Trade Signals – Excessive Optimism Remains Despite Market Decline (ST Negative for Equities)

S&P 500 Index 2075

By Steve Blumenthal
November 11, 2015

Following below is my market, investor sentiment and economic dashboard. Notable this week is that excessive optimism remains despite the recent market sell-off.  Excessive optimism is short-term negative for equities.  Our trend and breadth indicators are in a sell.  Don’t Fight The Fed indicator moved to Modestly Bearish from Neutral.  High Yield bond selling off aggressively.

Included in this week’s Trade Signals:

Equity Trade Signals:

• CMG NDR Large Cap Momentum Index: Sell Signal on June 30, 2015 at S&P 500 Index 2063
• Long-term Trend (13/34-Week EMA) on the S&P 500 Index: Sell Signal – Bearish for Stocks
• Volume Demand is greater than Volume Supply: Sell signal for Stocks
• NDR Big Mo: Buy Signal for Stocks

Investor Sentiment Indicators:

• NDR Crowd Sentiment Poll: Neutral Optimism (short-term Neutral for Equities)
• Daily Trading Sentiment Composite: Excessive Optimism (short-term Bearish for Equities)

Fixed Income Trade Signals:

• The Zweig Bond Model: Buy Signal
• High Yield Model: Sell Signal

Economic Indicators:

• Don’t Fight the Tape or the Fed: Indicator Reading = 0 (Neutral for Equities)
• Global Recession Watch – High Global Recession Risk
• U.S. Recession Watch – Low U.S. Recession Risk

Cyclical Equity Market Trend: The Primary Trend Is Bearish for Stocks

1. CMG NDR Large Cap Momentum Index –Sell Signal (June 30, 2015 at S&P 500 Index 2063.11)

N = a sell signal or get neutral on your equity exposure.  B = a buy signal (Next buy signal trigger is at approximately 65.72.  Middle section of chart.)

Performance attributions are in the bottom of the chart.  Tested is the period from 1991 to present.  See important disclosures. CMG, NDR 

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

Note (in chart below – upper right hand corner) that the 13-week MA is about to cross above the 34-week MA trend.  That would be a positive development for the market.  For now the long-term trend, by this measure, remains bearish.  The 13-week EMA is at 2041.51 and the 34-week EMA is at 2043.31.  Close to crossing. Stay tuned.

Following is a closer look at the S&P 500 via the investable/tradable ETF “SPY” 2006 to present. 

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

 

3. Volume Demand Vs. Volume Supply – Remains on a Sell Signal

Volume Demand vs. Supply remains in a “sell” signal.  You can view past archived posts to see what the chart looks like.

• S&P 500 Index Gain/Annum When (12-31-1997 to present)
  • NDR Vol Demand Above Vol Supply: 10.0% (65.7% of the Time)
  • NDR Vol Demand Below Vol Supply: -5.5% (34.3% of the Time)

See important disclosure information below. NDR disclosure.

4. Big Mo Multi-Cap Tape Composite Model – Big Mo Remains is on a Buy Signal(active signal is a Buy signal generated on 10-9-2015 at S&P 500 Index 2014.89. This following a Sell signal that was generated several weeks prior at S&P 500 Index level 1986)

• Profitable Long Trades: 85.7% (data November 16, 1979 to present)
• Gain/Annum: 14.8% vs. Buy-and-hold gains of 8.6%
• On sell signals switch to Treasury bills and on buy signals switch to the S&P 500 Index TR

Here is the latest chart (not perfect but pretty good – of course, no guarantees, past performance can’t guarantee future performance and not a recommendation for you to buy or sell any security):

Big Mo follows a weight of evidence approach to determine the market’s cyclical trend.  Click here to see “How I Think About Big Mo”. NDR disclosure information. See important disclosures CMG.

Investor Sentiment 11-10-2015:

NDR Crowd Sentiment Poll: Neutral Optimism (short-term Neutral for Equities). Current reading highlighted in blue (below).

• The current weekly sentiment reading is 65.4. Last week’s reading was 66.2.  See below data for performance based on sentiment readings.
• Sentiment readings above 66 are considered to be Extremely Optimistic (Bearish)
• Sentiment readings below 57 are considered to be Extremely Pessimistic (Bullish)
• Historically such readings are bullish for equities
• Expect a rally
• Gain/Annum for the S&P 500 Index (data from December 1, 1995 to present):
  • Composite score Above 66 or Excessive Optimism = -7.7% (21.5% of the time)
  • Composite score between 57 – 66 from above 66 or Neutral Optimism = 2.5% (17.4% of the time)
  • Composite score between 57 – 66 from below 57 is bullish = 18.8% (20% of the time)
  • Composite score Below 57 or Excessive Pessimism = 10.2% (41.2% of the time)

Here is a look at the most recent chart:

Daily Trading Sentiment Composite: Excessive Optimism (short-term Bearish for stocks).  Current reading highlighted in blue (below).

• The current daily sentiment reading is 71.1. Up considerably from a reading of 64.4 last week.  See below data for performance based on sentiment readings.
• Gain/Annum for the S&P 500 Index (data from December 30,1994 to present):
  • Composite score Above 62.5 or Excessive Optimism = -10.6% (28% of the time)
  • Composite score between 41.5 – 62.5 or Neutral Optimism = 6.6% (45% of the time)
  • Composite score Below 41.5 or Excessive Pessimism = 31.9% (27% of the time)

Here is a look at the chart: Note the red arrows in the chart.  Also note the Excessive Pessimism back in August/September.

See important disclosure information below. NDR disclosure link.

Don’t Fight the Tape or the Fed – Indicator Reading = -1 (Modestly Negative for Equities). Current reading highlighted in blue (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.  The following is the model data from January 1998 through present:

• The current indicator is -1 (Modestly Negative).
• Gain/Annum when the combined indicator reading (1-30-1998 to present) is:
  • +2 = 26.9% Gain/Annum (5.7% of the time)
  • +1 = 20.9% Gain/Annum (23.5% of the time)
  • Neutral (0) = 6.2% Gain/Annum (39.4% of the time)
  • -1 = -1.6% Gain/Annum (25.4% of the time)
  • -2 = -46.8% Gain/Annum (6% of the time)

The tape is negative, yet the Fed remains on hold.  Neutral Reading here.  To learn more about this indicator, I did a piece titled “Watch Out For Minus Two”.

Finally, as we do each week, let’s take a look at the bond market.  Following is one of my favorite processes to identify when to shorten high quality bond maturities and when to lengthen maturities.  ETFs can be used to position into short-term exposure (examples like “BIL”) or long-term bond market exposure (examples like “TLT”, “LQD” and “AGG”). Please note that this is not a specific recommendation for you as I have no understanding of your personal financial situation. See important disclosure information below. NDR disclosure.

The Zweig Bond Model: “Buy” – Signaling Long-Term Bond Exposure: The model is currently bullish.

Click here to see how to read the above chart.  Click here for notes on “How To Track The Zweig Bond Model” on your own.  See important disclosure information below.

Tactical Strategy Updates:

We believe that price momentum can tell us a great deal about supply and demand dynamics.  When you compare a set of assets against each other (relative strength analysis), typically some are leading while others are lagging.  The idea behind relative strength based investment strategies is to position in the assets that are showing the strongest price leadership.

CMG Opportunistic All Asset Strategy – The strategy selects from a broad universe of asset classes and invests in up to eleven positions.  We measure price momentum of the various assets to identify the strongest relative strength.  Positions are held anywhere from one month to several months.  Positions are continuously re-evaluated.  The objective is to invest in the positions showing the strongest relative strength (price leadership) and, importantly, avoid assets that are showing the weakest price movement.

The return objective is growth with protection of principal.  As the strategy may invest in bonds stocks (generally a safer tilt) or stocks (generally a more aggressive tile) or both, the strategy may serve as a more flexible portfolio holding that sits in between an investors more traditional stock and bond holdings – allowing the overall total portfolio the ability to pivot towards equities or pivot toward fixed income depending on asset leadership.

Because the strategy may invest in multiple asset classes including indices, sectors, commodities and global stock and bond funds and ETFs, we believe an appropriate benchmark is global 60/40 (global stocks/bonds).

Here is what we are seeing:

• The portfolio is currently approximately 46% invested in U.S. Fixed Income (a mix of five positions that include: an extended duration bond ETF, a convertible bond ETF, a total return bond ETF, and a seven to ten-year treasury bond ETF exposure), 9% Utilities, 18% U.S. Healthcare, 9% U.S. Financials, 9% U.S. Large Cap Blend and 9% REITs. We recently traded out of a U.S. Large Cap Growth ETF.
• The strategy has successfully avoided commodities, metals, emerging markets and international equity exposure. We continue to see a pivot to fixed income and other lower risk oriented ETFs/funds.

CMG Tactical Rotation Strategy – A tactical Global Macro strategy that may invest in up to two of the following six asset classes: Domestic Equities, International Equities, Bonds, Commodities, REITs and Cash/Cash Equivalents.

• This is a relative strength based trading strategy.
• Positions are re-evaluated monthly. Up to two positions are selected.
• Currently 50% invested in BND (Vanguard Total Bond Market ETF) and 50% in VNQ (Vanguard REITs)

CMG Managed High Yield Bond Program

• A trend based trading strategy.
• Currently 100% invested in Cash

The History Behind Trade Signals:

I like to look at each investment made within a total portfolio as a unique risk.  In this regard, an individual investment strategy is one unique risk.  Hopefully, each risk selected and put into your portfolio will make money.  We know that is not always the case; thus, we diversify our set of risks that make up our portfolios.  Diversification is designed to achieve a certain return and risk profile.

From this perspective, I like to look at the forward return probabilities for equities and shape the various risks within my portfolio tied to probable equity market returns. Simply, when the market is attractively priced, overweight equities.  When expensively priced, underweight and hedge your equity exposure and overweight to alternative investment strategies (defined as anything other than traditional equity and bond market buy and hold) in your portfolios.

Given the expensively priced nature of the market today, I continue to favor the following mix: 30% equities (hedged), 30% fixed income (tactically managed) and 40% alternative and tactical investment strategies.  I believe something special happens when you combine several non-correlating strategies together.

Thank you for your interest in this weekly post.  It is appreciated!  I hope you find it helpful in your investment and advisory work with your clients.

A quick note on NDR: 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 titled, Being Right or Making Money. A great book full of sound practical advice.

Have a great week!

With kind regards,

Steve

Stephen B. Blumenthal
Chairman & CEO
CMG Capital Management Group, Inc.
Philadelphia – King of Prussia, PA
steve@cmgwealth.com
610-989-9090 Phone
610-989-9092 Fax

Social Media Links:

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.

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.

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.

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

IMPORTANT DISCLOSURE INFORMATION

Please remember that 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-together “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 Global Equity Fund^TM, CMG Tactical Bond Fund^TM and the CMG Tactical Futures Strategy 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 Global Equity Fund^TM, CMG Tactical Bond Fund^TM and CMG Tactical Futures Strategy 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 mange 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. (i.e. S&P 500 Total Return or Dow Jones Wilshire U.S. 5000 Total Market Index) is also disclosed. For example, the S&P 500 Composite 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.  Standard & Poor’s 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).