Risk On, Risk Off BS

I’m going to take a break from the “Trade Like Rory” series for a week. I will circle back in the weeks to come and close out this series by discussing the final 3 components of a successful investment process: actionable price targets, position sizing and finally, the how to execute, monitor and close a trade idea. This week, however, I’ve seen some things in the markets that need to be discussed now, and I also think it's time to give an updated report on the status of the markets.

 There are many phrases, sayings and terms used in financial media the make my skin crawl and cause me to throw up in my mouth. But today, I’m going to focus on the most egregious of all. I hear commentators on TV and I read headlines that describe financial market price action by saying markets are either “risk on” or “risk off.”

 It drives me absolutely nuts when I hear that. Almost as nuts as when I hear sports commentators describing a basketball player and saying that he knows how “to score the basketball.” Of course, he knows how to score the basketball. 

 What else would he be trying to score? 

 But I digress. Let me be very clear, when it comes to financial markets, RISK IS ALWAYS ON. I don’t care if you have money parked in a savings account, you own a 9-month CD, or you’re self destructive and you’re the one guy trading LPLT, which is double the movement of the S&P Platinum Index and has an average daily trading volume of 1,400 shares. RISK IS ALWAYS ON.

 Last week we experienced a couple of examples of why risk is always on.


Positive Correlation Between Private Jets and the Bovespa

Coming into last week, the ALPINE for the Bovespa was 56,937 and the ABYSS line was 55,237. Around lunch time last Wednesday, it was reported that a private jet carrying Brazilian presidential candidate Eduardo Campos crashed in the city of Santos. Almost immediately, the Bovespa fell over 2% and traded lower the rest of the day.

 Is a plane crash the kind of idiosyncratic risk you can manage?  Of course not. Where do you think the Bovespa closed on Wednesday?  Or finished the week? On Wednesday, the Bovespa bounced right off the ABYSS line and closed at 55,581. It went on to close the week at 56,963, just above its ALPINE line, and 2% above Wednesdays closing price.

 Whether you were long or short the Bovespa, risk is always on.


Friday Fun Day

 The S&P 500 SPDR exchange-traded fund, SPY, closed on Thursday at 195.76. The next morning when markets started trading in New York, SPY opened at 196.47, 36 basis points higher.

 During the day on Friday, the SPY traded as low as 194.31, 110 basis points lower than the opening price. SPY closed Friday’s trading at 195.72, 72 basis points higher than the intraday low.

 In one trading day, when nothing of real significance took place, the SPY moved a total of 235 basis points on the highest volume in three weeks, which was 40% higher than the daily average over the last six months. Whether you were long or short the S&P 500, risk is always on.


US Market Update

 The last time I did a market update was July 14. In that report, I said “For now, the playbook stays the same. Trade Slow Growth assets like utilities, REITs and US Treasuries on the LONG side. Trade High Growth assets like technology, consumer discretionary and US Small caps on the SHORT side, if inclined, or NEUTRAL if not.” Let’s see how these various markets have been performing for the last month.


Slow Growth

US Slow Growth Index: Percentage Change Since July 14, +20bps.

US Utilities (XLU): Percentage Change Since July 14, -87bps.

US REITS (VNQ): Percentage Change Since July 14, +91bps.

US Treasuries (TLT): Percentage Change Since July 14, +390bps.


US Equities

 S&P 500 (SPY): Percentage Change Since July 14, -45bps.


High Growth

 US High Growth Index: July Percentage Change Since July 14, -90bps.

US Technology (XLK): Percentage Change Since July 14, +94bps.

US Consumer Discretionary (XLY): Percentage Change Since July 14, -40bps.

US Small Caps (IWM): Percentage Change Since July 14, -148bps.


It looks like what I saw playing out actually came to pass. I’d love to tell you that I have a crystal ball or that I’m a “Market Whisperer” but I’m not. We have been using this same playbook since late January because the markets have been telling us that the sure fire way to make money is to be LONG slow growth assets and either SHORT or NEUTRAL high growth assets.

 Part of my trading edge is being able to understand and articulate what is happening in markets, right now. My edge is not in telling you where the S&P will be trading in December or in interpreting economic activity that occurred 3 months ago and we are just finding out about now. I continue to like the US Slow Growth playbook. We will keep trading with what the market is giving us until the market signals that a shift is occurring.

 Good trading should be boring. Once you have a solid investment process in place, you simply wash, rinse, repeat. It can be both empowering and boring to follow your process as the financial world whips all around based on the latest stories and whispers. If you want entertainment and fun while risking capital may I recommend Las Vegas or Macau?