Sentiment is reading extreme pessimism in a number of the indicators I favor. Such pessimism tends to be short-term bullish for the stock market.
The idea with investor sentiment is to go with the flow until an extreme is reached – then a change in short-term trend is probable. This is especially true at levels of technical support.
With that in mind, I’m watching for pessimism to trough and begin to improve.
The overall idea with risk management is to hedge equity exposure at times of extreme optimism, especially when the market is aged, overvalued, overbought and over-believed. At such times, risk is highest. This is where we find ourselves today.
The market remains range-bound and is again testing the 2040 level. The trend evidence is bullish (see the 13-week over 34-week EMA chart below); however, my favorite equity indicator continues to suggest caution (CMG Ned Davis Research Large Cap Momentum Index). I currently favor a lower allocation to the equity portion of a portfolio (hedged) and tactical management of the bond portion of a portfolio due to the ultra-low interest rate environment (this is where tactical HY and the Zweig Bond Model may help).
High yield is in a buy signal, but seasonally we have entered the more challenging months as high yield tends to underperform in May through August. We’ll stay nimble. The Zweig Bond Model is in a buy – favoring long-term fixed income ETF exposure.
Finally, having exposure to tactical strategies that have the ability to pivot towards fixed income or towards equity (sectors, style box, etc.) can deepen a portfolio’s overall diversification. Such strategies have their own processes that may add value to a diversified portfolio. Please note that this is not a specific recommendation to buy or sell any security as I have no information or understanding of your personal financial situation.
By Steve Blumenthal | For graphs and analysis of sentiment indicators see the full story in Trade Signals – Fed Minutes: Odds of a Rate Hike … Up
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.