Commodities Pro Dennis Gartman Simplifies the Risk-On/Risk-Off Trade

To be perfectly frank, we usually cringe when we hear terms such as “Risk On” and “Risk Off” used constantly in the media.

However, we have great respect for legendary fund manager, trader, and newsletter author Dennis Gartman and his usually very pragmatic and uncomplicated approach to explaining seemingly complicated issues.

He has now taken this common sense approach and created a way to capture “risk on” and “risk off’ in one of two simple trades. His partners in these new products are Mark Fisher (long-time trader, head of a clearing firm, and inventor of other financial products) and UBS. The two products seek to allow investors to either implement a ‘risk on’ or ‘risk off’ strategy via a single exchange-traded product, something that many traders and investors are looking for. This could include those seeking to hedge their portfolios as well as those looking to just make a short-term play on the overall health of the markets.

Gartman says the ETN's, appropriately named Risk On (ONN) and Risk Off (OFF) "take a look at all of the risk that one would get around the world," including bonds, currencies, stocks and commodities, including energy. In effect the ETNs are designed to let traders capture moves in the globalized economy in one trade.

"It's something the market needs," says Gartman of the ETNs, calling them "simple elegant and useful."

“Correlation between asset classes and across geographic regions has risen dramatically over the past two decades as investors move in concert in reaction to changes in the global economic outlook,” said Christopher Yeagley, Managing Director and US Head of Equity Structured Products. “These two ETNs are designed to give investors the ability to take advantage of this in a straightforward manner: if they expect economic growth, they can purchase ONN to express a “risk on” view, and if they don’t expect growth, they can purchase OFF to express a “risk off’ view of the world.”

In case you are not familiar with how highly correlated asset classes have become, just today Bloomberg did a piece on the subject. Bloomberg reports that the uncertainty in Europe is affecting US equities at a level never seen before. The article noted that the correlation between the DJIA and swings in the euro reached a record of 0.85 on December 2nd, the highest level since the introduction of the single currency in 1999. According to the report, the Dow and the euro have moved in the same direction 72% of the time thus far in 2011, up meaningfully from the 49% average over the 11 previous years.

Closer to home, correlations among individual equities to the S&P 500 is also at an all-time high. Dave M. wrote a Daily State Article on November 28th detailing the subject. In the article, Dave pointed out that according to Ned Davis Research; correlations of the constituent stocks in the S&P 500 index to the actual index hit an all-time record of 85% last month. In short, this means that when the market moves, 85% of the stocks move in the same direction and to the same magnitude.

Perhaps there is something to this Risk ONN or Risk OFF idea after all.

(Note: We are going to be following these products fairly closely to see how they perform under various market scenarios and look forward to trying them out in our trading… thanks to Seeking Alpha and Yahoo Finance for some source and interview material).

Good Trading!
David W. (aka The Underground Trader)
Manager The FlashTrading Service

 

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