I noted several weeks ago that investor sentiment had reached a bullish extreme. Such readings are generally short-term bearish for equities. With the stock market down seven days in a row, investor optimism has declined but still remains excessively optimistic. The best returns come from points of extreme investor pessimism: Here is what I mean (yellow shading marks the current reading):
source: Ned Davis Research
The CMG Managed High Yield Bond Program remains in a buy; however, the trend is weakening and the fundamental picture does not look good. Defaults jumped to 4.5% in July, the worst since 2010. This quote from Seeking Alpha says it best:
Default rates blowing out to crisis proportions while institutional investors are piling into distressed junk bonds and drive up prices despite soaring defaults – these are the kinds of out-of-sync movements that our era of interest rate repression, QE and the relentless search for yield is becoming famous for.
Stay tactical and disciplined. The next default wave will create an outstanding opportunity.
You’ll see today that the CMG Ned Davis Research Large Cap Momentum Index remains in a sell signal, suggesting caution on U.S. Large Cap ETFs.
The Zweig Bond Model remains in a buy signal, suggesting exposure to longer-dated high quality bond ETFs. It is a trend following indicator that has done a good job at staying invested in bonds over the last several years (page down for the performance stats).
With interest rates so low, I believe some sort of risk management is prudent if not mandatory. Here is a look at what happens should interest rates rise (loss) or fall (gain). Show this chart to your clients.
Interest rates are anything but normal. Bonds won’t help a portfolio like they have in the past. Stay flexible and tactical with your high-quality bond exposure.
By Steve Blumenthal | For charts, analysis, and commentary see the rest of the story in Trade Signals: Bond Market Risks, Zweig Bond Model a Buy, HY Weakening, Sentiment at Bullish Extreme, Trend Positive, CMG Opportunistic All Asset Strategy 45% Equities / 55% Fixed Income.
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.
