The Central Banks, the Market and Wealth Creation
By January 22, 2016
By Steve Blumenthal
“Since the only way you are going to find solutions to painful problems is by thinking deeply about them — i.e., reflecting — if you can develop a knee-jerk reaction to pain that is to reflect rather than to fight or flee, it will lead to your rapid learning/evolving.”
– Ray Dalio
Numerous investor behavior studies have been conducted by researchers, and most come to the same conclusion: individual investors tend to buy and sell at the wrong time. Perhaps it is the “fight or flight” in us that gets in the way. “Thinking deeply” – “Reflecting”. A good friend and advisor client said to me this morning, “This business can be a bi&@h.” I told him I was posting a chart today that may speak to his frustration. Here, I share it with you.
The chart shows that since 1901, the Dow Jones Industrial Average has spent 76.4% of the time declining in value or recovering from loss and just 23.6% of the time creating wealth.
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The data is better if we look at 1930 to the present but the overall message remains the same. The market spends the majority of time getting back to even.
I believe most individual investors think the majority of time is spent making money. The longest bull market run was 1987 – 2000. That is what we hold in mind but that was an exceptional period. Most of the time the road was higher but bumpy. Notice how bear markets tend to happen quickly and the majority of time is spent recovering from loss. 1930 to present looks like this:
See important disclosure information below.
This certainly points to the need for broad diversification, tactical thinking and sound risk management.
A quick side note: you can follow @NDR_Research on Twitter. They post frequently and as you know by now, I’m a big fan. You can follow me @SBlumenthalCMG.
Yesterday, I visited with a long time client (I hold onto just a few individual relationships, as most of our clients are professional advisors). My friend has built several businesses and, at age 78, runs a high-end ice rink, plays on an over-40 competitive adult hockey team and tells me he is “still skating hard.” Love that! His wife skated for Germany at the 1964 Winter Olympics in Innsbruck and is a sought-after figure skating coach and choreographer.
As for their investment returns last year, let’s just say they didn’t meet their expectations. Long-term in this business is pretty easy for compounding has time to work its magic. The short-term metrics, at any given window in time, can be more challenging. Though, you know this well.
Since most investment returns are derived from equities, one can see the challenges that present for individual investors spending all of their time not in our business.
I hope you find the chart helpful in your work with your clients.
This week’s piece is purposely short. The snowstorm is quickly moving east, DC is getting pounded and we are up next. I’m putting five shovels in the garage and offering hot chocolate to our teenage boys for a job well done. I can just see their faces now.
I’ll be in Florida on Tuesday speaking on gold at the Inside ETFs conference. See the story below entitled, “Gold – Not Yet.” The speaker line up is outstanding. Next week, I’ll bullet point for you some of the key takeaways.
Enjoy the snow if you are in the east and hire a few kids to do the heavy shoveling.
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Included in this week’s On My Radar:
- Support Holds – Faith in Central Bankers Returns
- Gold – “Not Yet”
- Trade Signals – The Bear Bites
Support Holds – Faith in Central Bankers Returns
A day after kicking off yet another European Central Bank stimulus review, Mario Draghi used Davos as a platform to convince investors he’ll do what’s needed to reignite consumer prices. Bloomberg
The announcement was welcome news for the markets. On Wednesday, I suggested support at 1820 in the S&P 500 Index. That appears to have held. With investor pessimism at extreme levels, a short-term rally makes sense.
I’m anticipating a rally to the S&P 500 Index 1950 to 2000 level. And see it as an opportunity to reestablish hedges. In my view, the weight of evidence remains negative (see the CMG Ned Davis Research Large Cap Momentum Index below), the market remains richly priced and margin debt is higher than it was in 2000 and 2007. Out-of-the-money put options may serve as an important hedge.
For now, it remains all about central bank support. Expect some news from Japan next week.
Gold – “Not Yet”
I wrote a piece this week for ETF.com entitled, “Gold –Not Yet” and thought I’d share the chart with you. Here is the link to the full piece. I explain how to follow this process and suggest a few Gold ETF’s for you to consider.
Trade Signals – The Bear Bites
By Steve Blumenthal
Posted Wednesday January 20, 2015
Included in this week’s Trade Signals:
Equity Trade Signals:
- CMG NDR Large Cap Momentum Index: Sell Signal – Bearish for Equities
- Long-term Trend (13/34-Week EMA) on the S&P 500 Index: Sell Signal — Bearish for Equities
- Volume Demand is greater than Volume Supply: Sell Signal – Bearish for Equities
- NDR Big Mo: See note below (btw, this process triggered a sell signal last Friday).
Investor Sentiment Indicators:
- NDR Crowd Sentiment Poll: Extreme Pessimism (short-term Bullish for Equities)
- Daily Trading Sentiment Composite: Extreme Pessimism (short-term Bullish for Equities)
Fixed Income Trade Signals:
- The Zweig Bond Model: Buy Signal
- High-Yield Model: Sell Signal
- Don’t Fight the Tape or the Fed: Indicator Reading = 0 (Neutral for Equities)
- Global Recession Watch Indicator – High Global Recession Risk
- U.S. Recession Watch Indicator – Low U.S. Recession Risk
Tactical All Asset Model:
- Relative Strength Leadership Trends: Utilities, Fixed Income, Muni Bonds, Gold and Cash are showing the strongest relative strength:
Click here for the link to the full Trade Signals (updated charts and commentary).
Susan and I were heading out for dinner Thursday evening. We were staying at the Trump SoHo Hotel. The elevator stops a few floors below ours and LeBron James jumps in. I’ve never seen Susan star struck before. That was a lot of fun.
Here is the view from the 36th floor. It is going to look a lot whiter in a few hours.
Brianna is coming home this weekend and she and a few friends will be at the house. A big dinner is planned for tonight, and a fire, and a bottle of red wine. Love our family dinners. My fingers are crossed that my Sunday flight departs on time.
BTW, If you are on twitter, you can follow the conference by using hashtag #InsideETFs.
Wishing you the very best!
With kind regards,
Stephen B. Blumenthal
Chairman & CEO
CMG Capital Management Group, Inc.
Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Chairman, CEO and CIO. Steve authors a free weekly e-letter entitled, On My Radar. The letter is designed to bring clarity on the economy, interest rates, valuations and market trend and what that all means in regards to investment opportunities and portfolio positioning. Click here to receive his free weekly e-letter.
Social Media Links:
CMG is committed to setting a high standard for ETF strategists. And we’re passionate about educating advisors and investors about tactical investing. We launched CMG AdvisorCentral a year ago to share our knowledge of tactical investing and managing a successful advisory practice.
AdvisorCentral is being updated with new educational resources we look forward to sharing with you. You can always connect with CMG on Twitter at @askcmg and follow our LinkedIn Showcase page devoted to tactical investing.
A Note on Investment Process:
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.
My objective is to position in line with the equity and fixed income market’s primary trends. I believe risk management is paramount in a long-term investment process. When to hedge, when to become more aggressive, etc.
Trade Signals History: Trade Signals started after a colleague asked me if I could share my thoughts (Trade Signals) with him. A number of years ago, I 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 in your investment process.
Provided are several links to learn more about the use of options:
For hedging, I favor a collared option approach (writing out-of-the-money covered calls and buying out-of-the-money put options) as a relatively inexpensive way to risk protect your long-term focused equity portfolio exposure. Also, consider buying deep out-of-the-money put options for risk protection.
Please note the comments at the bottom of this Trade Signals discussing a collared option strategy to hedge equity exposure using investor sentiment extremes is a guide to entry and exit. Go to www.CBOE.com to learn more. Hire an experienced advisor to help you. Never write naked option positions. We do not offer options strategies at CMG.
Several other links: