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Trade Signals – Why Risk Management?

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By Steve Blumenthal
March 11, 2020
S&P 500 Index — 2,791

Posted each Wednesday, Trade Signals looks at several of my favorite equity market, investor sentiment, fixed income, economic, recession and gold market indicators. Market trends persist over time and stem from changes in risk premiums or the amount of return investors demand to compensate them for the risks they take.

Risk premiums vary a great deal over time in response to new market information or changes in the economic environment or even changes in investor sentiment. When risk premiums increase or decrease, stocks and bonds and other assets have to be priced again. Investors react to the changes gradually and this creates trends.

Rules-based trend following strategies don’t predict, they react to what prices are telling us about supply and demand. More buyers than sellers, price moves higher and more sellers than buyers, price moves lower. Trend-following strategies seek growth opportunities while maintaining a level of protection in down markets.

Trade Signals is organized into three sections:

  • Market Commentary 
  • Trade Signals — Dashboard of Indicators
  • Charts with Explanations 

For informational purposes only. Not a recommendation to buy or sell any security.  

Market Commentary

Notable this week:

“The credit markets see a default cycle ahead and make no mistake, this is a negative credit shock of immense proportions.”
– David Rosenberg, Rosenberg Research

In the realm of stock market analysis, “perfect” is elusive, but getting an edge that is useful is something great. That is why we at CMG believe diversifying to asset classes and utilizing several different stop-loss risk management processes is the best way to grow and defend your wealth. We are quite pleased with how our portfolios are responding to the current market crisis. I’ve been writing about the challenges recessions present and my belief that the next recession will be particularly challenging due to the massive amount of debt. Let’s talk about recession risks and we’ll take a look at what our various risk management signals are telling us.

Recession: There is now a high risk of recession within the next six months.

My favorite recession watch indicators update post each month-end. I’m going to get out in front of the March 2020 month-end indicators and make a bold call: The  beginning of the next recession starts in Q2 2020 – perhaps as early as March. It takes two back-to-back quarters of negative GDP growth to officially identify recessions. The challenge is we know that only in hindsight. The further challenge is that the stock market declines approximately 36% or more in recessions. The last two got us -50%. The next will prove more challenging due to large amount of low-rated, high-risk debt. If we are indeed entering recession, as I believe, the current -20%, while painful, is nothing like -50%. One needs a 25% subsequent return to get back to even after a -20% loss. One needs 100% just to get back to even after a -50% loss. 

I believe the coronavirus and the oil price war are enough of a shock to tip the cards. One of my favorite recession watch indicators is the stock market. My 30 years of experience trading the high yield bond market that tells me that, at major turning points, the HY market leads the stock market and the stock market leads the economy. The CMG Managed High Yield Bond program moved to a sell signal two weeks ago (near the high), the stock market has since followed. It is important to note that not all signals win (some create small whipsaw trades) and that major turns come infrequently but this one is well worth watching.

Because the stock market is a leading indicator for the economy, I like The Economy Based on the Stock Market Indicator recession indicator (updated through February 2020 in the Recession Indicator section below). It has a 77% correct signal history dating back to 1948. It does not trigger often, nor do recessions occur often (just one to two in each of the decades since 1950 with the only exception being the last decade). The process looks at the trend in the stock market relative to its five-month smoothed moving average. When the stock market falls below its smoothed moving average line by 4.8%, a recession signal is triggered. The process updates once a month; however, if we look at where the indicator is today, a recession trigger just fired. Absent a large gain in the stock market by month end, by this indicator, there is now a High U.S. Recession Risk. 

Risk Management

It’s not the 15% to 20% declines that cause the most trouble, it is the -40% to -60% that take so long to recover from. We believe job number one is defending wealth. If we can protect our clients’ core wealth, it enables us to invest small amounts into special situation opportunities. Defend and grow the core and strategically invest where we see outsized opportunities. If a 2-3% allocation fails, your return may be down 2-3% that year. If it wins to the potential we believe, it can meaningfully enhance wealth. Anyway, that’s how we think about wealth management. Let’s look at ideas around growing and defending your core.

Below, in the “Dashboard” section, the various equity market trend signals are turning “risk off.” Volume Demand (buyers) vs. Volume Supply (sellers) moved to a Sell Signal, which is bearish for equities.  The CMG Ned Davis Research US Large Cap Long/Flat model is nearing a sell signal, as are the 200-day moving average S&P 500 and NASDAQ trade signals. The Zweig Bond Model remains bullish on high quality bonds. The HY market is in a significant sell-off. That is where we see the greatest risks and the coming greatest rewards. Investor pessimism is extremely bearish, which is short-term bullish for equities. Market support will likely come from the Fed. We see little appetite for a fiscal response getting through Congress at this time.

If you are a CMG client, here are a few strategy updates:

CMG Managed High Yield Bond Program – Traded to short-term Treasury Bill (cash) exposure a few weeks ago. Seeking lower price re-entry opportunity at higher yields.  
CMG Large Cap Long/Flat Strategy – remains invested in S&P 500 Index exposure via a low-fee ETF (signal is nearing a sell signal).
CMG Beta Rotation Strategy – the strategy remains positive for the year and is considerably outperforming the S&P. This is due to the allocation to the utility sector in late January. The strategy also incorporates a stop-loss risk rule that is tied to a moving average rule that looks at short-term, medium-term and long-term trends.
CMG Mauldin Smart Core Strategy – A combination of four distinct trading strategies. The strategy is performing as we anticipated and we are pleased. About 26% equity exposure, 68% in various government bond ETFs, and 6% gold. The bond and gold positions have performed particularly well. The four strategies can move between various asset classes.
CMG High and Growing Dividend ETFs – The strategy allocates to a handful of ETFs that meet our standards. Five moving average signals are used that range from short-term, medium-term to long-term. When the price of any ETF is below four of the five moving averages, the ETF is positioned to a Treasury bill ETF. Stop-loss triggers have been reached on several of the ETFs.
CMG Tactical All Asset Strategy (formerly the CMG Opportunistic All Asset Strategy) – The portfolio has continued to reduce equity risk exposure. Currently allocated to 30% Treasury bills (cash), 10% gold, 10% long-duration government bonds, 10% utility sector, 20% equities, 10% corporate bonds and 10% emerging market bonds.  Overall, the strategy is performing well.

Overall

The coronavirus is a black swan-like shock to the economic system and the oil industry is facing a three-sided attack: falling prices, a move of institutional investors to divest from fossil fuel companies, and crushing debt loads. Debt is the problem. The U.S. oil and gas industry has about $86 billion of rated debt due in the next four years, according to Moody’s. Nearly all of that debt is either junk rated, or rated just above junk. Fifty-seven percent of that is due in just the next two years. As oil prices fall and credit markets tighten, many companies won’t be able to refinance their debts or extend maturities.

Diversified portfolios, especially if risk-managed, should be holding up well. It’s not -20% we should fear, it is the -40% to -70% we need to protect our wealth against. No risk management process is perfect; thus, diversify to asset classes and diversify risk management processes. And stick to the game plan. A much better investment opportunity is ahead. Let’s get to it in good health both physically and financially.

The indicator dashboard section is next, followed by the updated charts with explanations.

Not a recommendation for you to buy or sell any security.  For information purposes only.  Please talk with your advisor about needs, goals, time horizon and risk tolerances. 

Trade Signals — Dashboard of Indicators

(Green is Bullish, Orange is Neutral and Red is Bearish)

Equity Trade Signals 

  • Ned Davis Research CMG U.S. Large Cap Long/Flat Index: Buy Signal – 100% U.S. Large Cap Equity Exposure
  • Long-term Trend (13/34-Week EMA) on the S&P 500 Index: Buy Signal – Bullish for Equities
  • Volume Demand (buyers) vs. Volume Supply (sellers): Sell Signal – Bearish for Equities
  • S&P 500 Index 200-day Moving Average Trend: Buy Signal – Bullish for Equities
  • S&P 500 Index 50-day vs. 200-day Moving Average Cross: Buy Signal – Bullish for Equities
  • NASDAQ Index 200-day Moving Average Trend: Buy Signal – Bullish for Equities
  • Don’t Fight the Tape or the Fed: Indicator Reading = 0 (Neutral Signal for Equities)
  • Value vs. Growth Factor Model: Favors Growth over Value

Investor Sentiment Indicators

  • NDR Crowd Sentiment Poll: Extreme Pessimism (S/T Bullish for Equities) 
  • NDR Daily Trading Sentiment Composite: Extreme Pessimism (S/T Bullish for Equities) 

Fixed Income Trade Signals

  • CMG Managed High Yield Bond Program: Sell Signal
  • Zweig Bond Model: Buy Signal – Bullish for High Grade Corporate and Long-Term Treasury Bond Market Trends

Economic Indicators

  • Global Recession: Neutral Global Recession Risk
  • U.S. Recession:  High Probability of U.S. Recession Risk (Next Six Months)
  • Inflation Watch: Low to Neutral Inflation Pressures

Select Recession Watch Indicators

  • Global Recession Probability Indicator: Neutral Global Recession Risk
  • The Economy Based on the Stock Market Indicator: High U.S. Recession Risk
  • Recession Probability Based on Employment Trends: Low U.S. Recession Risk
  • Credit Conditions – Recession Indicator: Low U.S. Recession Risk
  • U.S. Economy vs. Yield Curve: High U.S. Recession Risk 

Gold:

  • Trend Indicator – 13-week EMA vs. 34-week EMA: Buy Signal

♦ Sign up for Steve’s weekly (free) On My Radar investment e-newsletter: subscribe here. ♦

Charts with Explanations

Equity Market Charts

1. Ned Davis Research CMG U.S. Large Cap Long/Flat Index – Buy Signal – 100% U.S. Large Cap Equity Exposure

The Ned Davis Research CMG U.S. Large Cap Long/Flat Index measures “market breadth.”  Market breadth is simply market activity, such as advances and declines, new highs and new lows, advancing and declining volume and price momentum and trend based upon the number of stocks in uptrends and downtrends.  Technicians like “breadth” measurements for two main reasons:

  1. Breadth thrusts are often present at the start of major bull markets.
  2. Breadth nearly always weakens before prices do at a major peaks.

(Source: Ned Davis Research)

The NDR CMG U.S. Large Cap Long/Flat Index process measures market breadth by analyzing the overall technical strength of the markets trend across 24 Industry Groups (GICS). The process measures the trend of each of the industry groups, evaluating the rate of change in price momentum over short-term, intermediate and long-term time frames and combines the scores creating a composite trend score.  The cumulative score is plotted on an ongoing daily basis (in the middle section of the chart) creating a ‘weight of evidence’ based trend line.  A high score means that there is broad positive up-trending participation across the 24 Industry Groups.  Generally, scores above 50 (bold red dotted line in the middle section of the chart) indicates a strong market environment and scores below 50 indicates a weak market environment.  The Index process also measures mean-reversion as measured by something called a “Z-score.”  A Z-score is the number of standard deviations or distance price has moved from its mean data point. Within the NDR CMG U.S. Large Cap Long/Flat Index, this helps the index identify extreme down-side market environments.  Market tops behave differently than market bottoms.  Market tops generally take time to form and roll over.  During major market sell-offs, margin calls kick in, investors tend to panic and liquidity drys up as would be buyers back away; thus, major market corrections tend to “V” bottom.  The mean reversion indicator is designed to measure extreme selling and help the index get back into the market sooner in a systematic disciplined way.

The most important line to follow in the chart below is the blue “model equity line” in the middle section of the chart.  It is the combined total score across the 24 sub-industry sectors.  Think of model equity line as a rolling “market breadth” measurement.  The model moves to short-term Treasury Bills when the reading drops below 50%.  Such readings low readings signal the majority of stocks across the 24 sub-industry sectors are breaking down. When below the 50% line, and the trend has turned higher, the model moves to 50% invested U.S. Large Cap equity exposure if the model equity reading is higher than it was 21-days ago.  When the index reading is above the 50% line, the index is 100% invested.  The enhanced version removes the scaling out of the market from 100% to 80% (model equity line trending down when reading between 70 and 60) to 40% (model equity line trending down when reading between 60 and 50) to 0% (model equity line below 50).

NDR Disclosure

Legend:

Up Arrows with “B” Label = Buy Signal (100% long)
Down Arrows = Reduce Market Exposure to Model Target Weights
S&P Dow Jones Index Data, 1995 to present

Source: S&P Dow Jones Indices and Ned Davis Research.
Note: CMG Large Cap Long/Flat Strategy performance may differ
from index performance due to trade dates/times, types of U.S. ETF large cap exposures and costs.

Next is a Long/Short version of the Index.  The model goes from 100% invested in U.S. Large Cap market exposure to 100% short U.S. Large Cap market exposure on readings below 50%.  50% long and 50% Treasury Bills when the trend reading is below 50% but rising above its 21-day smoothed moving average.  The model is fully invested on readings above 50%.

  • Here’s the data (note in the lower left-hand chart the model returns – a several hundred basis point improvement in model return):

Source: Ned Davis Research (1992 to present).
Note: S&P Dow Jones Indices does not calculate the Long/Short Index.

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

The process measures the intermediate-term trend in the S&P 500 Index.  A bullish trend is identified when the blue 13-week smoothed moving average (“MA”) trend line rises above the 34-week smoothed MA trend line.  A bearish trend is signaled when the blue line drops below the red line.  You can see that this trend process has done a pretty good job at identifying the major cyclical (short-term) bull and bear market trends (note small red and blue arrows).  In terms of risk management, a good stop-loss level may be at the point when the 13-week drops below the 34-week EMA with re-entry at the point the 13-week crosses above.

Click here to see “How I think about the 13/34-Week Exponential Moving Average.”

Bottom line: The 13-week shorter-term trend line has crossed the 34-week longer-term trend line = bullish signal for equities.

3. Volume Demand vs. Volume Supply: Sell Signal – Bearish for Equities

When there are more buyers than sellers, prices move higher. When there are more sellers than buyers, prices decline. Supply and demand works that way in all things – real estate, oil, stock prices and all goods in a free market.

The Volume Demand vs. Volume Supply 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, reflected in the chart below, is better when Vol Demand is better than Vol Supply. More buyers than sellers. This is a relatively slow-moving but important indicator.

The yellow highlights in the next two charts shows the current signal. Currently in a buy signal. Following is the model’s data 1981 to present (which includes the great bull market and the two bear markets since 2000, and model data from 1997 to present (which includes the tail end of the great bull market, the 2000-2002 and 2007-2009 bear markets and the bull market that started in March 2009):

Source: Ned Davis Research
NDR Disclosure
Click here for additional information about the indicator.

4. S&P 500 Index 200-day Moving Average Trend: Buy Signal – Bullish for Equities

Here is how to read the chart:

  • Focus in on the dotted line (200-day moving average) and the two boxes at the bottom of the chart.
  • Buy signals are when the 200-day moving average line is rising and sell signals are when the 200-day moving average is falling. Specifically, a sell signal occurs when the 200-day MA price line drops from a high point by 0.5% or more. A buy signal occurs when the 200-day MA price line rises from a low point by 0.5% or more.
  • Current trend signal is shaded grey. Bottom line: Returns are best when the 200-day MA trend line is rising.

5. S&P 500 Index 50-day vs. 200-day Moving Average Cross: Buy Signal – Bullish for Equities

Next is a look at what is known as the “Golden Cross.” Sell signals occur when the 50-day shorter-term moving average trend line drops below the longer-term 200-day moving average trend line. Please refer to the circles in lower part of the chart. This trend-following process is also in a buy signal.

6. NASDAQ Index 200-day Moving Average Trend: Buy Signal – Bullish for Equities

Read this chart in the same way as the S&P 500 200-day MA rule explained immediately above. 200-day MA line is dashed yellow line. The solid blue line is the NASDAQ Composite. Focus on upper right in chart and data box below. Current “mode regime” is shaded in the data boxes (bottom of chart).

7. Don’t Fight the Tape or the Fed – Indicator Reading = 0 (Neutral Signal for Equities)

Current readings highlighted in yellow 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.
  • Bottom line: when both the trend in interest rates (lower yields) and the trend in the overall market (the tape) are bullish, the market has historically performed best.
  • +2 readings have occurred about 12% of the time since 1980.
  • +1 readings have occurred approximately 25% of the time since 1980.
  • -2 readings have occurred approximately 6% of the time since 1980 and the performance during those periods, as shown in the chart is poor. “Watch out for -2!”
  • The chart on the left is from 1980 to present and the chart on the right is from 1999 to present.

Source: Ned Davis Research
NDR Disclosure; CMG Disclosure.
Click here for additional information about the indicator.

8. Value vs. Growth Factor Model: The Model Favors Growth (Updates Monthly)

Investor Sentiment

NDR Crowd Sentiment Poll: Extreme Pessimism (S/T Bullish for Equities)

The current weekly sentiment reading is 48.9. It was 51.9 last week.  The current regime is highlighted in yellow.

NDR measured 92 incidences of Crowd Sentiment extremes since 1996. There have been 92 extremes since 1996. The crowd was right just one time and wrong 91 times. Had one followed the crowd at the time at those extremes, one would have lost over 12,000 S&P 500 points (according to NDR).  The last Extreme Pessimistic was reached on December 24, 2018 and the last Extreme Optimistic was reached in early April 2019.

It is important to note, the most attractive Extreme Pessimism buy signals have historically occurred with readings below 47.  The most attractive sell signals have historically occurred with readings above 70. Call them super extreme “extremes.”  These are the most important levels I am keeping my eye on when it comes to investor sentiment.

Here is how to read the next data box:

  • Best buying opportunities occur at “Extreme Pessimism” readings below 57.
  • Gain/Annum for the S&P 500 Index (data from December 1, 1995 to present).
  • Current indicator score highlighted in yellow:

Source: Ned Davis Research
NDR Disclosure; CMG Disclosure

NDR Daily Trading Sentiment Composite: Extreme Pessimism (S/T Bullish for Equities)

Current regime is highlighted in yellow below.

  • Current daily sentiment reading is 16.67. It was 32.22 last week.
  • Buying opportunities occur at “Extreme Pessimism” readings below 41.5.  Selling/trading opportunities occur at “Extreme Optimism” readings above 62.5.
  • Note: The most attractive buying opportunities have historically occurred with readings below 25 (faded red arrow).  While the strongest sell signals have occurred with readings above 75.
  • 1994-to-Present and 2006-to-Present.  Data boxes in the bottom section of the chart (current indicator zone shaded grey below):

Source: Ned Davis Research

NDR Disclosure; CMG Disclosure.

Bond Market

The Zweig Bond Model: Buy Signal – a bullish signal for high quality fixed income bond funds and ETF exposure.

Current indicator score highlighted in yellow (bottom right section):

NDR Disclosure; CMG Disclosure

  • The bottom section of the above chart details the drawdown (“Max DD %”) history and a few other statistics. For example, if your $100,000 investment declines 10% to $90,000 before it again moves higher, your drawdown is 10%.
  • Barclays Aggregate Bond Total Return has a max drawdown of -14.12% vs. a max drawdown for the Zweig Bond Model of -5.06%.
  • You can compare the Barclays Aggregate Bond Index Total Return Max DD to the Model’s Max DD.  Hoped for is a higher return and a lower DD.  Also listed is the hypothetical growth of $1,000.
  • GPA% shows the hypothetical comparison of the Zweig Bond Model and the Barclays Agg Total Return index.  The Model outperformed buying and holding the index by a wide margin.
  • Finally, you can calculate the model on your own – detailed in the upper left section of the chart.  How to Track the Zweig Bond Model.
  • Click here for more info about the Zweig Bond Model.

Economic Indicators:

  • Global Recession – High Recession Risk
  • U.S. Recession – Low Probability of U.S. Recession Risk (Next Six Months) 
  • Inflation Watch – Low Inflation Pressures

Select Recession Watch Indicators:

The average decline in the S&P 500 is approximately 37% during recessions. The last two recessions have given us greater than -50% each. I believe, given the fact that we have tripled up on the very same thing that caused the last recession (debt/leverage/Fed policy), the next recession will be equally or more challenging than the last two. Thus, my recession obsession. Following are my favorite recession watch indicators.

Bottom line: We are likely in a global recession. There is no current sign of recession in the U.S. in the coming six months. I remain data dependent.

Global Recession Probability Indicator – Neutral Global Recession Risk

  • First, focus in on the blue model line.  It plots the probability of recession based on leading indicators from 35 different countries (non-U.S.).  The current reading is 62.64, meaning there is an 62.64% probability that we are in a global recession. Bottom line: High Global Recession Risk.
  • Note the dotted lines that market three zones: High Recession Risk to Low Recession Risk.  The grey shaded bars that show periods in which the OECD said there was global recession (something that is only known more than six months after the fact).
  • The model line crossed above 70 in mid-2018. About six months later, the OECD confirmed the global recession. You can see that this indicator is not perfect as recessions sometimes started before the cross above the 70 line or after the cross. For U.S. investors, since business is global, this model can be an early warning indicator for U.S. recession.
  • Bottom line: As of 2-29-2020, currently late stage – exiting global recession.
  • Finally, focus in on the data box in the lower right section of the chart.  When the reading is ‘Above 70’ recession has occurred 92.77% of the time.

The Economy Based on the Stock Market Indicator – Low U.S. Recession Risk

  • Focus on the up and down arrows. Economic expansion signals (up arrows) are generated when the S&P 500 Index rises by 3.8% above its five-month smoothed moving average line.  Economic contraction signals are generated when the S&P 500 Index falls by 4.8% below its five-month smoothed moving average line.
  • Current signal = Expansion. The most recent recession signal occurred in February 2019.
  • Note the 77% “Correct Signals” in the top left corner of the chart. This this process has done a good job at signaling prior to recessions. Not perfect but pretty good.

Recession Probability Based on Employment Trends – Low U.S. Recession Risk

  • Focus in on the up and down arrows.  Down is a recession signal.  Up is an expansion signal.
  • Expansion signals are generated when the Employment Trends Index rises by 0.4% from a low point.
  • Contraction signals are generated when the index falls by 4.8% from a high point.
  • Current signal indicates expansion.  Last signal date occurred in 2009.

Credit Conditions – Recession Indicator – Low U.S. Recession Risk

  • Focus in on the lower section of the chart.  A drop below the green dotted line has preceded the last three recessions (yellow circles).  When lending tightens up “Credit Conditions Unfavorable,” companies have a hard time funding.  Recession tends to follow with lending conditions become unfavorable.
  • The vertical grey bars indicate past recessions.
  • Bottom line: Lending conditions are currently favorable.

Here is a look at the NDR Credit Conditions Index and its components:

U.S. Economy vs. Yield Curve – High U.S. Recession Risk 

  • Watch for a drop below the green dotted line.
  • Such drops below 0 is what is known as an inverted yield curve.  It is when the 6-month Treasury Bill yield is higher than the longer-duration 10-year Treasury Note yield.
  • An inverted yield curve has preceded every recession since 1958 (lower section of chart) with a “mean lead time” of 14 months prior to recession start.
  • Since recessions are only known in hindsight, it is important to have a high probability to know in advance.  All the bad stuff happens in recessions.
  • Note May 2019 yield curve inversion.
  • Bottom line: Once the yield curve inverts, recession follows about a year later. Most recent inversion occurred in April 2019.  Signaling high probability of recession by July 2020.

Gold:

13-week EMA vs. 34-week EMA: Buy Signal

Buy signals occur when the 13-week moving average trend line (blue line) crosses above the 34-week moving average trend line (red line).  Sell signals occur when the 13-week moving average trend line (blue line) crosses below the slower moving 34-week moving average trend line (red line).

Green arrows indicate buy signals, red arrows sell signals.

As a general rule, I generally favor up to 5% in gold with an increase to 10% for more aggressive investors. 0% exposure indicator is bearish.

Why risk management?

Asset Classes Move Through Periods of Bull and Bear Market Cycles Over Time: This next chart shows the BULL market Secular Trend for Stocks (top section), the direction in Long-Term Government Bond Yields (middle section) and Commodities (bottom section).  The best gains are made in Secular Bull market cycles.

Investing is a probability game.  Limit downside: In the long run, it’s about the math.  This next chart shows the “The Merciless Mathematics of Loss”.  A 10% decline only requires an 11% subsequent return to get back to even.  A 30% decline requires a 43% subsequent return to get back to even.  A 50% decline requires a 100% subsequent return to get back to even.  You can read more about it here.

I hope you find this information helpful.  Thank you for your interest.  It is appreciated.

♦ To receive Steve’s free weekly On My Radar e-newsletter, subscribe here. ♦

With kind regards,

Steve

Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
10 Valley Stream Parkway, Suite 202
Malvern, PA 19355
blumenthal@cmgwealth.com
Telephone: 610-989-9090
Facsimile: 610-989-9092

Advisor/Investor Education Materials and White Papers

Several client educational pieces:

CMG is committed to setting a high standard for ETF strategists. And we’re passionate about educating advisors and investors about tactical investing. If you’re looking for the CMG white paper, Understanding Tactical Investment Strategies, you can find that here.

You can always connect with CMG on Twitter at @SBlumenthalCMG and LinkedIn.

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.

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.

Every week, I share with you research I find valuable.  No one indicator is perfect, but we believe risk can be assessed and should be managed.  Some of this research helps to shape our thinking around risk management and it helps us think about how we might size various risks within the construct of a total portfolio.  For example, overweight or underweight equities/fixed income and how much one should consider allocating to tactical/liquid alternative exposures (such as managed futures, global macro, long/short equity).  When and what to hedge?  Shorten or lengthen bond maturity exposure?  We believe such risks can be managed and, to us, broad portfolio diversification is important.  If you’d like to talk to us about how we use some of these indicators within our various investment strategies, please email me or email our sales team.

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.

Using 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.

Visit http://www.theoptionsguide.com/the-collar-strategy.aspx for more information.

Diversification – Suggested 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.

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