Trade Signals – Bond Market Sell Signals

By Steve Blumenthal
September 21, 2016

S&P 500 Index — 2,140

Posted each Wednesday, Trade Signals looks at several of my favorite stock, investor sentiment and bond market indicators.  It is my weekly risk management dashboard, designed to keep me better in sync with the major technical trends.  I hope you find the information helpful in your work.  For informational purposes only… Not a recommendation to buy or sell any security.

“Because for any given level of return, if you diversify, you can generate that return with a lower risk; or for any given level of risk, if you diversify, you can generate a higher return.  So it’s a free lunch.  Diversification makes your portfolio better.”

— David Swensen, Chief Investment Officer
Yale University Endowment

With a nod towards broad portfolio diversification, following is a quick summary of what I am seeing this week — organized by investment category (equity markets, fixed income and liquid alternatives):

Equity Markets:  Investor Sentiment is extremely pessimistic, which is generally short-term bullish for equities.  The overall equity market trend is bullish.  The aged cyclical bull market cycle remains in place.  Of course, we remain in a central bank-driven world and it is concerning that the cyclical bull market is aged and valuations reflect the second most expensively priced market in history.  I favor reduced equity exposure (hedged), tactical bond exposure due to ultra-low interest rates and experimental global central bank policy.  I prefer a 30/30/40 allocation over 60/40.

Fixed Income:  The Zweig Bond Model moved to a sell signal this week, suggesting a bearish environment for bonds.  The CMG Managed High Yield Bond Program remains in a sell signal.

Liquid Alternatives:  The CMG Opportunistic All Asset ETF Strategy remains allocated approximately 73% to equities and 27% to fixed income.  We are seeing strong relative price leadership in emerging markets, technology and biotech.  For weightings by asset class, please see the CMG Opportunistic All Asset Strategy pie chart below.

Following are the most recent Trade Signals:

Equity Trade Signals (Green is Bullish, Orange is Neutral and Red is Bearish):

• CMG Ned Davis Research (NDR) Large Cap Momentum Index: Buy Signal – Bullish for Equities
• Long-term Trend (13/34-Week EMA) on the S&P 500 Index:  Buy Signal – Bullish Cyclical Trend for Equities
• Volume Demand (buyers) vs. Volume Supply (sellers): Buy Signal – S/T Bullish for Equities
• NDR Big Mo: See note below (active signal:  Buy Signal on March 4, 2016 at 1999.99)
• Don’t Fight the Tape or the Fed: Indicator Reading =  -1 (Neutral on Equities)

Investor Sentiment Indicators:

• NDR Crowd Sentiment Poll:  Neutral Optimism (S/T Neutral for Equities)
• Daily Trading Sentiment Composite:  Extreme Pessimism (S/T Bullish for Equities)

Fixed Income Trade Signals:

• Zweig Bond Model: Sell Signal
• CMG Managed High Yield Bond Program:  Sell Signal

Economic Indicators:

• Global Recession Watch Indicator – High Global Recession Risk
• Recession Watch Indicator – Low U.S. Recession Risk

Gold:

• 13-week vs. 34-week exponential moving average:  Buy Signal – Bullish for Gold

Tactical/Relative Strength — CMG Opportunistic All Asset Strategy:

Please click here for more info about the CMG Opportunistic All Asset Strategy.

Following is a more detailed review of the Trade Signals with charts:

1. CMG NDR Large Cap Momentum Index – Buy Signal — The Momentum and Market Breadth Data is signaling bullish for U.S. Equities.  (How I use the CMG NDR Large Cap Momentum indicator.)

• N = a sell or neutral signal on equity market exposure.  B = is a bullish buy signal.
• The top section shows the model (hypothetical) performance of the model (moving to cash on N (neutral signals) and moving to the S&P 500 Index on B (buy) signals (blue line) vs. buying and holding the S&P 500 Index (red line).
• The middle section of the chart is the model line that tallies the momentum and breadth scores of the stocks in our 22 market sectors. (An up-trending line reflects a healthier market environment.)
• Performance attributions are in the bottom of the chart (red arrows).
• Test period is 1991 to present.
• NDR Disclosure

Click here for additional information about the CMG NDR Large Cap Momentum Index.

2. 13/34–Week EMA Trend Chart:  Bullish Cyclical Trend for Stocks

Note (in the chart below – upper right-hand corner) that the 13-week EMA (blue line) has crossed above the 34-week EMA trend (red line) late first quarter 2016 (a trend buy signal).  The Cyclical Trend for Stocks is bullish by this measure.  You can see that this trend process has done a pretty good job at identifying the major cyclical bull and bear market trends (note small red and blue arrows).  A good stop-loss level may be at the point when the 13-week drops below the 34-week.

Click here to see “How I think about the 13/34-Week Exponential Moving Average.”

3. Volume Demand vs. Volume Supply – Buy Signal (S/T Bullish for Equities)

The process looks at a smoothed total volume of declining issues versus a smoothed total volume of advancing issues using a broad market equity index.  The performance below is when Vol Demand is above or below Vol Supply.  More buyers than sellers or more sellers than buyers.  This is a relatively slow-moving indicator.

• S&P 500 Index Gain/Annum (12-31-1997 to present).
• The yellow highlight in the chart that follows shows the current regime, percent gain per annum and the amount of time since 1997 that the signal was above or below volume demand.

Here is the data from 1981 to present (which includes the great bull market of 1981 to March 2000).  Same conclusion, markets are stronger when there are more buyers than sellers:

NDR Disclosure.  Click here for additional information about the indicator.

4. Big Mo Multi-Cap Tape Composite Model – We have decided to remove this composite data. We believe the CMG NDR Large Cap Momentum Index is a better process and we’d like to avoid any potential confusion.  However, if you would like a copy of the chart, please send me an email reminder each week and I’ll forward a copy to you.  (FYI: Last signal was a “Buy” on 3-4-16 at S&P 500 Index level at 1999.99.)

5. Don’t Fight the Tape or the Fed – Indicator Reading = -1 (Neutral for Equities).  Current reading highlighted in yellow (below).  The indicators that comprise this reading are a combination of NDR’s Big Mo and the 10-year Treasury yield.  It highlights just how important Fed activity is to market performance.  Readings range from +2 to -2.

• Gain/Annum when the combined indicator reading (1999 to present. Current indicator score highlighted in yellow):

Here is a look at the indicator from 1980 to present (including the great bull market of 1980 to March 2000).  Same conclusion.  Don’t fight the Fed or the Tape:

Source: NDR
NDR Disclosure; CMG Disclosure.  Click here for additional information about the indicator.

Investor Sentiment — 9-6-2016

NDR Crowd Sentiment Poll:  Neutral Optimism (S/T Neutral for Equities).  Current reading highlighted in chart below.  The current weekly sentiment reading is 60.2.  It was 63.6 last week.

• Gain/Annum for the S&P 500 Index (data from December 1, 1995 to present. Current indicator score highlighted in yellow):

Source: NDR
NDR Disclosure.  CMG Disclosure.

Daily Trading Sentiment Composite:  Extreme Pessimism (S/T Bullish for Equities).  Current reading highlighted below.

• The current daily sentiment reading is 35.56.  It was 38.89 last week.
• 1994 to Present (current indicator score highlighted in yellow):

Source: NDR
NDR Disclosure.  CMG Disclosure.

The Zweig Bond Model:  “SELL” – The model is Bearish on L/T Bonds

• Model indicators – process detailed in the upper left section of chart.

Current indicator score highlighted in yellow (bottom right section):

NDR Disclosure; CMG Disclosure.

How to Track the Zweig Bond Model.  Click here for more info about the Zweig Bond Model.

Gold: 13-week vs. 34-week exponential moving average:  Buy Signal – Bullish for Gold

Note the dotted red line on the right-hand side of the chart.  The 13-week trend line crossed above the 34-week trend line.  This signal indicates a new cyclical bull market trend for gold.

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Thank you for your interest in this weekly post.  It is appreciated.  It helps me to stick to a long-term focused, disciplined investment process and I hope it helps you as well.

With kind regards,

Steve

Stephen B. Blumenthal
Chairman & CEO
CMG Capital Management Group, Inc.
Philadelphia – King of Prussia, PA
blumenthal@cmgwealth.com
Telephone: 610-989-9090
Facsimile: 610-989-9092

CMG AdvisorCentral – Educational Pieces and White Papers

Several client educational pieces:

• When Beating the Market Isn’t the Point
• Trend Following Works!
• Correlation, Diversification and Investment Success
• The Merciless Math of Loss (this is about how compound interest works for you and significant loss against you)
• Here is a link to our Advisor Blog page
• Here is a link to our Advisor Resource page

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.  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.  You can always connect with CMG on Twitter at @askcmg and follow our LinkedIn Showcase page devoted to tactical investing.

Ned Davis Research:

For years, I have subscribed to Ned Davis Research.  They are an independent research firm.  Their clients are institutional (professional) investor clients like CMG.  They are one of the most respected research firms in the business.

They offer several levels of subscription.  You can contact them directly at Ned Davis Research at 617-279-4878 to learn more.  Please know that neither I nor CMG are compensated in any form.  I’m just a big fan of their research and their way of thinking.  As a side, Ned Davis authored one of my favorite books, Being Right or Making Money.  A great book full of sound, practical advice.

Trade Signals History:

Trade Signals started after a colleague asked me if I could share my thoughts (Trade Signals) with him.  A number of years ago, I 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 in your investment process.

Every week, I share with you research I find valuable.  No one indicator is perfect, but we believe risk can be assessed and should be managed.  Some of this research helps to shape our thinking around risk management and it helps us think about how we might size various risks within the construct of a total portfolio.  For example, overweight or underweight equities/fixed income and how much one should consider allocating to tactical/liquid alternative exposures (such as managed futures, global macro, long/short equity).  When and what to hedge?  Shorten or lengthen bond maturity exposure?  We believe such risks can be managed and, to us, broad portfolio diversification is important.  If you’d like to talk to us about how we use some of these indicators within our various investment strategies, please email me or email our sales team.

Click here for “The History Behind Trade Signals.”

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.

Using 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.

Visit http://www.theoptionsguide.com/the-collar-strategy.aspx for more information.

Diversification – Suggested Client Talking Points:

A diversified investment portfolio is designed to meet pre-defined investment goals.  It is often hard to stay the course when stress presents.  That is when many investors make mistakes.  Diversification means that not all investment risks perform at the same time.  For example, managed futures and long/short funds have underperformed the last several years but are outperforming recently.  We’d all like to be in the best performing areas all the time, but that is just not possible.

Major market events tend to present one or two times per decade.  It is for this reason that a longer-term view can provide a useful perspective.  We know that many investors incorrectly sold out of the markets during the tech bubble in 2000-2002 and again with record selling at the height of the 2008 great financial crisis.  No one knows exactly how the current distress will play out.

For some time, I’ve been talking about the following: the issues in the high yield bond market, issues that can present post-QE and zero interest rate policy, issues with unmanageable debt in Europe, Japan and China and the issues a rising dollar may trigger as it relates to the $9 trillion in EM debt that was borrowed in dollars.  As much as I’d like to think I do, I don’t know for sure which or how and when any of the above risks present and the degree to which they might play out.

What we can do is build portfolios that are diversified across a number of risk factors and market environments.  We can identify periods in time to become more or less aggressively positioned (overweight when valuations are cheap and underweight when they are expensive).  We can manage risk not only by the collections of ETFs and funds selected but also how we combine them together.  Diversification brings meaningful improvement to portfolios designed to achieve a return objective over a long-term period of time.

I see the world of investing through a lens of risk and reward.  Ultimately, it is far more important to minimize losses than to capture the best gains.  Find me someone or some way to always capture the best gains – impossible, doesn’t exist.  I’m friendly with some of the world’s greatest investors and none of them see themselves as perfect.

Over time, it’s really about understanding the power of compound interest.  To this end, I wrote a paper entitled, The Merciless Math of Loss.

IMPORTANT DISCLOSURE INFORMATION

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 (collectively, “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.  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 Tactical All Asset Strategy Fund^TM, CMG Global Equity Fund^TM, CMG Tactical Bond Fund^TM, CMG Global Macro Strategy Fund^TM and the CMG Long/Short Fund^TM is contained in each Fund’s prospectus, which can be obtained by calling 1-866-CMG-9456 (1-866-264-9456).  Please read the prospectus carefully before investing.  The CMG Tactical All Asset Strategy Fund^TM, CMG Global Equity Fund^TM, CMG Tactical Bond Fund^TM, CMG Global Macro Strategy Fund^TM and CMG Long/Short Fund^TM 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 manage 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 (e.g., S&P 500 Total Return or Dow Jones Wilshire U.S. 5000 Total Market Index^SM) is also disclosed.  For example, the S&P 500 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.  S&P Dow Jones 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.