Steve Blumenthal, CEO, CMG Capital Management Group
4/22/2015 Trade Signals: In summary, both Big Mo (Momentum) and the 13/34-Week EMA suggest that the market remains in a cyclical bull market (up trending) state. I believe trend is most important: therefore, buy the dips (on extreme pessimism) as long as the 13/34-Week Blue EMA line is above the Red EMA line and own equities (but hedged as valuations are high, the market bull is aged; thus, overall equity market risk is high). For charts and explanation see Trade Signals – “Risk On” Trade Remains in Place.
From an investment management perspective, I’ve followed, managed and written about trend following and investor sentiment for many years. I find that reviewing various sentiment, trend and other historically valuable rules based indicators each week helps me to stay balanced and disciplined in allocating to the various risk sets that are included within a broadly diversified total portfolio solution.
My objective is to position in line with the equity and fixed income market’s primary trends. I believe risk management is paramount in a long-term investment process. When to hedge, when to become more aggressive, etc.
Next, let’s take a look at the bond market.
The Zweig Bond Model: “BUY” Signal – Cyclical Bull Trend for Bonds Remains Bullish
Historical performance is summarized in the table on the bottom left. The Model Equity gain per annum percent (GPA%) is nearly 2.5% higher than the Barclays Aggregate Total Return Bond Index. The gain of $1,000 becomes greater than $80,000 vs. nearly $27,000 over the full back tested period and it did so with a Sharpe Ratio of 0.88 vs. 0.30 (a meaningful improvement). The Sharpe ratio uses standard deviation to measure a fund’s risk-adjusted returns. The higher the Sharpe ratio, the better the returns relative to the risk taken.
The yellow highlight shows the current Signal (orange arrow) for the strategy and the historical performance when on that signal (the model was originally established by Martin Zweig and Ned Davis from Ned Davis Research in 1986 – performance reflected is hypothetical). The original model had four rules. A fifth rule was added post 2008 to capture the fact that corporate bonds could decline even in a declining interest rate environment (the 2008/09 credit crisis). It is a 50-day moving average trend indicator that may help capture such risk.
We worked with Ned Davis Research (NDR) to create a daily / tradable version of the model that we could share with our advisor clients. Given the growth in ETFs, we took the buy and sell signals and ran our performance analysis using the Barclays Aggregate Bond Total Return Index (which serves as a broad proxy for the U.S. bond market).
The blue line in the chart shows the growth of $100 since April 1, 1967 in comparison to the black line which is the growth of the Barclays Aggregate Bond Total Return Index. The table at the bottom left compares the performance of the model to buying and holding the Barclays Aggregate Bond Market Total (TR) Return Index.
A proxy for the Aggregate Bond Index is the iShares Barclays Aggregate Bond Fund ETF symbol “AGG”. AGG seeks to track the Aggregate Bond Market TR Index. On sell signals, a short-term bond ETF may be used to reduce the interest rate risk. It is a pure tactical trend following model. This is not a recommendation to buy any security or invest following this strategy as I have no knowledge of your personal investment goals, risks tolerances and objectives. The idea is to show there are ways which may help you protect against a period of sharply rising interest rates (an environment that is unfavorable to bond holdings).
Of course, past performance cannot predict or guarantee future results. Click here for NDR disclosure information. See Trade Signals – “Risk On” Trade Remains in Place for the full story and important disclosures. Sign up for weekly AdvisorCentral updates.
Steve Blumenthal is CEO and CIO of CMG Capital Management Group. The objective behind all of Mr. Blumenthal’s work is to help advisors build better portfolios by allocating with a long term game plan that is risk sensitive and properly diversified. Mr. Blumenthal is a self-proclaimed “quant geek” with an analytical mind for the markets that helps him connect with everyday investors and industry experts alike.
