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Breadth in positive momentum, as measured by the Ned Davis Research CMG US Large Cap Long/Flat Index’s (NDRCMGLF Index, or the Index) model, has driven today’s allocation to a 100% equity investment. The last Market Pulse™ signal occurred in April, when the model de-risked to an 80% equity allocation in response to negative price action associated with an embattled technology sector and unknowns associated with escalating trade tariffs. However, the model revealed improving market health beginning late in July after another strong earnings season. This shift in momentum was reflected in the model’s increasing composite score until its directional trend, an intermediate-term moving average, went positive to trigger full U.S. equity investment.
Positive Directional Trend Moves Model to Full Equity Allocation
*Note: The composite score zone must be surpassed for the equity allocation change to be in effect. As an example, assuming the composite direction is down; i.e., a deteriorating/declining trend, if the score is 53 and it drops to 50, then the allocation is still 40%. The score must drop below 50 to move the allocation to 0%. Assuming the composite direction is up, i.e., an improving trend, it will always allocate 100% to the S&P 500, regardless of the current composite score. For illustrative purposes only. Line chart shows snap shot of composite score since last signal change in April.
The model’s score closed above 65 for the first time since June, and continued to move upwards until the persisting trend of its score went positive, as measured by the model’s moving average. Should the model’s composite score turn down and exhibit a negative trend, it would trigger an 80% equity allocation again. Furthermore, should a negative trend persist, pushing the model’s composite score below 60, for example, it would signal greater market breakdown and a 40% equity allocation, as illustrated in the table above.
Year-to-Date Cumulative Return (%): S&P® 500 Index
1/1/2018 – 8/24/2018
Source: FactSet. Data as of August 24, 2018. Past performance is no guarantee of future performance. Index performance is not indicative of fund performance. Indices are not securities in which investments can be made. Index returns do not reflect a deduction for fees & expenses. See index descriptions and additional disclosures below.
There are many cross-currents in the market at this time, with the S&P 500 Index’s 8.9% year-to-date return being positively driven by strong performance in the technology and consumer discretionary sectors, while the consumer staples and telecom sectors detracted from returns.1 Trade tariff concerns continue and we are likely entering a seasonally weak period with the upcoming U.S. mid-term elections. However, the market can continue to climb the emotional wall of worry while being supported by a strong macro backdrop; including economic growth and relatively low interest rates and inflation, as well as continued demand with corporations still showing strong net share repurchasing. We believe the discipline of following the objective evidence of the model helps keep the Index on the right side of major market movements.
Investors do not have to manage market uncertainty themselves. An allocation to the S&P 500 Index with embedded risk management is available through the VanEck Vectors® NDR CMG Long/Flat Allocation ETF (LFEQ®). LFEQ tracks the Ned Davis Research CMG US Large Cap Long/Flat Index which is informed by Market Pulse. The ETF was developed to offer guided equity allocation by trading into and out of the market automatically for its investors. This U.S. equity strategy seeks to minimize losses from potential market drawdowns typical of traditional buy-and-hold or static strategies.
The Index’s model (i.e., Market Pulse) measures the overall health of the market through an evaluation of market breadth. In this case, market breadth refers to advancing and declining price trends and countertrends at the GICS®2 industry group level. The model computes a robust moving average score daily3 to capture multi-industry and multi-term trend and countertrend measures to gauge overall market health. It then calculates the score’s directional trend to see if it is improving or declining. Collectively, the score and its directional trend determine the equity allocation of either 100%, 80%, 40%, or 0% − in which case the allocation would be to cash.4
There are a few key reasons why measuring market breadth provides sound trend analysis for guiding equity allocations. The Index’s co-developer, Steve Blumenthal of CMG Capital Management Group, Inc., wrote a whitepaper, Risk Management for all Markets, detailing this tactical approach. Mainly, market breadth has typically weakened before top-line prices have at major market peaks and breadth thrusts5 often occur just before major bull market recoveries. Furthermore, the S&P 500 is considered as a very efficient market, meaning the underlying securities’ fundamentals and macro environmental factors tend to be priced in almost immediately.
IMPORTANT DEFINITIONS AND DISCLOSURES
1Source of all data unless otherwise noted: FactSet and Ned Davis Research. Data as of 8/24/2018.
2Global Industry Classification Standard (GICS®) is a widely accepted equity securities classification system developed by Morgan Stanley Capital International (MSCI) and Standard & Poor’s.
3While the NDRCMGLF Index’s model computes a daily score, it does not mean that the allocations will change on a daily basis. The model is measuring multiple trends and countertrends over multiple terms, across multiple industries to assess market health and meaningful market trends.
4When allocated to a percentage of equities (long), that portion of the Ned Davis Research CMG US Large Cap Long/Flat Index will comprise the S&P 500 Index. When allocated to a percentage of cash (flat), that portion of the Index will be allocated to the Solactive 13-week U.S. T-bill Index.
5Source: Ned Davis Research. Breadth thrust is a technical indicator used to ascertain market momentum and signals the start of a potential new bull market after what may have been an oversold market.
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Ned Davis Research CMG US Large Cap Long/Flat Index is a rules-based index that follows a proprietary model developed by Ned Davis Research, Inc. in conjunction with CMG Capital Management Group, Inc. The model produces daily trade signals to determine the Index’s equity allocation percentage (100%, 80%, 40%, or 0%). When allocated to a percentage of equities (long), that portion of the Index will comprise the S&P 500 Index. When allocated to a percentage of cash (flat), that portion of the Index will be allocated to the Solactive 13-week U.S. T-bill Index.
Solactive 13-week U.S. T-bill Index is a rules-based index mirroring the performance of the current U.S. 13-week T-bill.
S&P 500® Index consists of 500 widely held U.S. common stocks covering industrial, utility, financial and transportation sector.
VanEck Vectors® NDR CMG Long/Flat Allocation ETF (LFEQ, or the Fund) provides risk-managed exposure to S&P 500 equities using multiple technical indicators that help determine when to be in the market and by how much. The Fund seeks to track its respective Index, designed by Ned Davis Research, Inc. (NDR) and CMG Capital Management Group, Inc. (CMG).
The Fund is subject to risks associated with equity securities, index tracking, investing in other funds, operational, U.S. Treasury bills, market, high portfolio turnover, fund shares trading, premium/discount risk and liquidity of fund shares, passive management, absence of prior active market, authorized participant concentration, trading issues and concentration risks. The Fund is considered non-diversified and may be subject to greater risks than a diversified fund.
The Fund is not sponsored, endorsed, sold or promoted by Ned Davis Research, Inc. or CMG Capital Management Group, Inc. NDR and CMG make no representation or warranty, express or implied, to the owners of the Fund or any member of the public regarding the advisability of investing in securities generally or in the Fund particularly or the ability of the Index to track the performance of equities market.
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