Opportunity, Not Crisis, Looms In 2019? - Hedge Fund Alpha (formerly ValueWalk Premium)

Opportunity, Not Crisis, Looms In 2019?

“I think we’re going to see a lot more of what we just saw, which is a lot more volatility, it’s really easy to say ‘I’m really bullish’ or ‘I’m really bearish.’ I kind of see a two-sided market.”

“I think in the next year it will be, from where we are today, … at least 10 percent down and 10 percent up; maybe 15 percent either way from where we are right now,” – Paul Tudor Jones, CNBC interview via ETF Trends

Q3 hedge fund letters, conference, scoops etc

Earlier this week, John Mauldin and I hosted a 2019 Investment Outlook webinar. We talked about the economy, the Fed, Italy, Brexit and the end of the European Central Bank’s QE asset purchase program. My favorite part of our discussion was John recalling the article he wrote concerning a scientific study on complexity theory and sandpiles. How sandpiles grow, how “fingers of instability” develop, and how this leads to the sandpile’s eventual collapse. What grain of sand that triggers the slide is less relevant – what matters most is the stability in the system. Many pockets of instability within a system is what puts the system at risk.

What’s going on in Europe is a risk, trade war is a risk and debt (north of 300% of GDP in the U.S. and, frankly, most everywhere) is a risk. But as gloomy as that sounds, our message is about positioning and opportunity. We talked about what we see ahead in 2019 and finished the discussion talking about a coming outstanding buying opportunity in high yield debt. I’ve been trading the trends in the high yield bond market since 1990. There have been three outstanding buying opportunities. Number four is nearing. It will be epic.

If you’d like to listen in (and view the slide deck), click on the webinar replay link to learn more. Put your sneakers on, plug your earphones in and, as my grandmother Cookie used to say, “Walk briskly!” We do hope you find the webinar helpful.

Finally, the balance of the post is a quick read. Rushing to finish to get to tonight’s 76’ers game with the boys. Good fun! Best to you – have a great weekend!

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Included in this week’s On My Radar:

  • Opportunity, Not Crisis, Looms in 2019
  • Tweet of the Week
  • Trade Signals – Extreme Pessimism is S/T Bullish, Equity Trends Continue to Weaken
  • Personal Note – 76’ers

Opportunity, Not Crisis, Looms in 2019

ETF.com: “Steve, what are some of the biggest concerns you’re hearing from your clients looking into 2019?”

I think Paul Tudor Jones is in the right ball park. Absent recession, and right now there is no evidence of a looking U.S. recession, risk of cyclical bear decline is in the -20% to -25% range. We are down about 10% in the S&P 500 from the high. That’s not pleasant but it’s not -50% to -70% that I believe is probable in the next recession. You can find the interview I did with ETF.com here.

Tweet of the Week

Trade Signals – Extreme Pessimism is S/T Bullish, Equity Trends Continue to Weaken

December 12, 2018

S&P 500 Index — 2,651

Investor sentiment is flashing an extreme pessimism signal, which is short-term bullish for equities. The Long-term Trend (13/34-Week EMA) on the S&P 500 Index turned negative two weeks ago, signaling a confirmed downtrend for U.S. large-cap equities. The Ned Davis Research CMG U.S. Large Cap Long/Flat indicator also signaled caution by reducing equity exposure from 100% to 80%. The model’s equity line has turned down. The S&P 500 200-day moving average trend line (a longer-term trend-based indicator) is rising. A drop of 0.5% from a high price point will cause it to move to a sell… signaling a falling trend. Overall, trend evidence continues to weaken. I favor a disciplined stop-loss and re-entry rule on long-term equity oriented holdings. For U.S. large-cap exposure, I use the NDR CMG Long/Flat process. For example, if you have three large-cap holdings, consider 13/34-week trend on one position, Long/Flat on another and the 200-day MA on the third. Diversify trading strategies. Similar rules can be applied to tech exposure, small-cap exposure, etc. Bottom line: Trends are weakening. Risk is rising.

I’ve added a new chart to the equity trend line-up: A simple rule to manage tech exposure risk. It is the NASDAQ Index 200-day Moving Average Trend model. The process uses the same rule the S&P 500 Index 200-day MA model uses, except it plots the NASDAQ Index. When the 200-day MA line drops by 0.50% from a high point, a sell is signaled. When the line rises by 0.50% from a low point, a buy is signaled. The shaded area in the box in the lower right hand section of the following chart shows the current signal.

Don’t Fight the Tape of the Fed indicator moved back to a “0” neutral reading. High-yield bonds remain in a sell. The Zweig Bond Model remains in a sell, favoring short-term bond exposure over long-term high quality bond exposure.

As the great Art Cashin says, “Stay wary, alert and very, very nimble.”

Click here for this week’s Trade Signals.

Important note: Not a recommendation for you to buy or sell any security. For information purposes only. Please talk with your advisor about needs, goals, time horizon and risk tolerances.

Personal Note – 76’ers

I do hope your holiday plans are shaping up nicely, the many parties with friends and family are fun and hopefully any stress you may feel soothed by a fine glass of red wine. Life is awesome…

Our boys are home from school and we have tickets to tonight’s Philadelphia 76’ers game. The team is looking pretty good. Susan and I stepped out last night to work on our Christmas list. We were guessing on one of Kieran’s gifts so I snuck away from her and I called the youngest, Kieran, “Ki, it’s Santa, I need to know if you’d prefer an Eagles or Sixers jersey.” Santa is in search of a Landry Shamet 76’ers jersey. Shamet was the 26th pick on the 2018 draft, a rookie from Wichita State and the kid can score.

Have a great weekend. Wishing you the very best!

♦ If you are not signed up to receive my weekly On My Radar e-newsletter, you can subscribe here. ♦

With kind regards,


Stephen B. Blumenthal

Executive Chairman & CIO

CMG Capital Management Group, Inc.

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