Trade Signals – Investor Pessimism, Momentum and Trend

By Steve Blumenthal
May 11, 2016

S&P 500 Index 2069

I’m in Las Vegas this week at the SALT Alternatives Investment Conference.  I’ll share some high level notes in Friday’s “On My Radar.”

The market remains range-bound.  Sentiment has improved, meaning investor sentiment is nearing the extreme pessimism zone. This tends to be short-term bullish for the markets.  However, equity valuations remain high and thus risk is high.  The Zweig Bond Model remains bullish on bonds.  High yield remains in a sell signal — there is modest price improvement from the recent lows.

Following are the most recent Trade Signals:

Equity Trade Signals:

• CMG Ned Davis Research (NDR) Large Cap Momentum Index:  Sell Signal – Bearish for Equities. (Last signal on June 30, 2015, S&P 500 Index level 2063.11)
• Long-term Trend (13/34-Week EMA) on the S&P 500 Index:  Buy Signal – Bullish Cyclical Trend for Equities
• Volume Demand is greater than Volume Supply:  Sell Signal – Bearish 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 (Bullish for Equities)

Investor Sentiment Indicators:

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

Fixed Income Trade Signals:

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

 

Economic Indicators:

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

Gold:

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

Tactical — CMG Opportunistic All Asset Strategy (update):

Relative Strength Leadership Trends:  The fixed income and international exposures have done particularly well this past week.  Gold continues to show strong RS.  Current holdings are reflected above.

The Strategy is a relative strength-driven process that evaluates approximately 100 different ETFs, including large-caps, mid-caps, small-caps, value and growth, sectors, various fixed income, international and emerging markets.  The objective is a diversified portfolio that invests in the ETFs mathematically demonstrating strong market leadership.

Following is a more detailed review of the above Trade Signals:

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

1. CMG NDR Large Cap Momentum Index – Sell Signal – The Momentum and Market Breadth Data is signaling Bearish for U.S. Equities (the last signal was generated on June 30, 2015 with the S&P 500 Index at 2063.11).  This is my favorite risk-on/risk-off equity market 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).
• Tested is the period from 1991 to present.
• See important disclosures below.  CMG, NDR

How I use the CMG NDR Large Cap Momentum indicator:  We run several strategies here at CMG.  In one of our strategies, we invest in a low-fee large-cap S&P 500 Index ETF on “B” buy signals and we switch to BIL (a short-term Treasury Bill ETF) on “N” sell signals.  We also run a long/short strategy based on the same signal.  Further, when the indicator is in a sell signal, it helps us identify periods where we should be more mindful of hedging our long-term focused equity holdings.  At such times, out-of-the-money put options on an ETF, such as SPY, may be prudent.

Separately, we run several ETF tactical strategies (CMG Opportunistic All Asset Strategy and CMG Tactical Rotation Strategy).  We are often asked if the CMG NDR Large Cap Momentum Index is used within these strategies.  It is not.  Our tactical equity strategies look at relative strength that compares stocks, bonds, sectors, cash, etc. and seek to position in the assets showing the strongest price leadership.  Such strategies tend to move away from areas of greater risk (like equities) to less risky areas (like bonds and cash) and do so based on the rules built within each strategy.  On occasion, our CMG NDR Large Cap Momentum indicator may be in a sell signal, yet our tactical equity strategy may still have an overweight exposure to equity-oriented funds or ETFs.

As markets don’t typically tsunami overnight (though it can happen), historically, they tend to peak and change trend over months, not days.  Most corrections are in the 5% to 10% range with the sizable corrections tending to occur during periods of recession.  So, with this thinking, we believe that portfolios should be broadly diversified to include a number of potential return drivers (let’s call each one separately a risk).  Thus, in my view, portfolios are a collection of various different risks (otherwise known as “diversification”).

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

Note (in chart below – upper right-hand corner) that the 13-week EMA (blue line) recently crossed below the 34-week EMA trend (red line).  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.”

SB Comments:  Further adding to the confusion is the inclusion of the 13- over 34-week EMA chart.  I believe it has done a good job at historically capturing the market’s primary cyclical trend. 

3. Volume Demand vs. Volume Supply – Sell Signal (Bearish 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.  It is a relatively slow-moving indicator.  The last buy signal was in 2012.  The indicator was in a sell signal in June 2015.

• S&P 500 Index Gain/Annum (12-31-1997 to present) when
  • NDR Vol Demand Above Vol Supply: 9.8% (64% of the time)
  • NDR Vol Demand Below Vol Supply: -5.0% (36% of the time)

Here is the data 1997 to present:

See important disclosure information below.  NDR disclosure.

SB Comments:  Similar to the 13/34-week EMA trend chart, we don’t use Volume Demand vs. Volume Supply in any of our investment processes.  Personally, I like to note if there are more sellers than buyers or buyers than sellers as it is ultimately supply and demand that moves prices in all things.  Looking at this measure gives me another data point to get a feel for the level of potential risk.  This is an indicator I have reviewed each week for many years.

4. Big Mo Multi-Cap Tape Composite Model – We have decided to remove this composite data. We believe our 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 (Bullish for Equities).  Current reading highlighted in green (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 (Bullish for Equities).
• Gain/Annum when the combined indicator reading (1999 to present) is:
  • +2 = 25.7% Gain/Annum (6.1% of the time)
  • +1 = 15.5% Gain/Annum (24.2% of the time)
  • Neutral (0) = 4.7% Gain/Annum (39.8% of the time)
  • -1 = -3.3% Gain/Annum (23.3% of the time)
  • -2 = -44.5% Gain/Annum (6.6% of the time)

SB Comments:  This data shows the historical risks and rewards that come with being in line with Fed activity and market trend.  I use it to help me assess the level of market risk (high, low or neutral).  You can see what the returns were like, historically, based on the reading of the indicator.  To learn more about this indicator, please refer to a piece I wrote entitled, “Watch Out For Minus Two.”

NDR disclosure information.  See important disclosures below.   CMG disclosure information.

Investor Sentiment — 5-10-2016:

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

• The current weekly sentiment reading is 63.2. Last week’s reading was 66.6.  See following data for performance based on sentiment readings.  Source: NDR
• Gain/Annum for the S&P 500 Index (data from December 1, 1995 to present):
  • Composite score Above 66 or Excessive Optimism = -7.5% (21.1% of the time) (Bearish for Stocks)
  • Composite score between 57 – 66 from above 66 or Neutral Optimism = 1.6% (17.5% of the time)
  • Composite score between 57 – 66 from below 57 is bullish = 19.3% (20.1% of the time)
  • Composite score Below 57 or Excessive Pessimism = 9.8% (41.3% of the time) (Bullish for Stocks)

Source: NDR

SB Comments:  Long ago, famed investor Sir John Templeton said to me, “The secret of my success is that I buy when everyone is selling and I sell when everyone else is buying.”  Back then, there were few sources available that measured and reported investor sentiment.  Now there are many.  My favorite is NDR’s Crowd Sentiment Poll.  It updates weekly and is slower moving than the Daily Trading Sentiment Composite (below).  I use the information to measure if pessimism is extreme or if optimism is extreme.  It helps with the hedging we do with the put options in one of our equity strategies.  For example, if optimism is extremely high (which is bearish for equities) and other indicators are suggesting high market risk, we may put hedges in place to protect some of the downside.  If the market then declines and moves into a reading of extreme pessimism, we may reduce or remove the hedges and look to reset them when the market rallies back to extreme optimism.

You can see how the market performed when optimism was extreme (poor performance) and when pessimism was extreme (good performance).  We try to stay in line with this as best we can with our hedging.

Daily Trading Sentiment Composite:  Extreme Pessimism (short-term Bullish for Equities).  Current reading highlighted below.

• The current daily sentiment reading is 40. Last week’s reading was 60. 
• Gain/Annum for the S&P 500 Index (data from December 30,1994 to present):
• Composite score Above 62.5 or Excessive Optimism = -10.9% (27.7% of the time) (Bearish for Stocks)
• Composite score between 41.5 and 62.5 or Neutral Optimism = 6.6% (45.2% of the time)
• Composite score Below 41.5 or Excessive Pessimism = 31.4% (27.1% of time) (Bullish for Stocks)

1994 to Present:

Source: NDR

SB Comments:  See explanation immediately above under the Crowd Sentiment data.  While the Crowd Sentiment is my favorite, it is mainly because I have followed it for so long.  That doesn’t make it better or worse than the daily data.  I like following both and note that they are generally more in sync than not, though the daily data tends to move more quickly.

Again, you can see how the market performed when optimism was extreme (poor performance) and when pessimism was extreme (good performance).  We try to stay in line with this as best we can with our hedging.

See important disclosure information below.  NDR disclosure link.

The Zweig Bond Model:  “Buy” – The model is currently Bullish on L/T Bonds.

The Zweig Bond signal 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 (e.g., on Sell signals: favor “BIL”) or long-term bond market exposure (e.g., on Buy signals: favor ETFs such as “TLT,” “LQD” and “AGG”).

Please note that this is not a specific recommendation to buy or sell any security, as I have no information or understanding of your personal financial situation.  See important disclosure information below.

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.  NDR disclosure.

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.

♦ If you are not signed up to receive my weekly On My Radar e-newsletter, you can subscribe here. ♦

Other important links we hope you find helpful:

CMG AdvisorCentral – Educational Pieces and White Papers

Several client educational pieces:

• When Beating the Market Isn’t the Point
• 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

A Quick Note about 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. 

Thank you for your interest in this weekly post.  It is appreciated.

Click here for “The History Behind Trade Signals.”

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

A Comment on Diversification – 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 (here).

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.

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-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 , 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 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. 

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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.