Elevated Risk Suggests “Do not Buy the Dips”

Elevated Risk Suggests “Do not Buy the Dips”

Elevated Risk Suggests “Do not Buy the Dips”


The S&P 500 close to all-time highs, the stretched valuations and a lack of growth, signals that risk is elevated up here

Notably, corrections in excess of 20%  (38 to 55% corrections do happen) for major stock market happen frequently and recently have been brought about by concerns of a global economic slowdown.

Macro-events like the possible Brexit, the US Presidential elections, and world central banks that continue participants about rate hikes Vs stimulus, a heightened level of  risk is evident.

The calm implied by the low levels of the Chicago Board Options Exchange Volatility Index (NYSEArca:VXX) belies the fragility of markets, which have become susceptible to abrupt declines.

The really bad news for investors is that it is harder to hedge against such a sell off.

Increased correlations between regional equity markets make it tougher to hide out in foreign stocks, defensive equities and low-volume ETFs have been bid up, and bond yields are hanging at ultra-low levels.

With bond yields not discounting enough inflation a traditional 60/40 asset allocation between stocks and bonds will fare poorly in the event of a collapse in stocks as the negative relationship between stocks and bonds fades.

During the S&P 500 selloffs in August 2015 and at the beginning of Y 2016, bonds provided a less effective hedge with monthly returns of a standard 60/40 portfolio dipping to -5%, much larger selloffs than during the Euroarea crisis and the global growth scare in October 2014.

Systematic call overwriting, in which an investor receives a premium for selling upside exposure on one of their holdings, is a better way to hedge equity risk than buying VIX futures or puts.

In the event that a strong selloff happens a rebound may be very elusive.

Stocks are againat the upper end of their recent range and offer poor asymmetry with little return potential and potential for more frequent and a deeper correction.

While ‘Buying the Dips’ has worked since Y 2014 , investors are now very concerned about the recovery catalyst in the next correction as central bank ‘tools” are in question and global growth and inflation remain low.

Remember, in dicey time cash is an asset.

Thursday, the US major stock market indexes finished at: DJIA -19.86 at 17985.19, NAS Comp -16.03 at 4958.62, S&P 500 -3.64 at 2115.48

Volume: Trade was light with just 730-M/shares exchanged on the NYSE.

  • Russell 2000 +4.6% YTD
  • S&P 500 +3.5% YTD
  • DJIA +3.2% YTD
  • NAS Comp -1.0% YTD
HeffX-LTN Analysis for DIA: Overall Short Intermediate Long
Bullish (0.32) Bullish (0.31) Bullish (0.27) Bullish (0.38)
HeffX-LTN Analysis for SPY: Overall Short Intermediate Long
Neutral (0.24) Bullish (0.25) Neutral (0.19) Bullish (0.29
HeffX-LTN Analysis for QQQ:  Overall Short Intermediate Long
Neutral (0.24) Very Bullish (0.51) Neutral (0.17) Neutral (0.06
HeffX-LTN Analysis for VXX: Overall Short Intermediate Long
Bearish (-0.36) Very Bearish (-0.59) Bearish (-0.32) Neutral (-0.17)

Stay tuned…

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