The significant signal this week is the -2 reading on the Don’t Fight the Tape or the Fed model. The model looks at the technical health of the broad equity market (how are most stocks doing across the various sectors). When the majority begin to break down and just a few support the market (looking at trend and momentum of thousands of stocks), the technical health is not good. This indicator combined with a 10-year Treasury yield indicator creates a reading from +2 (bullish) to -2 (bearish).
The last model reading of -2 was in 2012. As you’ll see below, the annual gain per annum when the reading was -2 was a -46.8% (an occurrence 5.9% of the time since 1998). Note that doesn’t mean a 46.8% decline is coming; it just means that the market has declined during past periods of -2. Thus the “watch out for -2” warning. Also interesting is the relatively high level of investor optimism. This is surprising after last week’s negative week for U.S. equities.
This combined with a negative reading in the CMG NDR Large Cap Momentum Index and a collection of other unfavorable technical readings (below), suggests, to me at least, reduce and hedge equity exposure. The market remains richly priced. Risk is high. See the rest of the story in Trade Signals: Watch Out for Minus 2 (Don’t Fight the Tape or The Fed Indicator is in a Rare -2 Model Reading) – A Strong Sell Signal (Hedge).
By Steve Blumenthal | See important disclosures.
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.