August 11, 2022 S&P 500 Index — 4,207
Posted each Wednesday, Trade Signals provides a summary of various Equity, Fixed Income, Sentiment, Economic, and Gold market indicators.
Market trends persist over time and stem from changes in risk premiums (the return investors demand to compensate them for the risks they take.) Risk premiums vary over time in response to new market information. Investors react to the changes gradually, and this creates trends.
Rules-based Trend following strategies don’t predict; they react to what price signals in terms of supply and demand. With more buyers than sellers, the price moves higher. More sellers than buyers, price moves lower. The long-term objective of trend-following is to participate in secular bull market gains while minimizing the losses associated with secular bear market declines.
Trade Signals is organized into three sections:
For informational purposes only. Not a recommendation to buy or sell any security.
On the inflation front, things finally look a little more temperate. A big part of it is simply falling gasoline prices, but if you look at July’s CPI (Consumer Price Index), there are some hints that the worst may be behind us in terms of the pace of Fed interest rate hikes. And that has the stock market in an upbeat mood. Overall CPI was down 0.02%. Core inflation, excluding food and energy, rose 0.3%. Note the breakdown by color in the following chart.
The probability of a 75 bps rate hike dropped to 50%.
I remember when the probability of a 50 bps rate hike spooked the market. The reality is that one month does not make a trend.
Over the prior 12 months, headline CPI is up 8.5%, and Core inflation is up 5.9%. The hope is the slowing this month vs the last two will prompt the Fed to be less aggressive. Finally, inflation eased primarily because of the 7.7% drop in gas prices.
Interestingly, the “Don’t Fight the Tape or the Fed” indicator moved to a bullish +1 score this week. The Zweig Bond Model continues to signal a bullish trend in high-grade bonds and the 10-year Treasury Weekly MACD remains in a bullish buy signal (suggesting lower interest rates). Also, the 2-year vs. 10-year Treasury yield curve has continued to invert to its lowest level since the height of the tech bubble. Recession anyone?
On the equity market front, the NDR Daily Investor Sentiment indicator shows Extreme Optimism, which is short-term bearish for equities. The S&P 500 Index Daily MACD model remains in a buy signal, but the move is aged with the moving averages higher than any time in the last year (red circle lower right in the following chart). Both the Daily Investor Sentiment and Daily MACD are signaling caution. The intermediate-term trend signals for equities remain bearish as you’ll see further below.
The short-term trend in the High Yield bond market turned bearish this week. Further, the weekly technical pattern in HY continues to show a bearish trend of lower lows and lower highs. If we are indeed heading into a recession, it will spell trouble for the high yield bond market… and opportunity in HY bonds on the other side of the recession.
Gold is back above $1,800. A bullish intermediate trend buy signal looks to be near. My personal long-term view on gold remains bullish. Of course, no guarantees; I could be wrong.
The Dashboard of Indicators follows next.
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.
(Green is Bullish, Red is Bearish)
1. Ned Davis Research CMG U.S. Large Cap Long/Flat Index – Sell Signal – 0% U.S. Large Cap Equity Exposure
The Ned Davis Research (NDR) CMG U.S. Large Cap Long/Flat Index measures “market breadth.” Market breadth is simply a measurement of market activity, such as advances and declines, new highs and new lows, advancing and declining volume and price momentum, and Trends based on the number of stocks in uptrends and downtrends. Technicians like “breadth” measurements for two main reasons:
The NDR CMG U.S. Large Cap Long/Flat Index process measures market breadth by analyzing the overall technical strength of the market across 24 Industry Groups (GICS), as measured by three types of priced-based, industry-level indicators: trend-following, volatility, and mean-reversion. Trend-following primary indicators include momentum and moving average measures that evaluate the rate of change in price in each of the 24 Industry Groups (GICS) over short-term, intermediate, and long-term time frames to assess the current direction of the markets. Mean-reversion indicators are applied in each of the 24 Industry Groups (GICS), measuring the deviation in price movement above and below the historic long-term price trend. Mean-reversion is based on the theory that prices and returns eventually move back towards their historical mean (or average). The model applies these primary and secondary indicators across the S&P 500 industry groupings to ultimately produce trade signals that are either bullish (meaning prices increasing over time) or bearish (meaning prices decreasing over time). The final market breadth composite is the scaled aggregation of these indicators across the S&P 500 industries to determine the breadth composite score (between 0 and 100). 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) indicate a strong market environment, and scores below 50 indicate a weak market environment.
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 the 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).
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 in readings above 50%.
Source: Ned Davis Research (1992 to present). Note: S&P Dow Jones Indices does not calculate the Long/Short Index.
2. S&P 500 Large Cap Index – 13/34–Week EMA Trend Chart: Sell Signal – Bearish for Equities
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 (“M.A.”) trend line rises above the 34-week smoothed M.A. 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.”
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 dynamics work 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.
Source: Ned Davis Research NDR Disclosure Click here for additional information about the indicator.
4. S&P 500 Index Monthly MACD: Sell Signal – Bearish for Equities
5. S&P 500 Index Daily MACD Indicator: Buy Signal – Short-term Bullish for U.S. Large Cap Equities
Focus on the MACD moving average lines at the bottom of the chart. Buy signals (green arrows) occur when the black line crosses above the red line. Sell signals (red arrows) occur when the black line crosses below the red line. You can learn more about MACD here.
6. Don’t Fight the Tape or the Fed – Indicator Reading = -0 (Neutral Signal for Equities)
Current readings are highlighted below.
Source: Ned Davis Research NDR Disclosure; CMG Disclosure.
7. S&P 500 Index vs. 200-Day Moving Average Trend: Sell Signal – Bearish for US Large Cap Equities
Here is how to read the chart:
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 the lower part of the chart. This trend-following process is also in a buy signal.
9. NASDAQ Composite vs. 200-Day Moving Average Trend: Sell Signal – Bearish for Equities
Read this chart in the same way as the S&P 500 200-day M.A. rule explained immediately above. 200-day M.A. line is the dashed yellow line. The solid blue line is the NASDAQ Composite. Focus on the upper right in the chart and data box below. The current “mode regime” is shaded in the data boxes (bottom of the chart).
10. Value vs. Growth Factor Model: Favors Value over Growth
The middle section of the next chart plots a relative strength ratio comparing the S&P 500-Citigroup Growth Index to the Citigroup Value Index. When the line is rising, growth is outperforming value. When falling, value is outperforming growth. Note the longer-term uptrends and downtrends. The bottom section features the NDR Asset Allocation model (scaled 0-100). When the model is between the two brackets, the model is considered neutral (i.e., no clear tendency for outperformance by either market). The data box in the top left corner shows the annualized performance based on the signal. Grey shades the current signal. The long-term model tends to produce one trade per year to one trade every few years.
NDR Crowd Sentiment Poll: Neutral Optimism (S/T Bullish for Equities)
“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful.” – Warren Buffett
This sentiment indicator is a composite sentiment indicator designed to highlight short- to intermediate-term swings in investor psychology. The evidence, looking at this indicators data back to 12-1-1995, suggests that the crowd (investors in general) are wrong at market extremes. Supporting Buffett’s advice.
NDR Daily Trading Sentiment Composite: Extreme Optimism (S/T Bearish for Equities)
The current regime is highlighted in yellow below.
The Zweig Bond Model: Buy Signal – Bullish on Bonds
C urrent indicator score highlighted in yellow (bottom right section):
10-Year Treasury Weekly MACD: Buy Signal -Declining Rates: Bullish on Bonds
Extended Duration Treasury ETF: Buy Signal -Declining Rates: Bullish on Bonds
Dr. Copper: Long-term Bearish Sell Signal
“Dr. Copper” is insider lingo used in the commodities markets to explain price trends in copper’s ability to predict the overall health of the economy. When copper prices decline, it may indicate sluggish demand and an imminent economic slowdown. The following chart looks at monthly price data.
U.S. Dollar Price Trend: Short-term (Daily MACD) Sell Signal
U.S. Dollar Price Trend: Medium-term (Weekly MACD) Buy Signal
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.
Global Recession Probability Indicator – High Probability of a Global Recession
The Economy Based on the Stock Market Indicator – High U.S. Recession Risk
Recession Probability Based on Employment Trends – U.S. Recession Risk
Credit Conditions – Favorable, L ow U.S. Recession Risk
U.S. Economy vs. Yield Curve – High U.S. Recession Risk
13-week EMA vs. 34-week EMA: S ell Signal
Buy signals occur when the 13-week moving average trendline (blue line) crosses above the 34-week moving average trendline (red line). Sell signals occur when the 13-week moving average trendline (blue line) crosses below the slower moving 34-week moving average trendline (red line).
Green arrows indicate buy signals, red arrows sell signals.
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.
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
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.
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 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, and 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.
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.
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 E.M. 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 by 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 .
Investing involves risk. Past performance does not guarantee or indicate 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 (collectively, “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. Portfolio positions are subject to change at any time without notice. Please contact your CMG representative if you have any questions about your account.
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, has not been independently verified, and does 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.
The Ned Davis Research CMG U.S. Large Cap Long/Flat Index is not sponsored by S&P Dow Jones Indices or its affiliates or third party licensors (collectively, “S&P Dow Jones Indices”). S&P Dow Jones Indices will not be liable for any errors or omissions in calculating the Ned Davis Research CMG U.S. Large Cap Long/Flat Index. “Calculated by S&P Dow Jones Indices” and the related stylized mark(s) are service marks of S&P Dow Jones Indices. S&P® is a registered trademark of Standard & Poor’s Financial Services LLC and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC.
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 advisor’s use of the model if the model had been used during the period to actually manage 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 (e.g., S&P 500 Total Return or Dow Jones Wilshire U.S. 5000 Total Market IndexSM) is also disclosed. For example, the S&P 500 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. S&P Dow Jones 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 advisor located in Malvern, Pennsylvania. 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, or exclusively determines any internal strategy employed by CMG. A copy of CMG’s current written disclosure statement discussing advisory services and fees is available upon request or via CMG’s internet website at http://www.cmgwealth.com/disclosures/advs. Click here to review CMG’s Privacy Policy.