S&P 500 Index 1409
By Steve Blumenthal
December 5, 2012
Included in this weeks Trade Signals are the following:
- Updated Sentiment Charts – sentiment is neutral favoring “RISK ON”
Equity Market Update: “RISK ON”
I continue to favor RISK ON as Investor Sentiment has moved higher in both the NDR Daily Trading Sentiment Composite and the NDR Crowd Sentiment Poll. Sentiment readings in both charts remain well below Extreme Optimism and continue to support a bullish posture. See the Charts 1 and 2.
Investment Sentiment charts 12-5-12:
Chart 1. NDR Daily Trading Sentiment Composite. Favors RISK ON
- In Chart 1, note that the S&P Gain/Annum (red arrow on the left) of 28.6%.
- The “active hedging” idea is to go against the crowd at points of either Extreme Optimism or Extreme Pessimism. “Buy when everyone else is selling and sell when everyone else is buying”.
- It will be interesting to see where the market rallies to when sentiment reaches the Excessive Optimism area (above 62.5) – specifically the blue area I marked on Chart 1.
Chart 2. NDR Crowd Sentiment Poll – has just moved to the neutral zone. Favors RISK ON
- In Chart 2, note the Gain/Annum (red arrow on the left) of 4.60% when the reading is between 55.5 and 61.5. Daily Trading Sentiment has been between 55.5 and 61.5 21% of the time since 12-1-1995.
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.
It is a period 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.
Tactical Investment and other Trading – Alternative strategies:
Please note: Within your portfolio construction process, I do not recommend hedges against your tactical strategy allocations as they already offer a diversifying return stream to your overall portfolio. The idea within the Enhanced MPT portfolio construction process is to combine a diverse set of risks that include assets/strategies that historically produce non-correlating return streams (i.e. strategies with the ability to profit in up or down trending markets). Of course, past performance can not predict or guarantee future performance.
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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