Overall, from a trading perspective, I am now with a neutral view on equities. Our CMG NDR Momentum Index (my favorite measure) which looks at momentum and market breadth remains in a sell signal. However, the weekly 13-week vs. 34-week moving average has just turned bullish on the market. The markets are generally stronger November through April. There is a strong seasonal tailwind.
Sentiment is neutral to negative. The daily sentiment charts are showing extreme optimism which is generally short-term bearish for equities. Fed policy is unfavorable, valuations are high, trend is positive but market breadth is neutral at best.
It is important to remember that we may be at the end of Fed QE and ZIRP. That environment provided unprecedented lift to high risk assets. The Fed is signaling a rate rise in December. To project the last five years returns forward may not be wise. Valuations remain high.
I favor broad risk diversification. No one investment does well all of the time. I favor a focus on strong risk management.
Some time ago my wife Susan asked me what I felt was the most important thing she should know about investing. I answered compound interest, how it works and why it is so important to minimize loss.
Along that line, I learned yesterday that the great Richard Russell, long-time author of Dow Theory Letters, passed away last weekend. He said the most popular letter he wrote was titled, Rich Man, Poor Man. Here are his first two Rules:
Rule #1: “Compounding is the royal road to riches. Compounding is the safe road, the sure road and, fortunately, anybody can do it. To compound successfully you need the following: perseverance in order to keep you firmly on the savings path. You need intelligence in order to understand what you are doing and why. And you need a knowledge of the mathematics tables in order to comprehend the amazing rewards that will come to you if you faithfully follow the compounding road. And, of course, you need time, time to allow the power of compounding to work for you. Remember, compounding only works through time.”
Rule #2: “DON’T LOSE MONEY: This may sound naive, but believe me it isn’t. If you want to be wealthy, you must not lose money, or I should say must not lose BIG money.”
Amen and rest in peace Richard!
See the rest of the story in Trade Signals – Rich Man Poor Man.
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.