Trade Signals – Mixed Investor Sentiment
S&P 500 Index 1843
By Steve Blumenthal
April 16, 2014
Sentiment has become more constructive. The Daily Trading Sentiment Composite is back in the Extreme Pessimism (Bullish) zone supporting a further rally.
The cyclical trend as measured by Big Mo remains bullish; however, seasonal tendencies suggest caution.
In my opinion, some form of equity risk management remains paramount as a 5% to 20% correction is probable (May to October). I continue to support some form of risk protection as it relates to long-term focused equity exposure (inexpensive and relatively easy to implement).
Ideas range from covered call oriented funds and ETFs, funds focused on core equity exposure with a built in risk management processes, out of the money put options and/or inverse ETFs. Send me a note if you’d like to discuss further.
I’m heading to Spain on Friday to visit my daughter who is studying abroad. We are spending two days in Marbella, the southern coastal town on the Mediterranean Sea then to Seville, where she is studying. I return home next Wednesday. She is going to show me her school and introduce me to her elementary school class (where she teaches English once a week). I’m bringing some American candy as instructed.
I’m excited to visit Spain, but mostly, I am so looking forward to seeing Brianna. I hope you too find some needed down time and wish you a long and wonderful holiday weekend with your loved ones. I’m going to relax and really try to separate from the work world. As such, there will be no On My Radar this Friday.
Included in this week’s Trade Signals (the usual weekly charts):
- Investor Sentiment – Crowd Sentiment Poll: Neutral
- Investor Sentiment – Daily Trading Sentiment Composite: Extreme Pessimism (Bullish)
- Seasonal Tendencies: Challenging May to October Period
- Cyclical Equity Market Trend Charts: Bullish Market Trend Environment Remains
- Cyclical Bond Market Trend Charts: 10-year Treasury & 30-year Treasury: A Declining Interest Trend (note change)
Investment Sentiment charts 4-15-2014:
Sentiment Chart 1 – NDR Crowd Sentiment Poll: Neutral Optimism
Crowd Sentiment Poll (my favorite) is improving yet the Investors Intelligence Survey of Advisory Services remains in a Sell signal (Chart 3 below). In Chart 3: note the chart measures sentiment of 130 investment newsletter writers – it recently peaked above a reading of 80: the most optimistic level since 1987.
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).
Sentiment Chart 2 – NDR Daily Trading Sentiment Composite – Extreme Pessimism (Bullish)
Sentiment Chart 3 – Sentiment Indicator based on forecasts gathered from 130 stock market newsletters. Note the orange box tied to buy and sell signals. It is currently in a Sell.
The chart is centered on the concept that the stock market tends to be a manifestation of group psychology in motion, as highs coincide with extreme group enthusiasm and lows coincide with excessive crowd fear. This sentiment indicator uses forecasts gathered from 130 stock market newsletters. Such information can be useful at opinion extremes, because at those extremes the stock market majority is usually wrong. Almost by definition, a top in the market is the point of maximum optimism and a bottom is the point of maximum pessimism.
This is concerning from an extreme sentiment standpoint; however, I will really get concerned when either of the following cyclical trend charts turn bearish. For now, the major cyclical trend for equities remains higher and I continue to lean in that direction.
Seasonal Tendencies: The Challenging May to October Period
Following are two of my favorite cyclical market trend charts:
Cyclical Equity Market Trend Charts: Both Remain Bullish
Cyclical Trend Chart 1– 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.
Cyclical Trend Chart 2– The Big Mo Multi-Cap Tape Composite continues to signal a bullish uptrend for the market. Think of this indicator as a risk timing tool. This is far different than market timing. The idea is to hedge the portion of your portfolio invested in equities against periods of major market risk. No indicator is perfect. I have followed Big Mo for many years – it is my favorite.
The NDR Big Mo Multi-Cap Tape Composite Model was created to give a composite reading on the technical health of the broad equity market. The model uses trend and momentum indicators based on a broad array of our NDR Multi-Cap cap-weighted sub-industry group price indices. Trend indicators are based on the direction of a sub-industry’s moving average, while the momentum indicators are based on the rate of change of the sub-industry’s price index. By including many indicators together in the composite model, the process quantitatively analyzes the “weight of the evidence” regarding the market’s trend and momentum rather than relying on only one or a few indicators.
Following is a quick look at the trend in interest rates.
Cyclical Bond Market Trend Charts: 10-year Treasury & 30-year Treasury:
The 30-year Treasury bond is now in a declining interest rate environment. The 10-year Treasury bond is nearing a change in trend.
Conclusion
The cyclical trend remains positive as measured by Big Mo and 13/34 EMA and though aged, the trend remains in place. Further, Don’t Fight the Tape or The Fed supports the up trend in stocks. QE has been powerful fuel.
It is the ending of QE, tied to the pick up in the economy and inflation, that should concern us. The seasonally challenging period of May to October is in front of us and risk of a 5% to 20% correction is high. I continue to favor hedging your important long-term focused equity exposure. Think of it as inexpensive insurance.
CMG Tactical Strategy Update
We continue to hold mostly long equity exposure in our CMG Opportunistic All Asset Strategies with a modest move toward emerging markets across the portfolio. The portfolios are approximately 70% Equity, 30% Fixed Income.
Our CMG Tactical Rotation Strategy moved to a more defensive position for April: 50% TLT (iShares Treasury Bonds) and VNQ (Vanguard REIT). Month-to-date that has served us well. Both strategies are relative strength, price momentum-based, tactical trading strategies.
High yield bond prices are firm to higher. We remain positioned long high yield bond funds. We traded back into high yield bonds at the beginning of April in our CMG Managed High Yield Bond Program. April is typically one of the best performing months for the high yield bond market. We hope this month proves true to form.
We are still working on the Zweig-NDR Bond Model. Stay tuned.
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
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
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