CMG AdvisorCentral

Tactical investing news, views and resources for financial advisors

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.)

0217-01

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.

0203-13

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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The Quest for Yield

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Yields are at 5,000-year lows.

71% of the world’s government bonds are yielding less than 1%.  33% yield less than 0%.  In a picture it looks like this:

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Source: Bloomberg; JPMorgan Asset Management, BofA Merrill Lynch

Risk is being overlooked in HY bonds.  Yields on high yield debt are close to the same yields on less risky loans.  The chase for yield has driven investors to riskier asset classes.

I am anticipating a once-in-a-generation buying opportunity in HY bonds.  While the trend this week is up, continue to invest with the trend.  Move to the safety of cash or Treasury Bills when the trend crosses down.

Click below for a great chart showing what a 1% increase in interest rates does to bond prices.  Show it to your clients!

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Trade Signals – Sentiment Better, Risk On Remains

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With a nod towards broad portfolio diversification, following is a quick summary of what I am seeing this week — organized by investment category (equity markets, fixed income and liquid alternatives):

Equity Markets: Investor Sentiment moved from excessive optimism to neutral.  The trend remains positive.  Supply and demand continues to evidence more buyers than sellers (a bullish signal).  Don’t Fight the Tape or the Fed moved from 0 to -1.  This next chart shows us why we want to watch out for -2 (an unfavorable trend and unfriendly Fed environment):

09.07.01

The 13/34-Week EMA trend indicator remains bullish.  The CMG NDR Large Cap Momentum Index is nearing a buy signal; its model trend line is bullish.

A quick note on the chart above:  NDR shows price appreciation and not total return.  So, the Buy/Hold + 8.55% Gain/Annum would be higher with dividends added in.  That would be more informative; however, since we are comparing the price appreciation in each zone (+2, +1, Neutral (0) as reflected), I believe the data is telling and useful in giving us a sense for which environments suggest more or less risk.  Actual returns in each category are higher.  A thank you to an astute reader.

Fixed Income: The 10-year Treasury Yield is back down to 1.52%.  Money is voting with its pocket… saying the Fed won’t raise rates.  The Zweig Bond Model remains bullish on bonds and our HY remains in a buy signal.  The underlying HY fundamentals are terrible; however, this is another good example where trend following can be a good friend.  We will ride the uptrend until it reverses.  Further, we see “JNK” and “PCY” exhibiting the strongest relative strength in fixed income (this from a universe of nine ETFs ranging from short-term and long-term Treasury bonds, corporate bonds, munis, high yield, emerging market, inflation and developed market bonds).

Liquid Alternatives: The CMG Opportunistic All Asset ETF Strategy is currently allocated approximately 81% to equities and 19% to fixed income.  We are seeing strong relative price leadership in “EEM” (Emerging Markets), “VT” (Vanguard Total World Stock ETF), “QQQ” and “IYW” (Technology ETFs) and “IYF” (U.S. Financials).  Our two fixed income ETFs, “EDV” (Vanguard Extended Duration Treasury) and “TLT” (iShares 20+ Year Treasury Bond), have rallied nicely.  Biotech looks to be recovering from the Hillary Clinton statements.  For weightings by asset class, please see the CMG Opportunistic All Asset Strategy pie chart below.  Gold (“GLD”) looks to have held support at 125.  The cyclical trend for gold remains higher as evidenced by the Gold chart you’ll find in the full post (link below).

For charts, analysis, and commentary see the rest of the story in Trade Signals — Sentiment Better, Risk On Remains.

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.  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.

The slow, long expansion

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A client asked me how economic growth post the great financial crisis compares to other prior periods.  I did some digging and found this from Ned Davis Research, “Currently in its eighth year of growth, this expansion is the fourth longest of the postwar period.  Early next year it will be number three.  The longest expansion was ten years, which ended in March 2001 and encompassed the technology boom.”

Here is a look at the data from 1947 to present:

Anatomy of Post War Economic Expansions 03/1947 - 07/2016

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Trade Signals for Equity, Fixed, Liquid Alts

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CMG Capital Management Group Inc.A quick summary of what we are seeing by investment category (equity markets, fixed income and liquid alternatives):

  • Equity Markets: Investor sentiment remains extremely optimistic (short-term bearish for equities), Don’t Fight the Tape or the Fed moved from a +1 to 0 (now neutral on Equities). The 13/34-Week EMA trend indicator remains bullish.  The CMG NDR Large Cap Momentum Index is nearing a buy signal.  Neutral to positive on equities.
  • Fixed Income: HY remains in a buy signal and the Zweig Bond model remains in a buy.
  • Liquid Alternatives: The CMG Opportunistic All Asset ETF Strategy is taking on more risk. Recently, we increased allocations to technology and biotech.  Yesterday, we sold out of short duration bonds (“MINT”) into Vanguard Total World Stock ETF (“VT”).

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Market Today Feels Like 1997

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CMG Capital Management Group Inc.Technically, the S&P 500 Index looks strong.  The price trend, as measured by the 13/34-Week MA (posted below) turned positive in late March 2016.  My favorite “weight of evidence indicator,” the CMG Ned Davis Research Large Cap Momentum Index, is nearing a buy signal.

Further, the “Don’t Fight the Tape or the Fed” indicator is in a favorable equity market signal and Volume Demand (buyers) continues to be greater that Volume Supply (sellers).  You will find the charts below.

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