Investor sentiment has become more pessimistic which is short-term bullish for the equity market
Mid-week review of the markets
from CMG Capital Management Group
Equities The equity market trend remains positive as measured by Big Mo and 13/34-week EMA. There is good technical support at S&P 500 Index 1900 area.
Bonds After a pretty healthy sell-off, our high yield strategy has moved back into a “buy” signal. The Zweig Bond Model is also back in a “buy” signal reflecting a bullish environment for longer-term treasury and corporate bond exposure.
Sentiment Daily sentiment is in the Extreme Pessimism zone (a bullish counter indicator) and weekly sentiment is nearing Extreme Pessimism.
Commentary
All but a few sectors of the stock market are under pressure. Many are below their 50 and 200 day moving averages and more stocks are declining than advancing. The health of the market is in decline; however, the overall trend evidence remains positive and Don’t Fight the Fed remains an important theme.
Big Mo remains in a buy signal and the S&P 500 index’s 13-week EMA remains above its 34-week EMA. Those are the positives.
What concerns me most is how the market will react to a Fed QE exit. With Europe, Japan and China in economic decline (if not triple dip recession in both Europe and Japan) coupled with an overpriced (“bubble territory” as mentioned last week) and excessively margined equity market (this week’s special chart) the risk needle remains pointed to the far right. Own equities but hedge.
Portfolio Construction
I favor 30/30/40 with the 30% to equities hedged, 30% to fixed income flexibly managed due to low interest rates and 40% to tactical and alternative strategies. Within that last category, I favor a 10% allocation to precious metals.
More aggressive accounts might overweight equities (something in the order of 70% equities and 30% tactical). I recommend putting in place an “always on” hedge for your long-term focused core equity exposure. It’s a small expense relative to the downside protection it may provide you. When valuations become more attractive and forward return potential is higher, the need to hedge will decrease.
Overall, risk remains elevated, the market remains overvalued and some form of risk protection, in my view, simply makes sense. – Steve Blumenthal, Chief Investment Officer and portfolio manager at CMG Capital Management Group, Inc.
See CMG Trade Signals – Margin Debt At Record High for the full story and important disclosures.
