Charts of the Week

Posted on 03.13.17 |

My favorite trend following indicator is something we co-created with Ned Davis Research. It looks at the underlying trends in 22 industry sectors and scores the weight of evidence on a 0 to 100 scale. Here is the chart if you haven’t seen it before (note: I post it every Wednesday afternoon in Trade Signals). The trend for equities is currently bullish.

What about bond exposure? We monitor the Zweig Bond Model.

Please refer to the March 10, 2017 post of On My Radar for an explanation of how it works.

Finally, I believe the key to investing and perhaps the most important lesson to learn is how money compounds over time. To that end, I wrote a piece called the “Merciless Mathematics of Loss.” Next is the chart and you can find the full piece here.

Charts of the Week

Posted on 02.27.17 |

This week we offer several charts concerning inflation, interest rates, U.S. economic recoveries, equity market performance and equity mutual fund flows.

This chart plots U.S. economic recoveries. Note the blue line. Debt’s a major drag:

Source: Crestmont Research

Keep an eye on inflation (rising):

Year-over-year change in CPI – look at the January numbers in the far right of the chart. The most recent BLS – Bureau of Labor Statistics Annualized Inflation Rate year-over-year equals 2.5%. The Fed’s target has been reached:

Source: Advisor Perspectives

And if you were wondering what inflation looks like by category:

Source: dshort.com

Here is the current probability of a Fed March interest rate hike:

Switching to equities, Ned Davis Research has something they call “Top Watch Indicators”… meaning indicators that help them spot a probable market top.

Here’s how you view the next chart:

When the green bars in the lower section rise above the horizontal dotted line (50), a market top is indicated.
The vertical dotted lines and shaded area indicates the times that more than 50% of their top watch indicators signaled a market top.
Percentage declines are indicated.
Green bar on the far right shows where we are as of 2-14-17.

Source: Ned Davis Research

Chalk one little dot up for the active fund managers. All the money has been flowing into passive index funds and ETFs:

And all that money that chased into “high dividend papers?” In a few short months, they’ve given up six years of excess returns. I continue to be cautious on high dividend stocks due to over popularity, low interest rates and the risk of rising rates.

Diversification has been under pressure the last few years. The average university endowment lost 1.90% in 2016. However, it is best viewed over the long term and designed to achieve a certain return relative to an acceptable amount of risk. 100% allocation to stocks is for a different investor risk profile. Not wise to compare one asset class to a diversified investment plan. With that said, in case you were wondering… this is how the 10 richest universities invested their money in 2016:

“Don’t Fight the Tape or the Fed”

Posted on 02.21.17 |

The number one rule many of us were taught is “Don’t Fight the Fed.” I like to add “trend” into that equation and, as you’ll see in the next chart, the math is compelling.

When the Fed raises rates (don’t fight them) and the trend turns negative, equities underperform. Focus on the red arrows. Two different time periods are measured, however, the message is the same. The big corrections come when both the Fed and trend turn negative. I wrote some time ago in On My Radar to “watch out for minus 2.” We currently sit at -1. I’ll share this chart from time to time – especially if -2 is triggered.

Here is how you read the chart:

The top section plots the S&P 500 Index but focus on the middle section.
NDR has a Multi-Cap Tape Composite Model to measure the technical health of the broad equity market. That model aggregates the signals of over 100 component indicators and generates a signal based on the percentage of the component indicators that are giving a bullish signal for the S&P 500. It measures momentum and trend.
The Fed component is really an interest rate component, which measures the trend in rates by looking at the yield on the 10-year Treasury note. When the 10-week trend in yields are lower than their 70-week trend in yields, the S&P 500 has produced larger gains. When it is higher, the S&P 500 has performed poorly. It’s that simple.
The combined indicator can produce a score of -2 (both indicators are bearish) to +2 (both bullish) and overall have done a good job historically as a risk-on/risk-off indicator.
The current reading is -1 (data shows we need to watch out for -2): refer to the red arrows.

Source: Ned Davis Research

Beware: Rising Rate Environment

Posted on 02.21.17 |

Reminder for bond investors: When interest rates rise, bonds lose value. I shared the following chart in July 2016 (interestingly just two days from the 1.37% low in yields). It shows how much money is lost for every 1% increase in rates. The top section is the 10-year Treasury bond and the bottom section is the 30-year Treasury. (I know I’ve shared this chart with you several times, but I believe it is worth revisiting. I just don’t believe the average investor knows just how much risk they are taking on with their so called “safe” investments.)

1.37% was the low yield back on July 13, 2016. The 10-year Treasury is currently yielding 2.42% and the 30-year is yielding 3.02%. That adds up to a -8.84% loss in value for the 10-year and call it a -16% for the 30-year. Maybe rates move back down, but I’m not so sure. I’m a bit more worried about what those losses will look like when yields rise to 3.4%, 4.4% and 5.4% (similar to where they were in 2007). -30% is a real risk.

Best Ideas from the Morningstar ETF Conference

Posted on 09.20.16 |

On September 8, I had the privilege of participating on a panel regarding portfolio construction (“Beyond the 60/40 Portfolio”) at the Morningstar ETF Conference in Chicago. Not surprisingly, there were a lot of terrific discussions, and I took tons of detailed notes. One of my favorite sessions was the “Best Ideas” panel, which featured Mark Yusko of Morgan Creek Capital Management, John West of Research Affiliates, and Rich Bernstein of RBA. Morningstar’s Jeff Ptak did a great job moderating the panel.

As promised, I shared some of my notes from the Best Ideas panel in Friday’s On My Radar. More to come from the conference later this week. Stay tuned!

Trade Signals – Overvalued, Sentiment Remains in Bullish Extreme (S/T Bearish for Stocks), Cyclical Bull Uptrend

Posted on 08.31.16 |

With a nod towards broad portfolio diversification, following is a quick summary of what I am seeing this week — organized by investment category (equity markets, fixed income and liquid alternatives):

Equity Markets: The weekly Ned Davis Research (NDR) investor sentiment remains extremely optimistic (short-term bearish for equities). The daily sentiment indicator is now neutral from extreme optimism (neutral for equities). At this time, there’s more buying demand vs. selling supply (a bullish signal), the market trend remains positive. Don’t Fight the Tape or the Fed moved recently from a +1 to 0 (now neutral on equities). The 13/34-Week EMA trend indicator remains bullish. The CMG NDR Large Cap Momentum Index is nearing a buy signal. Valuations, which we’ll look at again in this Friday’s On My Radar, remain extreme (overvalued), so while trend evidence suggests a neutral to positive view on equities, I continue to favor an underweight exposure to equities and hedge.
Fixed Income: HY remains in a buy signal or uptrend and the Zweig Bond Model remains in a buy (bullish on high quality fixed income). We see “JNK” and “PCY” exhibiting the strongest relative strength in fixed income (this from a universe of nine ETFs ranging from short-term and long-term Treasury bonds, corporate bonds, munis, high yield, emerging market, inflation and developed market bonds). It’s been a good year for bonds.
Liquid Alternatives: Gold (“GLD”) is testing support at 125. The CMG Opportunistic All Asset ETF Strategy is currently allocated approximately 81% to equities and 19% to fixed income. We allocated to “IYF,” a U.S. Financial ETF in the last week, trading out of “BND,” a bond ETF. Emerging markets and technology continue to show strong price leadership. Biotech has had a tough week.

For charts, analysis, and commentary see the rest of the story in Trade Signals – Overvalued, Sentiment Remains in Bullish Extreme (S/T Bearish for Stocks), Cyclical Bull Uptrend.

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.

Time To Buy High Yield ETFs Again?

Posted on 03.07.16 |

CMG Capital Management Group CEO Steve Blumenthal spoke to Cinthia Murphy at ETF.com about the state of high yield bonds. Excerpt from the story:

From a technical—and more tactical—perspective, high-yield bond ETFs could prove to be a great short-term opportunity, but not a long-term one, says Steve Blumenthal of CMG Capital Management Group.

“A simple smoothed moving average can tell us a lot about both the short-term and the longer-term trends in high yield: It’s a short-term buy for now, but trading it with stops in place for the overall longer-term trend picture remains less favorable,” Blumenthal said.

See the full story in ETF.com: Is It Time To Buy High Yield ETFs Again?

Get Blumenthal’s Insights Into Gold At #InsideETFs

Posted on 01.20.16 |

Gold is in the news. What’s going on with the precious metal now as the U.S. stock market slides and the Fed slowly raises interest rates? How does gold, and other commodities, fit in to a diversified portfolio?

CMG Capital Management CEO Steve Blumenthal will be on the panel Gold for Tomorrow at Inside ETFs in Hollywood, Florida, this coming Tuesday, January 26, at 2:50 PM.

Primary Trend Still Bearish for Stocks

Posted on 01.10.16 |

Cyclical Equity Market Trend: The Primary Trend Is Bearish for Stocks

CMG NDR Large Cap Momentum Index – Sell Signal – The Momentum and Market Breadth Data is reading Bearish for U.S. Equities (last signal was on June 30, 2015 with the S&P 500 Index at 2063.11). This is my favorite risk on/risk off equity market indicator.

Top ETF Picks For 2016

Posted on 01.03.16 |

As one of the top ETF strategists, Steve Blumenthal was invited by ETF.com to present his rationale for his top ETF picks for the year. An excerpt from the story:

Stephen Blumenthal, founder and CEO of CMG Capital Management Group in King of Prussia, Pennsylvania, is a strategist specializing in using quantitative processes to identify areas of strong relative price leadership:

O’Shares FTSE Asia Pacific Quality Dividend Hedged (OAPH): A smart-beta ETF focusing on companies that meet certain requirements for market capitalization, liquidity, quality, low volatility and high dividend yield.