S&P 500 Index 1837
By Steve Blumenthal
December 26, 2013
The ride for equities continues on and boy has it been a good one. How much longer? The key charts for me are the two Cyclical Trend charts I share in this piece today and every Wednesday.
Having a strategy and the ability to stick to that strategy is critical to your investment success. I believe the single greatest threat to our success as investors is our own human nature. It may be easy to convince ourselves that we would have stuck with an investment strategy and remained systematic and dispassionate in our approach but I have experienced over my 30 plus years in the business that very few investors can do this.
As you evaluate your portfolio looking forward to 2014 and beyond consider the following:
- Set in place a long-term strategic investment game plan.
- Weight your exposure to a broad and diverse set of investment risks based on your personal risk tolerance, needs and time horizon. A high risk strategy for a low risk investor is a mismatch.
- Remember that not all allocations work at the same time.
- Resist the temptation to move from the worst performer to the best performer.
- It is better to rebalance quarterly or annually instead.
- Consider minor tactical adjustments along the way but remember to stick to your strategic investment game plan over an entire market cycle.
We are unfortunately our own worst enemies when it comes to patiently sticking to the investment game plan.
This week, along with the usual sentiment and cyclical trend charts, I again include the Santa Claus chart showing the history of market performance from mid-December into January (aptly named The Santa Claus Rally). The study shows that 41% of the markets’ annual return comes from the period between December 22 and January 6. Of course, past performance guarantees you and me nothing.
I also include a cyclical trend chart for bonds. As I’m sure you know, we are in a bearish rising interest trend or bearish period of time for bonds. Think about this as you review your forward strategic allocation plan. As this is important, I will include this chart in the weekly updates moving forward.
Included in this week’s update:
- Sentiment Charts – Extreme Optimism: Protect/Hedge Long Equity Portfolio Exposure
- Cyclical Bull or Cyclical Bear Market Trend Charts – Both Trend Charts Remain Bullish
- The Santa Claus Rally
- The Cyclical Trend for Bonds
- My Two Cents – Big Picture
Investment Sentiment charts 12-24-2013:
Sentiment Chart 1 – NDR Crowd Sentiment Poll – Extreme Optimism: Protect/Hedge Long Equity Portfolio Exposure
At a current reading of 71.9 (see yellow circle), investor sentiment remains in the Extreme Optimism zone. Note the market movement at past peak readings (yellow arrow). A correction remains highly probable.
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 Optimism
Cyclical Equity Market Trend Charts – Both Trend Charts 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 indicator has historically captured the cyclical bull and bear market trends. Signals occur when the lines cross.
Cyclical Trend Chart 2 – Big Mo continues to signal a bullish uptrend for the market. Note the 84.6% Profitable Long Trades and the Gain/Annum when “Bullish” investing in the S&P 500 Index and the “Switch” to cash on Bearish readings. While no process is perfect, this is a chart I have favored for many years. Keep an eye on this chart.
The Santa Claus Rally
Santa is alive and well. Over the 16 days between December 22nd and January 6th the Dow has gained 41% of its annual return (data from 1896 through 2010). Last week I posted the following:
From Ed Elfenbein at Crossing Wall Street:
I took all of the historical data for the Dow Jones from 1896 through 2010 and found that the streak from December 22nd to January 6th is the best time of the year for stocks. (December 21st and January 7th have also been positive days for the market but only by a tiny bit.)
Over the 16-day run from December 22nd to January 6th, the Dow has gained an average of 3.23%. That’s 41% of the Dow’s average annual gain of 7.87% occurring over less than 5% of the year. (It’s really even less than 5% since the market is always closed on December 25th and January 1st. The Santa Claus Stretch has made up just 3.8% of all trading days.)
Here’s a look at the Dow’s average performance in December and January (December 21st is based at 100): (CrossingWallStreet)
The Cyclical Bond Market Trend Charts – both trend charts are bearish (interest rates are rising)
10-Year Government Bond Chart
The current 10-year Treasury Note yield is 2.996%. The 13-week EMA is the blue line and the 34-week EMA is the red line. Trend change occurs when the lines cross. Rates are in a rising uptrend. Bearish for bonds.
30-Year Government Bond Chart
The current 30-year Treasury Note yield is 3.923%. The 13-week EMA is the blue line and the 34-week EMA is the red line. Trend change occurs when the lines cross. Rates are in a rising uptrend. Bearish for bonds.
My Two Cents – Big Picture Market View:
I’m expecting a meaningful correction in 2014. My best guess is for an equity market peak in mid to late 2015. Overall, the backdrop of low dividend yields, low inflation and low interest rates points to a low forward 10-year expected return. That means risk is higher today, not lower.
Further, the macro fundamental picture remains challenged due to unmanageable levels of debt, unmanageable entitlements and unprecedented market manipulation from the world’s global central banks. We are in a debt deleveraging cycle. Such cycles are different than releveraging cycles. It is simply not normal to have markets so manipulated. Here is the link to my 2014 outlook piece.
For now, the cyclical bull market trend remains positive and it is important to stay with that trend. Individual investors and pension managers could abandon bonds and buy equities. Foreign investors could and likely will run away from sovereign debt investments and find U.S. equities to be a store of safety. Expensively priced equity markets can become even more expensively priced.
Timing? It really is just a best guess, but when it hits it always hits hard. Sentiment can be a useful guide in determining when and when not to hedge your important long-term equity portfolio exposure.
Since investor sentiment is once again in the Extreme Optimism zone, now remains a good time to risk protect. I favor a collared option strategy initiated when investor sentiment is extremely optimistic and removed when investor sentiment is extremely pessimistic. Think of it as inexpensive portfolio insurance put in place in a disciplined way.
Trade Signals is designed to help you navigate the risks and rewards of the stock market. In addition to your long-term focused equity exposure, also add tactical strategies into your portfolio mix. We have several excellent non-correlating strategies for you to consider. Allocate to bonds differently. Look for tactical bond strategies and/or shorten your portfolio exposure. The biggest bubble I see today is in the bond market.
We are in uncharted waters. Stay vigilant and construct portfolios that are broadly allocated to a diverse set of risks.
I’m on a plane early tomorrow morning to Snowbird, Utah. The kids are soooo excited as am I. It just might be the single best trip we take together as a family. Helmets, skis, boots and smiles are packed and we are ready to go. I’m wishing you some down time filled with something that fills you up.
Wishing you a very happy New Year!
All the very best!
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
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