The Risk Manager Report - June 20, 2012June 20, 2012 @ 12:53 PM EST
The first step to successful investing is to identify the Market's "Big Picture" Environment in terms of risk versus reward. This is critical to success over the long term because different "environments" require different strategies. For example, in Bull Markets the objective is to maximize returns, while success in Bear Market Environments demands an emphasis on capital preservation. By reviewing the Environment every single week, we are assured that we will remain "in-tune" with conditions and not be surprised by environment changes.
At the center of our risk management work are our Exposure Models (see below). The models detail the current conditions for the Trend and Momentum of the Market and help guide us to the proper exposure to market risk.
Executive Summary For June 20, 2012
Stocks are rallying this week, continuing their momentum from late last week. A New Democracy victory in the Greek elections over the weekend effectively took a Greek euro exit off of the table, which was welcome news for markets. On Wednesday it was confirmed that Greece had successfully formed a new government, helping temporarily take them out of the "danger-zone" spotlight the embattled country has been in this summer. Other factors contributing to this week's rally has been expectations of additional monetary easing from the Fed (following a Goldman Sachs rumor of such on Monday). The rumor proved to be true, as the Fed announced it was extending Operation Twist through the end of the year on Wednesday. While it wasn't the white horse the markets were looking for (QE3), it is viewed as brighter news than a non-annoucnement. So, while stocks are moving higher this week, Spanish yields are still a nagging problem, and it's only a matter of time before the next "worrying point" emerges with the crisis in Europe ongoing. However, there is still plenty of potential upside in the form of a concerted response plan for Europe, Bernanke's testimony on Wednesday, etc.
Risk Management Models Summary
Our disciplined approach to managing risk is designed to keep our Portfolios "in-line" with the major trends of the market. We strive to keep portfolios mostly invested during Positive Environments and to Reduce Exposure to Market Risk during Bear Markets and severe corrections.
We focus on our two proprietary Risk Management System Models. Both systems are robust market models incorporating the entire spectrum of market indicators. In short, our disciplined systems act as our primary guide to exposure to market risk. (For more details on each risk management system, see model summary below)
Current Readings - Risk Management Systems
Graduated Risk Management System
Recommended Exposure to Market Risk (Short-Term): 71.25%
Long-Term "Big Picture" Trend Management System
Current Signal: Neutral
Graduated Exposure System (Intermediate Term Time Frame)
The Graduated Exposure Risk Management System is our guide to determining the appropriate exposure to market risk.
The system is a "Model of Models" comprised of of 11 independent Models. Each model includes has proved successful in its own right and gives separate buy and sell signals, which effects a percentage of our exposure to the market. Our Trend models (Short-Term Trend, Intermediate Term Trend, and Trend & Breadth Confirm and Investor Sentiment models) control a total 40% of our exposure. The 3 Momentum Models control 10% each and our 4 Environment Models each controls 7.5% of the portfolio's exposure to market risk. The model's "Recommended Exposure to Market Risk" reading (at the bottom of the Model) acts as our longer-term guide to exposure to market risk.
Long-Term "Big Picture" Trend System
Designed for Long Term Investors who do not wish to make a lot of adjustments to their holdings (i.e. 1 to 2 adjustments per year), our "Big Picture" Trend System focuses on the overall Environment of the market. The goal is to identify the "Major Trend" of the market and keep portfolios on the "right side" of the market's current cycle. The Model includes hundreds of indicators (both long term and short term) in the areas of "the tape," monetary conditions, investor sentiment, economics, valuation, overbought/oversold conditions, and industry leadership.
When the Environment is rated as "positive" (about 32% of the time) our studies have shown that the S&P has advanced at a rate of +38.4% annually. However, when a negative environment exists (about 20% of the time) the S&P loses almost -21% per year. The Model recently switched to a "Buy" signal on January 11, 2012 in response to the model registering a positive condition.
"Big Picture" Trend System
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