Category Archives: Risk

Relativity

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Friday was a very interesting trading day for me, and I thought I’d share my memories of it since I think it is instructive about both risk and emotional management.

As most of you would probably guess, I came into the day completely short. But I wasn’t just short: I was Herve Villechaize short. So short I could jump off a nickel. You get the idea.

In spite of the fact that Monday registered the highest closing price in the 13 billion year history of the universe for many indexes, including the now-Apple-laden Dow 30 Industrial Average, I’m a dauntless bear, and I spent the week shorting, shorting, and then shorting some more.

Before I go further, I should explain a couple of elements of my trading that are important to this story. First off, since I’m a constant-as-the-Northern-Star permabear, I judge my own performance inversely. If the market is down, I certainly want to be up. And if the market is up, I know I have to tolerate being down.

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World’s Best Investment!

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What if I told you there is a ‘no risk’ investment that will out perform the S&P 500, even assuming the S&P 500 will continue upward at the pace it has over the second half of 2014? Would you buy that investment?

Then consider owning cash, if you are a US resident denominated in USD. Very simply, SPX in USD units has been declining since the middle of the year, with the weekly trend by AROON having gone negative and what looks like a topping pattern forming.

spx.usd

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Markets to Add More Risk Into the Year-End?

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As you can see from a comparison of the following two percentage gained/lost graphs of the 9 Major Sectors (plus the SPX), (the timeframe on the first graph is year-to-date, and on the second is this past week), market participants ventured into the “riskier” sectors to add more risk this week.

The second graph shows that Energy and Materials contributed substantially to the lift in equities this week…look for that trend to either continue, or reverse, if commodity prices begin to plunge again. (more…)

Can a Portfolio Truly Be Well-Diversified?

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Although we often hear (or read) the words “diversified” and “portfolio” together, we should question if it is really true that an investment portfolio can really be well diversified.

To speak about diversification, we first need to speak about “correlation”. When it comes to correlation, our creed can be summed up in a statement once made by Ray Dalio of Bridgewater Associates:

“People think that a thing called correlation exists. That’s wrong. What is really happening is that each market is behaving logically based on its own determinants, and as the nature of those determinants changes, what we call correlation changes”. (Jack D. Schwager, “Hedge Fund Market Wizards, How Winning Traders Win”, Wiley 2012) (more…)

Pushed to the Brink

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October is turning out to be far more “trick” than “treat” for equity bears.

At the midpoint of the month, things looked sensational. Stocks were breaking down left and right, and it seemed that we had finally encountered a sea-change in the market.

Since then, however, stocks have exploded higher with a gusto that I underestimated. I certainly expected a bounce, but nothing of this degree. Much worse, it seems that the cessation of QE (announced yesterday) has done nothing to slow the equity bulls down.

This kind of environment can really mess with one’s head. Let’s take a look at the past couple of days on the ES: (more…)