Discerning Market Signal From Noise

An ETF strategist shares what key data points inform his next portfolio move at a time of deafening noise.

Reviewed by: Cinthia Murphy
Edited by: Cinthia Murphy

Steve BlumenthalStephen Blumenthal, the ETF strategist heading CMG Capital Management Group in Malvern, Pennsylvania, has long been on the lookout for the next recession. And now, with coronavirus causing a frenzy in global markets, the data-driven investor shares with us how he goes about separating signal from noise so that his next allocation move delivers on his “grow and protect” wealth management DNA, and isn’t instead an emotional reaction.

ETF.com: What’s your current macro view? Could coronavirus push this long bull market into a big correction?
Steve Blumenthal: We’re way late in the cycle, and now, you have a shock to the system like this. It’s meaningful. This could be something that accelerates the timing of the next recession.

I look at a number of recession launch indicators regularly. The weight of evidence right now says no recession for the next six months. Could coronavirus accelerate that? Yes, it could.

The problem is, it’s in recession that all the bad stuff happens. That’s when you get the 40-60% declines. We sit late cycle. We sit extremely overpriced. And we’ll have another recession. That’s what investors need to be prepared for, and make sure they defend against significant loss.

ETF.com: Mohamed El-Erian recently told CNBC that “shock events” such as a virus outbreak could be more disruptive to economic growth than a “traditional fundamental downturn.” Do you agree with that?
Blumenthal: El-Erian is a valiant and brilliant thinker. I'm going to absolutely agree with him.

ETF.com: With all the headlines about coronavirus, as an advisor and an asset manager, how do you separate noise from signal? What indicators do you look at specifically to inform your next portfolio move?
Blumenthal: I’ll begin by saying there’s no process that’s perfect. But there are processes that are more right than wrong. If we can run risk management and be right 70% of the time, and avoid the really big mistakes, that’s vital for an advisor.

I don’t trade off of the 200-day moving average, for instance. But absent anything else, it’s a great rule for people to follow. The reason I don’t trade off of it is that so many people do trade off of it, and a lot of fund managers will play some games around those well-known buy-and-sell triggers, so I don’t want to get run over in that gamesmanship.

Price is a great indicator of what's happening. I'm a big believer in looking at the cold hard evidence of what price is telling us.

What we use, on different asset classes, are different types of price-based moving average indicators. But what we use on large-cap equity is a little bit different than what we use on our utility position. It’s also a little bit different than what we do on our high yield and growing dividend players.

I like a collection of moving averages, where I look at short-term, medium-term and long-term. And then I weight them, and I say, “When the majority of them are above their moving average, I'm in. And when the majority of them are below the moving averages, I get out.”

By having different assets with different risk management measures wrapped around them, none of them are perfect in a vacuum. But together, all of them are good. The big key for a pre-retiree and a retiree—especially, because that’s where 75% of all the money is today—is to make sure we can overcome a 15-20% decline. That only takes a 20-25% gain to get back to even. Nobody’s happy, but it’s doable.

If you decline 50%, you need 100% to get back to even. Or you decline 75%, like what happened to tech in 2000-2002, you need 300% to get back to even. It’s all about math. And moving averages are a great tool, but since none of them are perfect, it’s important to diversify into several of them.

ETF.com: Right now, what are they telling you? Is there a segment of the market you’re getting out of?
Blumenthal: High yield. We've excited about our high yield trades [this week] because of moving averages and stop loss trades. Outside of that, we’ve been bullish on longer-date Treasuries, high quality stuff, and that has been a phenomenal play. Our equity position, whether it’s for dividends—whether it’s for utilities, whether it’s our S&P large cap—continues to be a positive. And we continue to be in it. But our lights are on.

ETF.com: Do you believe in buying the dip if we do get a major correction here? What signal would you look for to get back in?
Blumenthal: I want to see what the behavior looks like when we get to our moving average levels. That to me would be a really good indication of a better entry point. I like rules-based processes, and adhere to them.

I have a fundamental view. I’ve been in the game so long, I've seen so many professional investors get tripped up in the emotion of markets and do the wrong things at the wrong time.

Where would I start to get interested in it again? Down around the longer-term moving average trend lines, down around those 200-day moving average trend lines—the slower moving ones. We actually even have a 300-day moving average trend line. If pessimism is so extreme that it’s palpable, then I'm getting interested.

ETF.com: Coronavirus; a presidential election in the U.S.; a long-running bull market. It seems like a challenging time to be an advisor talking to clients and making asset allocation decisions for a longer term, isn’t it?
Blumenthal: Our philosophy begins with one simple principle: Defend your core wealth. We have a “grow and protect” mindset. If somebody’s investing, say, 80% of their core wealth in a portfolio designed to achieve a return objective and a risk objective, all of that should be disciplined. No emotion over the day’s events.

But I did look at the depths of the low in 2008. And I have to tell you, I was scared. I saw it wasn’t the first time I saw panic. There were similar periods. And the first one was the crash in ’87, and how people behaved.

It’s about having a disciplined game plan, grow and defend that core wealth, and, in our shop, we also get involved with select private investment opportunities for accredited investors. When we work with a client, we tell them, “Protect that core wealth. Let’s get your 80 back to 100.” Our objective is to do that inside of four to six years. If you want to be more aggressive, we can be more aggressive. And if you want 60% in the core, if you get that back to 100 over 10 years, let’s do that.

Remember that investing in the market—unless you save a lot of money—and managing it in disciplined ways, is not going to make people rich. A lot of clients think that’s what an advisor is going to do for them. But it’s just not.

Wealth is created either through businesses or through more aggressive investments. Our philosophy is to grow, defend the core, and then take a select few special bets that can accelerate return.

We think about wealth in a very disciplined way, using stop-loss risk management, and diversifying to a number of different types of averages. We put a stop-loss risk protection on everything we own in that core bucket. And then we’ll swing at a few good opportunities in the private sector.

Contact Cinthia Murphy at [email protected]

Cinthia Murphy is head of digital experience, advocating for the user in all that etf.com does. She previously served as managing editor and writer for etf.com, specializing in ETF content and multimedia. Cinthia’s experience includes time at Dow Jones and former BridgeNews, covering commodity futures markets in Chicago and Brazil equities in Sao Paulo. She has a bachelor’s degree in journalism from the University of Missouri-Columbia.