S&P 500 Index 1872
By Steve Blumenthal
August 26, 2015
Investor pessimism has reached extreme levels – expect a bounce. That’s the positive news. If you are not hedging your equity exposure, then it may make sense to raise cash on the coming rally. Use rallies to raise cash.
Find a process that works for you and stick to it. I favor a weight of evidence approach and the current evidence continues to signal that risk is high and equity exposure should be hedged. We believe that the best portfolios incorporate a broad set of diverse risks that include long-term exposure to stocks. Risk is high.
Call us if you have any questions and we can discuss what you own and share with you a few suggestions.
Included in this week’s Trade Signals:
- Cyclical Equity Market Trend: Sell Signal
1. CMG NDR Large Cap Momentum Index: Sell signal
2. 13/34 Week EMA on the S&P 500 Index: Sell signal
3. NDR Big Mo: Remains in a Buy Signal
- Volume Demand is greater than Volume Supply: Sell signal for Stocks
- Weekly Investor Sentiment Indicator:
NDR Crowd Sentiment Poll: Extreme Pessimism (short-term Bullish for stocks)
Daily Trading Sentiment Composite: Extreme Pessimism (short-term Bullish for stocks)
- Don’t Fight the Tape or the Fed: Neutral signal
- U.S. Recession Watch – My Favorite U.S. Recession Forecasting Chart: Signaling No Recession
- The Zweig Bond Model: The Cyclical Trend for Bonds is Bullish
NDR has politely asked me not to show several of their charts. This blog has become well followed and with the viral aspect of the internet and social media, the request is with respect to the thousands of other paying clients of NDR. I understand this and am going to work with them to see if we can find a solution that works for both them and us (you and me).
They have agreed to allow me to update you on the output of several of the models.
Cyclical Equity Market Trend: The Primary Trend Is Bearish for Stocks
1. CMG NDR Large Cap Momentum Index – Sell Signal
N = a sell signal or get neutral on your equity exposure.
B = a buy signal
Performance attributions are in the bottom of the chart. Tested is the period from 1991 to present.
2. 13/34–Week EMA Trend Chart: Cyclical Sell Trend for Stocks
Following is a closer look at the S&P 500 via the investable/tradable ETF “SPY” 2006 to present. Note the dotted red line (far right): It marks the point where the 13-week moving average dropped below the longer-term 34-week moving average. This is confirming a major change in trend to a new Cyclical Bear market trend.
Sell rallies with a target price on the SPY at just below 196.03. That is now immediate overhead resistance. For now, the October 2014 low of 179.25 has held. That level marks important support.
Click here to see “How I think about the 13/34-Week Exponential Moving Average”.
3. Big Mo Multi-Cap Tape Composite Model – The Signal Remains a Buy (noted is significant deterioration in trend evidence) 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.
Volume Demand Vs. Volume Supply – Remains on a SELL signal
Volume Demand Vs. Supply is in a “sell” signal. You can view past archived posts to see what the chart looks like.
Investor Sentiment 8-25-2015:
NDR Crowd Sentiment Poll: Extreme Pessimism from Below (Short-Term Bullish for Stocks)
- Sentiment readings below 57 are considered to be Extremely Pessimistic
- Historically such readings are bullish for equities
- Last week, sentiment was at 55. The reading yesterday was 48.8
- To put this into prospective, the lowest reading in 2013 was 55.2 and the lowest reading in 2014 was 53.3. It hit a low of 38.8 in 2011. The lowest recorded reading was 30.9 in 2009 at the market low point in early 2009
- In summary, the current extreme pessimism reading is in an area that has led to market rallies
- Expect a rally
Daily Trading Sentiment Composite: Bullish (short-term Bullish for stocks)
- Sentiment readings below 41.5 are considered to be Extremely Pessimistic
- Historically such readings are bullish for equities
- The reading yesterday was 8.9
- THIS IS THE SECOND LOWEST READING DATING BACK TO 1995. THE LOWEST WAS IN EARLY 2009. WE ARE NEAR THAT LEVEL
- It has been below 10 on only two other occasions since 1995. To say extreme is an understatement
- Expect a rally
Don’t Fight the Tape or the Fed – Neutral Reading
The indicators that comprise this reading are a combination of NDR’s Big Mo and the 10-year Treasury yield. I did a piece recently titled “Watch Out For Minus Two”.
The tape is negative, yet the Fed remains on hold. Neutral Reading here.
U.S. Recession Watch – My Favorite U.S. Recession Forecasting Chart: Signaling No Recession
Because the largest equity market declines occur during periods of recession, it is important to monitor for the probability of recession. Wall Street economists have a very poor track record in correctly timing recession.
One of my favorite recession watch charts is NDR’s Economy – Index of Coincident Economic Indicators. It is systematic (rules based) and looks to the stock market as its leading indicator. 79% of its signals, dating back to 1948, have been correct.
It is currently signaling NO Recession.
What you can do is reduce your equity exposure on sell signals. There are also a number of ways you can hedge your downside risk exposure. Remember that it requires a 25% return to overcome a 20% loss and a 100% return to overcome a 50% loss. The largest losses tend to come during times of recession.
Finally, as we do each week, let’s take a look at the bond market. Following is my favorite process 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.
The Zweig Bond Model: “BUY” – Signaling a Switch to Long-Term Bond Exposure: The Model is Bullish on Bonds
Click here to see how you read the above chart.
Click here for notes on “How To Track The Zweig Bond Model” on your own.
In summary, hedge and raise cash on rallies.
Include liquid alternative strategies (defined as anything other than traditional equity and bond market buy and hold) in your portfolios. I continue to favor the following mix: 30% equities (hedged), 30% fixed income (tactically managed) and 40% alternatives.
Thank you for your interest in this weekly post. It is appreciated! This is a process that has helped me over the years to better stay in line with the market’s primary trend(s). It helps me avoid the many daily distractions (commentator, analyst, CNBC, etc.) and stay disciplined in my investment process. I hope you find it helpful in your investment and advisory work with your clients.
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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
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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
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.
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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 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).