Trade Signals S&P 500 Index 1368 By Steve Blumenthal November 14, 2012 Included in this week s Trade Signals are the following: Updated Sentiment Charts sentiment points to RISK ON S&P 500 Index Chart (13 week EMA over 34 week EMA) nearing a trend change S&P 500 Index Chart price is below both the 50 day MA and the 200 day MA CMG CORE Four Strategies: Current Positions Equity Market Update: RISK ON Excessive Investor Pessimism continues to favor RISK ON as Investor Sentiment remains in the Excessive Pessimism (bullish) zone. See charts that follow. I believe we are in a long-term secular bear environment. Given this, I favor hedging the longterm equity exposure you might have in your portfolios tied to periods of Excessive Optimism and removing those hedges tied to Excessive Pessimism. Put options and covered calls against long equity exposure is something I favor. Never sell naked put or call options. The focus on this portion of your portfolio is on capital preservation. Go to www.cboe.com to learn more about options. All investments involve risk.
Investment Sentiment charts 11-14-12: Chart 1. NDR Daily Trading Sentiment Composite
Chart 2. NDR Crowd Sentiment Poll - is also in the Extreme Pessimism zone.
S&P 500 Index Chart (13 week EMA over a 34 Week EMA) I believe we are in the last stage of a Cyclical Bull market environment. The following chart has been effective at calling the cyclical bull and cyclical bear market periods. Note the red circle on the right hand side of the chart. I m watching for the 13 week to drop below the 34 week average. This would indicate a change from a cyclical bull period to a cyclical bear period. DJIA Cycle Composite for 2012 Concerning is the fact that the S&P 500 Index is now below both its 50 day and 200 day moving averages. The dark blue line represents an area of logical support. The next level of significant support is nearly 100 points lower at 1274. Given the high level of investor pessimism and the immediate support below, I favor a move higher from current support to 1400-1425. Of course, risk remains ever present.
The probability of challenging the 2012 market high (S&P 500 Index 1474) looks far less likely today than it did just a few weeks ago. I continue to believe we are in a long-term secular bear market cycle and that the shorter-term cyclical bull move is nearly complete. I continue to believe a year end rally is likely and would use it to again hedge the equity portion of your client portfolios. The Fiscal Cliff issues are front and center, the developed world remains awash in unmanageable debt and as they say we ve got issues. I ll be keeping a close eye on Investor Sentiment as the next rally develops. Because systemic risk is so extreme, it makes sense to me to re-establish hedges when sentiment moves back into the Extreme Optimism area. I see near term support for the S&P 500 Index at 1350-60 and immediate resistance between 1400 and 1425. I do not believe that the 1475 high will be challenged for some time to come. Summary My broader view is that I continue to believe we are in a long-term secular bear environment and that the equity market upside will be constrained as we struggle with the weight of excessive debt, excessive regulation, increased taxation, irresponsible spending and unmanageable entitlements. Too much debt constrains growth; and today s low yields and modestly high valuations simply don t support attractive forward 10-year return expectations. I feel that there is still opportunity to drive investment return within your portfolio; however, the thinking must be different than the 60/40 model construction. I favor a mix of asset classes that include equities (hedged from time to time as suggested in this piece), fixed income (tactically managed as interest rates are far too low thus risk is high) and tactical investment strategies along with other alternatives (such as gold, agriculture, commodities, currency trading and real estate). I ll share some specific portfolio construction ideas in the next Blumenthal Viewpoint piece. CMG Core Four Strategies: CMG Managed High Yield Bond Program: The strategy remains long HY bond funds (but very close to a sell signal) with the trade signal holding in relatively well against the 7% decline in the S&P 500 Index since the early October 1475 index high. We have a strict focus on stop loss risk management. Performance has been strong year-to-date. http://www.cmgwealth.com/ourproducts/separately-managed-accounts/individual-strategies/cmg-managed-hy/ CMG System Research Treasury Bond Program: Currently short treasury bond exposure but has reduced exposure from 100% short to 10% short as the strategy risk protects when a trade is performing poorly. Performance has been strong year-to-date. http://www.cmgwealth.com/our-products/separately-managed-accounts/individual-strategies/srtreasury-bond/
Scotia Partners Growth S&P Plus Program: Having just exited a profitable short trade, the strategy is positioned in cash today. Scotia s model has recently turned bearish on the market s directional trend with both the long-term technical component and the intermediate-term technical component of the model in a bearish signal. When the signals are in agreement on a bearish down trend, the strategy will enter into an inverse or short S&P trade on an up day in the S&P 500 Index. The goal is to identify the directional trend of the market and profit from the trend. Simply, the strategy will trade inverse the S&P on an up day within a down trending market attempting to profit when the S&P declines. The reverse is true when the model is confirmed bullish. Performance has been weak year-to-date; however, we continue to believe it is important to build a portfolio with multiple risk drivers including strategies that have the ability to make money in both up and down trending environments. For example, the strategy gained 75% in 2008. Click here for more information and important disclosures. http://www.cmgwealth.com/our-products/separately-managed-accounts/individual-strategies/scotiagrowth-sp-plus/ CMG Opportunistic All Asset Strategy: The allocations are approximately 60% equity, 20% fixed income and 20% cash in the TCA, Schwab, TD Ameritrade, Pershing, Fidelity and Jefferson National VA accounts. There has been a decided shift towards safety within the models over the last week. This strategy has been doing a good job of increasing equity exposure during bullish periods and increasing fixed income exposure ahead of bearish trending periods. Performance has been strong year-to-date. http://www.cmgwealth.com/our-products/separately-managed-accounts/individual-strategies/cmgopportunistic/ Please note: Within your portfolio construction process, I do not recommend hedges against your tactical strategy allocations as they already offer a diversifying return stream to your overall portfolio. The idea within the Enhanced MPT portfolio construction process is to combine a diverse set of risks that include assets/strategies that historically produce noncorrelating return streams (i.e. strategies with the ability to profit in up or down trending markets). Of course, past performance cannot predict or guarantee future performance. With warm regards, Steve Stephen B. Blumenthal Founder & CEO CMG Capital Management Group, Inc. 1000 Continental Drive, Suite 570 King of Prussia, PA 19406 steve@cmgwealth.com 610-989-9090 Phone 610-989-9092 Fax
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