S&P 500 Index 2069
By Steve Blumenthal
November 26, 2014
In short summary: Trend evidence remains positive as measured by Big Mo and the 13/34-Week EMA on the S&P 500. Sentiment is far too bullish suggesting short-term caution. Sentiment has reached the extreme bullish state about 28.5% of the time since 1994. The average return is a -10% when such extremes have been reached. The simple message is to be weary of crowds at extremes.
Due to current extreme bullish sentiment, I’ve moved the risk arrow farther to the right.
Conclusion: Trend evidence remains positive and don’t fight the Fed or the tape remain the important theme. Own equities (but hedged).
As for the bond market: The Zweig Bond Model remains bullish. High yield has turned higher. We are trading back into high yield today. Overall, bond yields are low and thus provide less value to a portfolio. Inflation is not an issue currently. Given the ultra low yields on fixed income, we suggest a more strategic (tactical) approach with the portion of your portfolio allocated to bonds.
Included in this week’s Trade Signals:
- Cyclical Equity Market Trend: Cyclical Bullish Trend for Stocks Remains Bullish (as measured by NDR’s Big Momentum indicator and separately by the 13/34-Week EMA S&P 500 Index Trend Chart)
- Weekly Investor Sentiment Indicator – NDR Crowd Sentiment Poll: Extreme Optimism
- Daily Trading Sentiment Composite: Extreme Optimism
- The Zweig Bond Model: Cyclical Bull Trend for Bonds (supporting longer-term treasury and Corporate bond exposure)
Cyclical Equity Market Trend: Cyclical Bullish Trend for Stocks Remains
Big Mo follows a weight of evidence approach to determine the market’s cyclical trend and measures a number of market internals to determine trend.
Click here to see “How I Think About Big Mo”.
13/34-Week EMA Trend Chart: Cyclical Bullish Trend for Stocks Remains
Following is a look at the S&P 500 index 13-Week (blue line) vs. 34-Week (red line). Bull and Bear market cycles are clearly defined. Bullish trend when blue line is above red line. EMA or exponential moving average is used. EMA is a type of moving average that is similar to a simple moving average, except that more weight is given to the latest data.
Following is a look at the S&P 500 via the SPDR ETF SPY 2006 to present.
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 trend indicator has historically captured the cyclical bull and bear market trends. Signals occur when the lines cross.
In summary, both Big Mo (Momentum) and the 13/34-Week EMA suggest that the market remains in a cyclical bull market (uptrending) state. Sentiment (as seen in the next few charts) remains optimistic (which is bearish).
As long as Big Mo and the 13/34-Week EMA remain bullish, buy the dips and own equities (but hedged).
The current cyclical bull move is aged.
Investor Sentiment 11-25-2014:
NDR Crowd Sentiment Poll: Extreme Optimism (Bearish for Stocks)
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).
The weekly NDR Crowd Sentiment Poll (one of my favorite sentiment indicators) is in the Extreme Optimism zone – bearish for stocks. Note the red arrow and the poor historical equity market performance when the majority of investors are bullish.
“The secret to my success is that I buy when everyone else is selling and I sell when everyone else is buying. Sounds easy to do yet it will be one of the hardest things for an investor to master.” Sir John Templeton, the Union League, Philadelphia 1985
Note that the average value of the indicator at Extreme Optimism (1995 to present) is 68.2. The idea here is that one wants to be a buyer when everyone else is selling (Extreme Pessimism) and a seller or equity hedger when everyone is extremely optimistic.
Daily Trading Sentiment Composite: Extreme Optimism (Bearish)
The Zweig Bond Model: “BUY” Signal – Cyclical Bull Trend for Bonds
Historical performance is summarized in the table on the bottom right. The yellow highlight shows the current buy signal for the strategy and historical performance on signal (the model was established in the 1980s – the data is hypothetical). The blue line shows the growth of $100 since April 1, 1967 in comparison to the black line which is the Barclays Aggregate Total Return index. The table at the bottom left compares the two.
Click here for notes on “How To Track The Zweig Bond Model” on your own.
Given the historically low yield on bonds, it is important to understand what happens to bonds when interest rates rise. However, for now, the weight of evidence continues to support being positioned in longer-term bonds, bond fund ETFs and/or bond mutual funds.
Interest Rate Gain/Loss Per Every 1% Interest Rate Move
*Think about the above chart as it relates to trading bond fund ETFs tied to the Zweig Bond Model signals as well as the current high risk environment tied to ultra low interest rates.
Wishing you a wonderful Thanksgiving holiday.
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
610-989-9092 Fax
Provided are several links to learn more about the use of 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.
Several other links:
http://www.theoptionsguide.com/the-collar-strategy.aspx
https://www.trademonster.com/marketing/upcomingWebinarEvents.action?src=TRADA2&PC=TRADA2&gclid=CKna3Puu6rwCFTRo7AodRiQAlw
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