coach.  How fitting that Coach “graduated physical life” at the start of the 2018 World Cup.  With body broken down, he probably wanted to make sure he wouldn’t miss a game… from a higher view.

Born on April 1, 1927, Bahr was a graduate of Temple University and coached Temple from 1970-73 and Penn State from 1974-88, leading the Nittany Lions to the NCAA semifinals in 1979 (my freshman year).  A team of 11 freshman, three seniors, a 5’8” outstanding goalie and the top player in college soccer, that year’s Hermann Trophy Award winner, Jim Stamatis.  Coach earned United Soccer Coaches College Coach of the Year that year.

Coach would stop practices and call us into the center of the pitch, “Look, just take a look.”  To the west was the setting sun.  His message to our collective group of very strong egos… stay humble!  “There is so much more that is much bigger than you,” and pause to let us take it in and then say, “Let’s call it a day.”

Forget that coffee and favorite chair.  Find a spot on the couch and take in some great World Cup soccer this weekend if you’re so inclined.  I’ll be watching with cold IPA in hand held high in toast to a great man. Perhaps this headline sums him up well, US legend Walter Bahr handled fame with quiet calm.  A nice tribute.

It seems completely unfitting to transition to all things finance, but I do want to share with you a piece I came across this week that ties into today’s intro quotes. It’s from Oaktree’s Howard Marks on passive investing.  Something important to keep on your radar.  I also share with you what I’m seeing in my favorite long-term equity market indicator, the Ned Davis Research CMG U.S. Large Cap Long/Flat Index.

Finally, thanks for indulging me and know how much I appreciate you reading my missives each week.  Have a wonderful weekend and go call or write a note to your coach (or that important person in your life)!

♦ If you are not signed up to receive my weekly On My Radar e-newsletter, you can subscribe here. ♦

Included in this week’s On My Radar:

• Howard Marks — Investing Without People
• What I’m Seeing Today Across 22 Sub-Industry Sectors
• Trade Signals — Gold Sell Signal, Extreme Bullish Optimism Receding, Long-term Equity Trend Remains Mod Bullish, Bonds Bearish
• Personal Note — Walter Bahr

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Howard Marks — Investing Without People

“The bottom line is that the wisdom of investing passively depends, ironically, on some people investing actively.
When active investing is dismissed totally and all active efforts cease, passive investing will become imprudent
and opportunities for superior returns from active investing will reemerge. At least that’s the way I see it.

– Howard Marks, Investing Without People

You can read Marks’ full piece by clicking here.

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What I’m Seeing Today Across 22 Sub-Industry Sectors

My favorite market risk-on/risk-off indicator is the Ned Davis Research CMG U.S. Large Cap Long/Flat Index, which measures “market breadth.”  Market breadth is a bit of a geek-ish name to non-industry folks, but it simply is a measure of market activity, such as how many stocks are advancing higher in price and how many are declining, how many are making new highs and new lows, is the trading volume advancing or decreasing in size and is price momentum strong or weak by looking at the number of stocks that are in uptrends and downtrends.

Technicians like “breadth” measurements for two main reasons:

• Breadth thrusts are often present at the start of major bull markets.
• Breadth nearly always weakens before prices do at major peaks.

The NDR/CMG process measures market breadth by analyzing the overall technical strength across 22 individually measured sub-industry sectors.  The process measures the trend of each of the sub-industry sectors, evaluating the rate of change in price momentum over short-term and long-term time frames and directional trend of each sub-industry sector (a list of the 22 sectors is below – more on that in a second).

We measure short-term price momentum, intermediate-term moving average crosses (though we don’t use it because so many others do) and you may be familiar with the “golden cross” that compares the 50-day moving average price vs. the 200-day moving average price.  In total, we analyze the price activity in each sector looking at the short-term, intermediate-term and long-term (defined as approximately 150- to 300-day moving average price trends).  The index process also considers several mean-reverting indicators, such as deviation from trend and relative strength but let’s save that deeper geek dive for another day.

Take a look at the chart that follows.  The most important line to follow is the blue model equity line in the middle section of the chart.  It is the combined total score across the 22 sub-industry sectors.  Think of it as “market breadth” or the combined weight of evidence measurement of what is going on in the stocks that make up the S&P 500 Index.

Here is how you read the chart:

• Markets do best when the model equity blue line is moving up. A defined uptrend. Breadth nearly always weakens before prices do at major peaks… fewer and fewer stocks are moving the market higher (recall tech stocks in 1999 and financials in 2007).
• When the model equity line is above 70, the index stays 100% invested. It defines a very strong bullish market. Therefore, you want to give the bull market the benefit of the doubt even if the blue line starts to turn down.
• When the model equity line is between 60 and 70 and the trend is moving higher, the index stays 100% invested. If the blue trend line is moving lower, and is lower than it was approximately fifty days prior, it signals some caution is suggested and the index scales out some market risk exposure moving to 80% invested with 20% moving to T-Bills.
• When the model equity line is between 50 and 60 and the trend continues to move lower, the index de-risks equity exposure even more to 40% invested with 60% moving to T-Bills.  With greater breadth deterioration comes greater risk. If in the 50 to 60 zone and the trend turns back up, the index moves immediately back to 100% invested.
• When the model equity line is below 50 and the trend is moving lower, the index scales the remaining balance into cash with 0% invested in equities (“Flat”) and 100% moving to T-Bills.  The most significant periods of risk come when the majority of sub-industries are breaking down.
• You’ll find the model’s statistical data at the bottom of the chart.
• Down arrows show levels of exposures.  Up arrows mark “B” for long signals.

Bottom line: The current Index Model Composite Score is 65.64% (yellow highlight with the red circle).  That’s in the moderately bullish zone, but the composite score is trending lower.  It signals some degree of caution.  The yellow highlight with the blue circle shows the index model is 80% invested.

In simple terms: If you have similar low level of interest in the markets as does my wife, Susan, (she just wants to know the basic summary), as I told her recently, think of the stock market as a leading economic indicator.  Recessions are when all the bad stuff happens and all of the hundreds of millions of investors investing in stocks doing ongoing research, making buying and selling decisions… all of that shows up in price.  If you have an army of 100 individuals going into battle and half of your army goes down, you don’t have a very strong army anymore and the risk of defeat is significantly elevated. Hence, if the NDR CMG US Large Cap Long/Flat Index Composite Score drops below 50, it is telling us that there is considerable weakness across 22 sub-industry sectors and we might be heading towards another recession.  While there are certainly no guarantees with this process or any other, I like it because it gives me a statistically significant, non-emotional rules-based way to measure risk and reward and allocate accordingly.

Further, it is just one of the trading strategies I use and since none are perfect, I like diversifying to several different trading strategies to further seek growth but do so in a way that helps me protect my backside.

With that index summary out of the way, let’s take a look under the hood as I share a few thoughts next with what I’m seeing in the data (next chart).

Here’s my quick take:

• Each sector can have a score of 0 to 100
• Higher scores are better than lower scores
• The best market breadth sector scores (most bullish) are:
  • Automobiles and Components
  • Media
  • Health Care Equipment and Services
• A number of sectors are what I’d call “moderately bullish” including:
  • Energy, Materials, Capital Goods, Professional Services, Consumer Durables
  • Retailing, Food and Staples Retailing, Pharmaceuticals, Biotech and Life Sciences
  • Financials, Insurance, Software and Services and Technology Hardware and Equipment
• The weakest are:
  • Telecommunication Services, Utilities, Food, Beverage and Tobacco, Household and Personal Products

Overall, most sectors are weakening as is reflected in the above chart (yellow highlight red circle).  If your quant geek mind is clicking in the same direction as mine, I see a new sector trading strategy in this data.  I’ve got my research team on it.

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Trade Signals — Gold Sell Signal, Extreme Bullish Optimism Receding, Long-term Equity Trend Remains Mod Bullish, Bonds Bearish

S&P 500 Index — 2,771 (06-20-2018)

Notable this week:

Notable this week is a sell signal in gold.  The 13-week exponential moving average trend had dropped below the 34-week trend line.   You’ll see in the next chart that investor optimism is coming off a near record high bullish investor bias.  Generally speaking, that’s a short-term negative indicator for equity markets.

Here is how you read the graph:

• Plotted in red is the daily reading going back to 2006.
• I’ve drawn a red line across the top and highlighted the “Excessive Optimism” zone in yellow.
• Note the prior extreme readings (the peaks)…  there are not too many of them.

Next, note the S&P 500 Index performance when investors are Excessively Optimistic, neither too bullish or bearish or Excessively Pessimistic.

Data from 1994 to present:

• Yellow marks the current zone.

Data from 2006 to present:

• Yellow marks the current zone.

Bottom line: The excessive bullish data suggests short-term caution and is a short-term negative for equity markets.

Trade Wars are heating up and is a concern.  The longer-trend model for equities, the Ned Davis Research CMG U.S. Large Cap Long/Flat signal, remains moderately bullish, signaling 80% large-cap exposure and the 13-week EMA vs. 34-week EMA trend remains positive.  Our shorter-term momentum/trend models are signaling more caution.  Overall, equities remain above the important 200-day MA line, while the yields on the 10-year and 30-year Treasurys remain below 3.07% and 3.22%… important levels to watch.  A break above those levels likely presents additional challenges for both the equity and fixed income markets.  To that end, the Zweig Bond Model remains in a sell signal on high quality fixed income, favoring short-term Treasury Bill ETFs over long-term Treasury Bond ETFs.

Bottom line: The overall weight of evidence continues to support a moderately bullish market outlook.  Yet, keep in mind that the cyclical bull is aged and valuations are high.  This coupled with extreme optimism and the four-year cycle pattern suggests considerable caution.  Participate and protect.  Have a stop-loss risk management process game plan in place.  I favor diversifying to trading strategies.  More defense today.  After the next recession when valuations and forward returns become attractive again… then more offense. 

The next section walks you through all of the Trade Signals charts.

Click HERE for the latest Trade Signals.

Important note: 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. 

Long-time readers know that I am a big fan of Ned Davis Research.  I’ve been a client for years and value their service.  If you’re interested in learning more about NDR, please call John P. Kornack Jr., Institutional Sales Manager, at 617-279-4876.  John’s email address is jkornack@ndr.com.  I am not compensated in any way by NDR.  I’m just a fan of their work.

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Personal Note — Walter Bahr

My family knows how much Coach Bahr means to me.  Brianna asked me this morning if I’d be writing about Coach.  I said, “Yes and with a tear.”  She said to make sure I include a photo with that early 1980s ugly “big hair.”  I told her the short shorts were not so cool either.

Here is a photo from days long ago, though it seems like just yesterday.

One last note: our field was named Jeffrey Field.  Bill Jeffrey was the head coach of the 1950 U.S. World Cup team and was the Penn State coach for 26 seasons, winning 10 national college championships.  The closest my 1979 to 1982 teams ever got was in 1979, with Coach Bahr, where we lost 3-2 in the semi-final game to Southern Illinois University Edwardsville by a heartbreaking last minute 40-yard knuckleball to the upper right side of the goal. I can still see it as if it were yesterday.  Ugh.  We beat Columbia University in the consolation game 5-0 to finish third.  SIU beat Clemson 3-2 to win the national championship. That one still hurts.

But “…ever forward never backward” as a very close friend likes to say. Indeed.

A flight to St. Louis is planned on Monday and I have some exciting news on the business front to share with you soon.  Enjoying the ride.  I hope you are enjoying yours as well.

Call your coach!  Let him or her know what they mean to you… I’ll be thinking about mine.

Have a wonderful weekend.

♦ If you are not signed up to receive my weekly On My Radar e-newsletter, you can subscribe here. ♦

With kind regards,

Steve

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

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If you find the On My Radar weekly research letter helpful, please tell a friend … also note the social media links below.  I often share articles and charts during the week via Twitter and LinkedIn that I feel may be worth your time.  You can follow me on Twitter @SBlumenthalCMG and on LinkedIn.

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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.

The objective of the letter is to provide our investment advisors clients and professional investment managers with unique and relevant information that can be incorporated into their investment process to enhance performance and client communication.

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A Note on Investment Process:

From an investment management perspective, I’ve followed, managed and written about trend following and investor sentiment for many years.  I find that reviewing various sentiment, trend and other historically valuable rules-based indicators each week helps me to stay balanced and disciplined in allocating to the various risk sets that are included within a broadly diversified total portfolio solution.

My objective is to position in line with the equity and fixed income market’s primary trends.  I believe risk management is paramount in a long-term investment process.  When to hedge, when to become more aggressive, etc.

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