Do You Feel Lucky? Well Do Ya?
Lance Roberts | Aug 21, 2012 02:38AM ET
That was the topic of this past stated on Friday , "Our 'buy' signals are back online but the setup is very poor on a risk/reward basis." The inherent risks of increasing exposure to the markets at current levels outweighs the possible reward. The only reason currently that "buy signals" are coming back online is the "hope" of continued Fed, and ECB, market intervention in the weeks ahead. The question no one seems to be asking is "what if it doesn't happen?" It seems to me that there is a lot of "hope" priced into the market currently.
The chart shows the 6-month average of the Volatility Index (VIX) versus the S&P 500. I have scaled the S&P 500 by 100 to make the charts more legible. I have divided the VIX into three categories - irrational exuberance (seen during the late 90's and the mid-2000 credit/housing bubble), investor complacency (more normalized levels of "no fear" of a market correction) and investor capitulation (sell everything). Currently, the VIX is at levels more associated with market tops than market bottoms and is very reminiscent of the 2011 market peak. The question now is simply "Do you feel lucky?"
There are more than enough potential catalysts to create a short-term correction in the markets. That correction will allow for increases in equity exposure to portfolios at lower levels of portfolio risk. Being disciplined and patient in your investing process will lead to longer term success.
As we stated above - professional gamblers understand the risks of winning, or losing, any potential hand. Weighing that risk, and allocating capital accordingly, is what separates winners from losers. There is no difference when investing. Managing portfolio risk means that you may not catch every opportunity - but avoiding the major losses is what keeps you in the game.
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