S&P 500 Index 1865
By Steve Blumenthal
March 26, 2014
We are nearing the end of QE. In last week’s On My Radar titled, The Likely Path to Higher Rates, I posted a great chart that suggests the Fed will begin hiking rates sooner and/or more aggressively than previously expected.
One of the most famous axioms on Wall Street is “don’t fight the Fed”. There is good reason as you will see in the Don’t Fight the Tape or the Fed chart included in this week’s piece. For now the Fed remains accommodative; however, QE is winding down and higher rates are in our future. Markets do not do well when the Fed takes the punch bowl away.
Included in this week’s update (the usual weekly charts):
- Sentiment Charts – Crowd Sentiment is Extremely Optimistic: Hedge
- Sentiment Indicator Based on Forecasts Gathered From 130 Stock Market Newsletters
- Cyclical Equity Market Trend Charts – Both Trend Charts Remain Bullish
- Don’t Fight The Tape Or The Fed – Remains Bullish
Investment Sentiment charts 3-25-2014:
Sentiment Chart 1 – NDR Crowd Sentiment Poll – Extreme Optimism:
Investor sentiment remains at a level of Extreme Optimism (Bearish). I continue to favor hedging long-term equity exposure until extreme pessimism is reached.
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 – Neutral
Sentiment Chart 3 – Sentiment Indicator Based on Forecasts Gathered From 130 Stock Market Newsletters
The following Investors Intelligence Survey of Advisory Services shows we are experiencing the most optimism since 1987 (NOT A TYPO).
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 turns bearish. For now, the major cyclical trend for equities remains higher and I continue to lean in that direction.
Following are two of my favorite cyclical market trend charts:
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 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. The last “B” buy signal was in 2011. 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 to keep your eye on.
Don’t Fight the Tape Or The Fed
Note the Gain/Annum when the reading is +2 and +1. Also note the Gain/Annum when the reading is -1 and -2 (especially -2). For now the Fed remains accomadative yet watch this chart closely. As noted above, markets do not do well when the Fed takes away the punch bowl.
Conclusion
The conclusion remains the same (see prior Trade Signal posts here). The cyclical bull market trend for stocks remains in place; however, risk is elevated. A Median PE of 21 based on actual earnings puts the market approximately 20% above its 50 year fair value. Click here for PE and Profit Margin charts.
Sentiment may serve as a guide in determining when to put some form of risk protection in place. Big Mo has a good track record and helps me position my trading – simply when to get very defensive and when to be more aggressive. I believe that buying out of the money put options is an inexpensive way to protect long-term focused equity exposure. Think of it in the same way you think about your homeowner’s insurance. Hope you don’t need it yet happy to have it in the event you do.
There are funds and strategies that incorporate various forms of risk protection. I think now is a good time to find them. Given the elevated valuations and the end of QE, increase your weightings to tactical investment strategies and hedge your equity exposure. Overcoming a 30% market decline requires a 44% gain. This cyclical bull market move is aged, it has been fueled by an aggressive Fed and it is important to remember that bear markets are a part of life. They happen.
We continue to hold mostly long equity exposure in our CMG Opportunistic All Asset Strategies. Our CMG Tactical Rotation Strategy is long SPY (S&P 500 Index ETF) and VNQ (Vanguard REIT). High yield bond prices are stable and our CMG HY Managed Bond Program remains in cash as dictated by our recent sell signal.
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
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.
CMG SR Tactical Bond FundTM , CMG Global Equity FundTM and CMG Tactical Futures Strategy FundTM: 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 SR Tactical Bond FundTM, CMG Global Equity FundTM and CMG Tactical Futures Strategy FundTM is contained in each Fund’s prospectus, which can be obtained by calling 1-866-CMG-9456. Please read the prospectus carefully before investing. The CMG SR Tactical Bond FundTM, CMG Global Equity FundTM and CMG Tactical Futures Strategy FundTM 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).