S&P 500 Index 1435
By Steve Blumenthal
December 19, 2012
Included in this week’s Trade Signals are the following:
- Updated Sentiment Charts – sentiment has moved to Excessive Optimism in the Daily Sentiment Chart and remains in the Neutral Zone in the Crowd Sentiment Poll chart. I believe it is time to get prepared to put hedges in place. Keep an eye on next week’s sentiment charts – posted on Wednesday. For now I cautiously continue to favor “RISK ON”.
- Russell 2000 Index Chart – logical immediate resistance.
Equity Market Update: “RISK ON”
Given that daily sentiment has moved into the Excessive Optimism Zone, I believe it is time to be prepared to put hedges in place for long equity exposure. Market technicals have been bullish in the face of considerable political dysfunction and markets generally do well around holiday periods. I’m watching for the Crowd Sentiment Poll to reach Excessive Optimism and believe we could reach that point by next week.
Below I show the Russell 2000 IWM index chart. There has been an explosive up move since I posted my RISK ON view a number of weeks back. We are now nearing a point of RISK OFF. I like putting hedges in place when Sentiment is at Extreme Optimism and the markets are at a point of logical overhead resistance. The IWM chart shows just how close we are to that today.
Investment Sentiment charts 12-19-12:
Chart 1. NDR Daily Trading Sentiment Composite. Favors RISK ON.
Chart 2. NDR Crowd Sentiment Poll – continues to move higher 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. 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.
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.
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. Too much debt constrains growth; and today’s low yields and modestly high valuations simply don’t support attractive forward 10-year return expectations.
IWM – Russell 2000 Small Cap Chart
I’m watching for a challenge of the September high to initiate a hedge. Sentiment has grown Excessively Optimistic in the daily numbers and is approaching the same in the weekly Crowd Poll numbers. Put options are cheapest when everyone is bullish. Excessive Optimism tied to points of logical resistance mark, to me, a good time to risk protect. I favor IWM put options as there is a lot of bang for the buck.
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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