CMG Tactical Strategy Review. No major changes since last week: We continue to hold mostly long equity exposure in our CMG Opportunistic All Asset Strategies with a modest move toward emerging markets across the portfolio. The portfolios are approximately 70% Equity, 30% Fixed Income. Our CMG Tactical Rotation Strategy moved to a more defensive position for April: 50% TLT (iShares Treasury Bonds) and VNQ (Vanguard REIT). High yield bond prices are firm to higher. We remain positioned long high yield bond fund exposure.
The cyclical trend remains positive as measured by Big Mo, investor sentiment is mixed and the Fed is supportive for now. Immediately ahead of us is the seasonally challenged May-October period. I believe that putting hedges in place remains the prudent thing to do. Risk is so significantly elevated due to Fed manipulation. The system is more leveraged than it was in 2008 and this cyclical bull is aged. Tactical strategies can further your portfolio diversification in important ways.
Now, here is a look at the S&P 500 Cycle Composite for 2014. The blue line in the chart below shows the tendency for the market to correct in the May to October period.
Here is the same chart absent the sector information. The dotted red line shows actual S&P 500 composite performance year-to-date through 4-24-14.
Several things to note:
- The cycle composite charts are designed to provide perspective on how repetitive historical market patterns could indicate a potential pattern for the current year. These cycle charts are based on the idea that seasonality (tendency for stock prices to behave differently during different times within a calendar year) and multi-year cycles have patterns that tend to repeat over time in the stock market. In addition to seasonal cycles, the four-year cycle (reflecting the time frame of a U.S. presidential term) and ten-year (decennial) cycle have been found to have significant repetitive tendencies historically. The cycle composite chart attempts to combine these three patterns into a single representative pattern.
- The one-year seasonal cycle is calculated by finding the average percent change in the S&P 500 Index for each day of a calendar year, based on all years from 1928 to present. The average daily percent changes are accumulated to produce a representative “average year” pattern. The same process is used for the four-year and ten-year cycles, but instead of using all years, they use only every fourth or tenth year (e.g., all years ending in “4”) historically. Thus we have three representative “average years” based on different historical cycles (one-year, four-year and ten-year) and we average them together to get a single composite cycle pattern that represents the current year, plotted in the top section of the chart. The chart also includes a line in the lower section indicating the actual pattern of the S&P 500 for the current year-to-date (its cumulative year-to-date percent gain), in order to see how the actual market corresponds to the cycle pattern.
- As the chart label indicates, the actual values (level) of the lines plotted are not significant by themselves; rather the trend of the lines indicating the potential direction of the market is where the focus should be. As always, we do not rely on seasonal or cyclical patterns as primary timing tools, instead basing analysis on factors such as the tape, the Fed, crowd sentiment, etc. However, knowing the historical tendencies of the market can often provide useful perspective on potential turning points and trends, which gain added weight when confirmed by primary NDR timing models and indicators. –Steve Blumenthal