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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Bob Rubin Interviews David Swensen

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In Friday’s On My Radar, Steve links to a great interview of David Swensen, Yale’s CIO, by former Goldman co-chairman and former Treasury Secretary, Robert Rubin.

Take a few minutes and watch the interview.  It’s worth it.  Add Swensen to the list of famed investors predicting low single-digit forward returns.  He shares some sage advice on portfolio management and diversification.

Click the photo for the full interview.

U.S. Household Asset Allocation (Ned Davis Research)

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In past valuation posts, I’ve occasionally shared the following two charts.  Ned Davis Research (NDR) charts the Federal Reserve’s “U.S. Household Asset Allocation” data.  Below is the charted history of stock, bond and cash percentages.  Stock ownership is currently 55.83% of a “Household’s” asset allocation (upper section of next chart).

NDR looks at that stock allocation number (55.83% today) and they then do something really cool.  They analyze the history of the percentage in stocks and plot the returns an investor received 10 years later.

NEXT CHART

Volatility: Calm Before the Storm?

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August and September are the two worst performing months for stocks each year.  You wouldn’t know it from the relative calm in the market.  From Bloomberg’s David Wilson, “This month’s pattern of calm for U.S. stocks persisted even after Federal Reserve officials laid out plans to begin selling some of the central bank’s bond holdings. The CBOE Volatility Index, or VIX, is headed for its lowest daily average in any September since calculations began in 1990.  Wednesday’s 0.4-point decline in the VIX, to 9.78, as the Fed announced the monetary-policy shift.”  The all-time low was in early 2007 at 9.39.  Readings below 10 are rare.

Here is a look at the VIX Volatility Index since 1999.  Imagine the calm confidence that set over the market in 2007.  VIX measures perceived risk.  We should get worried when everyone is comfortable and see opportunity when others are in fear.

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Animal Spirits and the “Fear Gauge”

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In Friday’s On My Radar, Steve Blumenthal wrote, “Last Monday, the VIX broke below 10 to close at 9.77, the lowest level in more than a decade.  There are only three other days the index has closed at lower levels, all of them in December 1993.  Investors are complacent to risk.  They shouldn’t be.”

Investment consulting firm 720Global also recently wrote about market volatility in The Unseen, “Volatility: A Misleading Measure of Risk.”

As investors, we are negligent if we follow the Fed’s lead into this complacent stupor. By prodding economic growth with unproductive debt and reigniting asset bubbles, the central banks have simply done more of what created the spasms of 2008 in the first place. Despite the markets calm façade and historically low perception of risk, the vast chasm that lies between perceived risk and reality is troublesome.

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Market Valuation & Forward Returns Update

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In the May 5th issue of On My Radar, Steve Blumenthal provides his popular survey of current market valuation and 10-year forward returns forecast.

First, Steve offers a quick primer on valuation and price-to-earnings (P/E) in layman’s terms.  Most investors (and even some financial advisors) don’t understand valuation methodologies and how median P/E works and what it tells us.

Steve presents a number of informative charts that advisors can use in their own valuation work and to discuss valuation and forward returns with their clients.

In sum, the broad market (i.e., S&P 500) remains very expensive and overvalued according to several metrics and 10-year forward returns are likely to be muted (0%-3% before inflation).  Steve says, “We clearly find ourselves today in a high valuation and low potential forward return environment.”  Click below to access the charts and Steve’s analysis!

ON MY RADAR

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.)

01-06-09

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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Dalio: Are We at the End of a Long-Term Debt Cycle?

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10-21-00Ray Dalio established Bridgewater Associates in 1975.  With $150 billion under management, Bridgewater is the largest hedge fund in the world.  The firm has approximately 350 institutional clients, including public and corporate pension funds, university endowments, charitable foundations, supranational agencies, sovereign wealth funds and central banks.

In 2015, Bridgewater published Economic Principles, a research paper discussing the driving forces behind the economy, and explains why economic cycles occur by breaking down concepts such as credit, interest rates, leveraging and deleveraging.  Here at CMG, our interns are required to read Economic Principles, among other books.  Though lengthy, it is the best working model on global economic cycles, debt, education, inflation and more I have read.

Dalio was interviewed by CNBC’s Andrew Ross Sorkin at last month’s CNBC Institutional Investors Delivering Alpha Conference.  In this week’s On My Radar, we summarize the interview and address Dalio’s question, “Are we at the end of a long-term debt cycle?”

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How to Use the CMG NDR Large Cap Momentum Index

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CMG Capital Management Group Inc.An advisor client asked me how I use the CMG Ned Davis Research Large Cap Momentum Index within a total portfolio.  My two cents is I like to have a systematic way, absent emotion, to raise some cash when the weight of technical evidence is negative and a way that gets me back fully invested when the weight of evidence is positive.

For example, I would favor a 30% allocation to equities at this time because, in my opinion, valuations are high (as you’ll see in Friday’s “On My Radar,” we are now at a level that is higher than it was at the market peak in 2007).  In my personal account, within my 30% equity weighting, I would have one-third invested in an ultra-low fee large cap ETF.  On sell signals, I would trade that large cap equity ETF to BIL (a short-term Treasury bill ETF).

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Charting The New Bull Market in Gold – Blumenthal in Forbes

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ForbesIn Steve Blumenthal’s latest Forbes article he discusses a way to block out the noise of gold fever and adhere to a time-tested method of modulating exposure to gold. According to this trend-following method, says Steve, a new cyclical bull market period for gold has just begun. Excerpt from the Forbes story:

Consider the use of a simple trend-following process to trade gold. One of my favorite methods is to compare two smoothed moving-average price lines: a 13-week moving average and a slower 34-week moving average. Think of a moving average as a smoothing of the price of a security (or index) over the past number of weeks.

See the full story in Forbes: Charting The New Bull Market In Gold.