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Charts of the Week

Posted on 03.21.17 |

I personally believe that recessions can be forecast in advance.  While no indicator is perfect, there are a few processes that have had a high correct signal rate in the past.

The reason that getting in front of recession is important is that it is during recessions that all the bad corrections tend to happen.  Bad as in -40% bad.

The other problem with recessions is that they are only known in hindsight.  It takes two quarters of negative GDP growth for the chief recession czars at the National Bureau of Economic Research to tell us when the recession actually started.

Following are three of my favorite leading “recession watch” indicator charts:

Chart 1: The Economy (no current sign of recession)

Here is how you read this chart:

  • Believe it or not, the stock market is a great leading indicator for the economy. It tends to turn down in advance of recession.
  • This process (bottom section of the chart) plots the S&P 500 Index (red line) and also a five-month smoothed moving average of the S&P 500.
  • The smoothed dotted line (green in lower section) represents the trend of the market’s prices.
  • When the red line (S&P 500 Index) drops below its smoothed moving average trend line (dotted green line) by 4.8% or more, a recession signal is generated.
  • When the red line rises above the dotted green line by 3.6% or more, a bullish signal is triggered for the economy.
  • The down arrows are the recession signals, up arrows are the expansion signals.
  • The gray vertical shaded lines mark the beginning and end of all the recessions since 1948.
  • In total, 79% of the signals have been correct though some have been a little early or just a little late. There were a few false signals but they didn’t keep you offsides for long.  All in all, in my opinion, pretty darn good.

0317.00

Chart 2: The Economy vs. the Employment Trends Index

Here is how you read the chart:

  • 100% correct signals
  • Down arrow – recession signal is generated when the Employment Trends Index drops by 4.8% from the most recent high watermark.
  • Up arrow – expansion signal is generated when the Employment Trends Index rises from its most recent low watermark by just 0.4%.
  • Data 1979 through 2/28/2017

0317.01

Chart 3: Global Recession Probability Model

Here is how you read the chart:

  • High global recession probability when the blue line is above the dotted red line.
  • Low global recession probability when the blue line is below the dotted green line (like today).
  • The box at the bottom right shows what happened. When above the dotted red line (the 70 level on the chart), recession occurred 81.46% of the time.  54% of the time (including the most recent high recession risk reading in 2016), a recession did not occur.  This is a probability game, folks… but pretty good accurate history.

0317.06

Conclusion: Low current risk of a U.S. recession.  Low current risk of a global recession.

Categories: Global Economy, Tactical Investment Strategies Tags: Ned Davis Research, On My Radar, recession, Risk, Steve Blumenthal, Trade Signals

Charts of the Week

Posted on 02.27.17 |

This week we offer several charts concerning inflation, interest rates, U.S. economic recoveries, equity market performance and equity mutual fund flows.

This chart plots U.S. economic recoveries.  Note the blue line.  Debt’s a major drag:

0224-04

Source: Crestmont Research

Keep an eye on inflation (rising):

0224-05

Year-over-year change in CPI – look at the January numbers in the far right of the chart. The most recent BLS – Bureau of Labor Statistics Annualized Inflation Rate year-over-year equals 2.5%.  The Fed’s target has been reached:

0224-06

Source: Advisor Perspectives

And if you were wondering what inflation looks like by category:

0224-07

Source: dshort.com

0224-08

Source: dshort.com

Here is the current probability of a Fed March interest rate hike:

0224-09

Switching to equities, Ned Davis Research has something they call “Top Watch Indicators”… meaning indicators that help them spot a probable market top.

Here’s how you view the next chart:

  • When the green bars in the lower section rise above the horizontal dotted line (50), a market top is indicated.
  • The vertical dotted lines and shaded area indicates the times that more than 50% of their top watch indicators signaled a market top.
  • Percentage declines are indicated.
  • Green bar on the far right shows where we are as of 2-14-17.

0224-10

Source: Ned Davis Research

Chalk one little dot up for the active fund managers.  All the money has been flowing into passive index funds and ETFs:

0224-11

And all that money that chased into “high dividend papers?”  In a few short months, they’ve given up six years of excess returns.  I continue to be cautious on high dividend stocks due to over popularity, low interest rates and the risk of rising rates.

0224-12

Diversification has been under pressure the last few years.  The average university endowment lost 1.90% in 2016.  However, it is best viewed over the long term and designed to achieve a certain return relative to an acceptable amount of risk.  100% allocation to stocks is for a different investor risk profile.  Not wise to compare one asset class to a diversified investment plan.  With that said, in case you were wondering… this is how the 10 richest universities invested their money in 2016:0224-13

Categories: Global Economy Tags: Equities, ETFs, Inflation, Ned Davis Research, On My Radar, Stephen Blumenthal, Steve Blumenthal, Tactical Investing, The Fed, valuations

Market Valuations Remain Excessively High, Probable Forward Returns to be Muted

Posted on 10.10.16 |

valuation-3-investwithalexRegular readers know that I favor the median price/earnings (P/E) ratio to assess broad market valuation.  Median P/E tends to remove common one-off accounting gimmicks.  However, by almost any valuation methodology, the market is overvalued and probable forward returns will be lower.

As of September 30, the median P/E of the S&P 500 Index was 23.3 (with the S&P 500 at 2,168.27).

  • 1,576.33 = Current Fair Value (this number is based on a 52.6-year median P/E of 16.9)
  • 2,057.69 = Overvalued (the S&P 500 was at 2,168.27 on 9-30-2016, so it is at a level of more than 5% above what is considered overvalued)
  • 1,092.81 = Undervalued is at 1,092.81 (a crisis event might get us there)

What does this tell us about returns over the coming 10 years?

READ MORE

 

The current opinions and forecasts expressed herein are solely those of Steve Blumenthal and are subject to change.  They do not necessarily represent the opinions of CMG.  CMG’s 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.

Categories: Tactical Investment Strategies Tags: Equities, Ned Davis Research, On My Radar, Stephen Blumenthal, Steve Blumenthal, valuations

Facing Your Investing Mistakes

Posted on 11.15.15 |

Steve Blumenthal, CEO, CMG Capital Management Group, speaks at ETF BootcampI really love when a trader/investor is able to speak honestly about his/her mistakes.  The best seem to be able to change course and adjust quickly.

I read a piece from Ned Davis recently where he reflected on the biggest mistake he made in the business.  It was in the late 1990s and was tied to record high equity market valuations. He cut back on equity exposure too soon.  He wasn’t alone.

Read More >

Categories: Tactical Investment Strategies Tags: Ned Davis Research, Stan Druckenmiller, Steve Blumenthal

Three-Way Asset Strategy

Posted on 06.20.15 |

Steve Blumenthal, CEO, CMG Capital Management Group

Steve Blumenthal, CEO, CMG Capital Management Group

On My Radar: Three-Way Asset Strategy (Stocks, Bonds and Gold)

The concept here is simple and often simple is best.  The red line shows the performance from 1968 to present when holding the asset classes (S&P 500, long-term bonds and gold) when the 3-month moving average is above its 10-month moving average.  It shows how a simple three-way model can do well against the stock market as represented by the Standard and Poor’s 500 Total Return Index.

Here is how it works:

  • The concept is to stay fully invested in any of the three assets provided each asset’s 3-month MA is above its 10-month MA.
  • If, for example, gold is the only asset with its 3-month above its 10-month, then the model will be 100% long gold. If stocks and bonds, than 50% is positioned in each.  If all three are in a positive up trend, than 1/3rd is allocated to each.
  • It’s that simple. The model’s returns are better and much less volatile than the S&P itself.

Read More >

Categories: Tactical Investment Strategies Tags: Meb Faber, Ned Davis Research, On My Radar, Steve Blumenthal

Keep an Eye on This Chart

Posted on 04.27.15 |

Monday morning. 4/24/2015. On My Radar (Summary) by Steve Blumenthal

Steve Blumenthal, CEO, CMG Capital Management Group, counsels strategic patience in investingThe consensus view sees economic improvement ahead while some see the economy getting worse. I share a chart today that shows every recession since 1950.  The point is – there have been seven recessions since 1970 and the economists “consensus view” missed them all. Zero for seven is a poor track record on the very topic they focus on most.

I think there is a better way and I was reminded this morning about one of my favorite recession forecasting charts.  I share it with you today and will begin including it each week in Trade Signals.  For me, it mutes the noise and has a 79% accuracy rate dating back to 1950.  Let’s take a look at the chart.

Read More >

Categories: Tactical Investment Strategies Tags: Ned Davis Research, On My Radar, Stephen Blumenthal

Trend Still Bullish For Stocks And Bonds

Posted on 04.23.15 |

Steve Blumenthal, CEO, CMG Capital Management Group

Steve Blumenthal, CEO, CMG Capital Management Group

4/22/2015 Trade Signals: In summary, both Big Mo (Momentum) and the 13/34-Week EMA suggest that the market remains in a cyclical bull market (up trending) state.  I believe trend is most important: therefore, buy the dips (on extreme pessimism) as long as the 13/34-Week Blue EMA line is above the Red EMA line and own equities (but hedged as valuations are high, the market bull is aged; thus, overall equity market risk is high). For charts and explanation see Trade Signals – “Risk On” Trade Remains in Place.

From an investment management perspective, I’ve followed, managed and written about trend following and investor sentiment for many years.  I find that reviewing various sentiment, trend and other historically valuable rules based indicators each week helps me to stay balanced and disciplined in allocating to the various risk sets that are included within a broadly diversified total portfolio solution.

Read More >

Categories: Market Snapshot Tags: Bonds, Equities, Ned Davis Research, Steve Blumenthal, Trade Signals

The Mathematics of Loss

Posted on 03.08.15 |

By Steve Blumenthal, CEO, CMG Capital Management Group

The Mathematics of LossAccording to my friends at Ned Davis Research, Inc., during the average buy-and-hold stock market, an investor spends 77% of his or her time recovering from cyclical downturns in the market.  77% of the time – that’s telling.  It’s in the mathematics of loss. Remember that it takes a 100% gain to overcome a 50% decline.

My two cents is that many investors expect 9% to 11%; yet, we currently live in a world of 4% to 5%.  If you are an older dog like me, you’ll remember your clients expecting 18% per year or more in the late 1990s and 2000.  My client, Roberta, left CMG in December 1999 after I grew her account 30% over the prior two years.  She was ultra-conservative and positioned accordingly.

The problem, of course, was that 30% paled in comparison to the 51.4% the S&P 500 gained in 1998-1999 or the 159.14% the NASDAQ gained over those two years.  She told me she was going to a Merrill Lynch broker and was investing in “safe stocks”.  Her $1 million account fell to less than $500,000.  Had she stayed, that same $1 million would have grown to over $1.3 million.  It is tough to compare a conservative bond strategy to stocks, but I showed her the forward return probabilities back then and I wrote frequently about a technology bubble.  Unfortunately, that didn’t help. She was in her mid-60s then.  Safe stocks.  Right.

Read More >

Categories: Tactical Investment Strategies Tags: Ned Davis Research, On My Radar, Steve Blumenthal

Trade Signals: Cyclical Equity and Bond Trends Remain Bullish

Posted on 03.06.15 |

By Steve Blumenthal, CEO, CMG Capital Management Group

Steve Blumenthal, CEO, CMG Capital Management Group, counsels strategic patience in investingFrom an investment management perspective, I’ve followed and written about trend and investor sentiment for many years.  I have found that going through the drill each week in a systematic way helps me stay balanced and in line with the market’s primary trend.  I believe risk management is paramount in the investment process.  When to hedge, when to become more aggressive, etc.

Trade Signals started after a colleague asked me if I could share my thoughts with him.  I have found that putting pen to paper has really helped me in my investment management process and I hope that this research is of value to you.

Read More >

Categories: Tactical Investment Strategies Tags: Big Mo, bullish, NDR Crowd Sentiment Poll, Ned Davis Research

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