The supply/demand indicator turned bullish last week. The process looks at a smoothed total volume of declining issues versus a smoothed total volume of advancing issues, using a broad market equity index. This indication is another sign of market strength.
The big “however” is investor sentiment. We had been suggesting that the extreme level of pessimism supported a short-term recovery in the markets. That has happened. Sentiment is now showing extreme investor confidence. Such optimism is rarely rewarded.
If valuations were low and the long-term trend (as measured by our CMG NDR Large Cap Momentum Index) I’d be more constructive on the U.S. equity market. I remain neutral on equities and continue to favor reduced exposure and active hedges.
One hedge idea is to consider buying 15% 3-month out-of-the-money put options and selling (and at the same time selling 4% out-of-the-money 1-month call options). NOT A RECOMMENDATION TO BUY OR SELL ANY SECURITY – TALK TO YOUR ADVISOR ABOUT SUITABILITY.
In periods of market dislocation (like 2002 and 2008), it takes a 25% recovery to overcome a 20% loss. It takes a 100% recovery to overcome a 50% loss (and many years). When valuations are high risk is highest. I believe hedging can be done with little overall cost if done consistently. I like using our longer-term CMG NDR Large Cap Momentum Index in this way. In sell signals, hedge. In buy signals, don’t hedge. I also like it as a disciplined systematic way to raise some cash. Not perfect. No guarantees. Go to CBOE.com to learn more. Hire an experienced advisor to help you. Never write naked option positions.
By Steve Blumenthal | See full story in Trade Signals – ST Trend Bullish, LT Not Confirmed, Sentiment Is Bearish.
The current opinions and forecasts expressed herein are solely those of Steve Blumenthal and are subject to change. They do not represent the opinions of CMG. CMGs trading strategies are quantitative and may hold a position that at any given time does not reflect Steve’s forecasts. Steve’s opinions and forecasts may not actually come to pass. Information on this site should not be used as a recommendation to buy or sell any investment product or strategy.