CMG AdvisorCentral

Tactical investing news, views and resources for financial advisors

Risk-On or Risk-Off?

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In Friday’s On My Radar, Steve Blumenthal discusses his favorite market risk-on/risk-off indicator: the Ned Davis Research CMG U.S. Large Cap Long/Flat Index. The Index measures “market breadth,” which, generally speaking, is a measure of market activity, such as how many stocks are advancing higher in price and how many are declining, how many are making new highs and new lows, is the trading volume advancing or decreasing in size and is price momentum strong or weak by looking at the number of stocks that are in uptrends and downtrends.

The NDR/CMG process measures market breadth by analyzing the overall technical strength across 22 individually measured sub-industry sectors.  The process measures the trend of each of the sub-industry sectors, evaluating the rate of change in price momentum over short-term and long-term time frames and directional trend of each sub-industry sector.

Click below to find out what this important indicator is telling us about current market breadth and whether we should be risk-on or risk-off.

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NASDAQ’s Jill Malandrino Interviews Steve Blumenthal

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Last week, NASDAQ’s Global Market Reporter, Jill Malandrino, interviewed Steve Blumenthal at the Philadelphia Stock Exchange.

Steve discussed the Fed’s recent interest rate hike and its plans for additional increases this year. Steve urged caution, noting that 10 of the last 13 interest rate increase cycles have landed the US in recession. Click below for the full interview and potential moves investors can make to protect and preserve.

Source: NASDAQ

Recession Watch Indicators

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Recently, we offered current U.S. recession watch charts, including the Employment Trends Index, the Economy and the S&P 500 Index, and Inverted Yield Curve.

It’s critically important to remain vigilant and to check these indicators regularly because the next great buying opportunity could be right around the corner.

The current recessions charts indicate…

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Equity Market Valuations and Probable Forward Returns

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At which point do rising interest rates spark the fire?  Rates are key to the equation of risk.  In Friday’s On My Radar, Steve surveys what the current equity market valuations tell us about risk… and likely forward returns.  Should you be playing more offense than defense or more defense than offense?  Valuations can help.

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Blumenthal’s 2018 Market Outlook

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In Friday’s On My Radar, Steve provides his much-anticipated market outlook for 2018.

Steve says, “The weight of market trend evidence remains bullish.  I remain focused on both market momentum and trend evidence. Despite the aged, overvalued and over-bullish environment, as evidenced in Trade Signals each week, I remain moderately bullish on both equities and fixed income.”

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Charts of the Week

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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.

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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.

Beware: Rising Rate Environment

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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.)

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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.

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Rising Inflation Pressures and What it Means to Your Bond Allocations

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Below is my “go to” inflation chart.  The Ned Davis Research Inflation Timing Model consists of 22 indicators that primarily measure the various rates of change of such indicators as commodity prices, consumer prices, producer prices, and industrial production.  The model totals all the indicator readings and provides a score ranging from +22 (strong inflationary pressures) to -22 (strong disinflationary pressures).  High inflationary pressures are signaled when the model rises to +6 or above.  Low inflationary pressures are indicated when the model falls to zero or less.

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Source: Ned Davis Research

Bonds, bond funds and bond ETFs lose money when rates rise.  I posted this next chart just a few days before Treasury yields hit a 35-year yield low of 1.37%.  What it shows is how much money is lost when rates rise.

If your starting point was a yield of 1.40% (top half of chart), as it was on 7/11/2016, and rates rose to 2.40% (which they did) your loss would be -8.84% if you were invested in 10-year Treasury Notes and -19.07% (bottom section of chart) if yields on the 30-year Treasury Bond rose to 3.25% (which it nearly did).  Further, note the risk of loss if the 10-year rises to 5.40%.  Note the -53.90% loss on the 30-year if yields rise to 6.25%.

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A number of pundits are calling for a 5% yield in the 10-year within a few short years.  I’m not in that camp but really… I don’t know.  I’m more in the “one more big recession” camp that will properly reset equity valuations and if so then rates should gap lower.

What I do believe is most important, is that investors should see this chart and size up the potential risk-reward for themselves.  With rates just coming off 5,000-year lows, my best advice is to think about your bond exposure as if your retirement wealth is dependent on it… and it is.

2.45% Treasury yields suck (as a good friend reminds me is a technical term) and rising inflation will eat into the net real yield and further cause interest rates to spike higher.  Treasury yields were north of 5% in 2007.

Be tactical with your bond exposure.  Don’t look at the last 35 years, as many people do, and project it forward.  The great bond bull market yield low is likely in.  Think differently about how you position that 40% of the traditional 60% equity / 40% bond portfolio.

The Bond Market is Facing a “Perfect Storm”

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I’ve been saying for some time that the biggest bubble of all bubbles is in the bond market. European sovereign debt might just be the first to crisis. Further, global debt has reached 325% of GDP. Academic studies show that economies get into trouble when debt-to-GDP exceeds 90%. Expand that to the U.S. and you’ll find a 105% debt-to-GDP number. (The number is actually much higher — 250% — if you include Social Security and Medicare debts.)

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According to Paul Schmelzing, “The current bond market is facing the “perfect storm” of potential steepening of the bond yield curve, monetary policy tightening and a multi-year period of sustained losses due to a “structural” return of inflation resembling that of 1967.”

Don’t despair… click below for ideas about what you can do with the fixed income portion of your portfolio.

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