Risk Adverse Volatility

This is a performance chart of a risk adverse stock model.  When volatility spikes on a stock with the lowest expectation in terms of risk, markets have increased downside potential.  This chart is 2008 through October 28,2014.  The spikes in volatility are all in 2014.

If Up

Volatility is back to normal as long as we remain in the bid mode.  Managers continue to pile in with the fear of being too clever by reducing their holdings earlier in the year.  This in itself does not guarantee a continued rally.  With the Fed tomorrow, whiplash will reappear for a bit and then focus on a general direction.

The break of recent past was orderly and did not have the important liquidity risk event which will ultimately appear along the ever expanding liquid alternative (ETFs) birthing.  Illiquid underlying wrapped products will cause a similar crash of more liquid alternatives as arbitrage balancing will perform its usual side step and let markets free fall to a profitable spread opportunity.  Then ETF repudiation will cut in half existing products for those which better weathered the correction.

Hey You! You In or Out?

Market had a tantrum last week and then put a con on the Fed so they would squeeze the stimulus doll into saying ma ma.   It is always a circle jerk in defense of equity prices since they are viewed as the world benchmark for economic stabilization.  Spontaneous bear implosions are all over everyone's shoes as the VIX declines into its proper uselessness along with premature declarations of this is it from noted talking heads.

All one can say about the volatility of last two weeks and the nothing for sale rallies of the last few days is it has primarily been about stupid out / stupid in action.   Huge discount now has turned into huge premiums with value lying somewhere in between.

Bears may believe they need a macro miracle to save them but their real hope lies rather in slow going down bid action until the recent lows are tested. 

Third Quarter Low Now In or This Rally Is A Set Up?

Downside crying was so loud the Bears forgot to cover.  Extreme short squeeze looks familiar as the markets reclaim old battle ground.  Steep premium over value has now has appeared but not as wide as the discounts we saw culminate when posting one week ago today.  Volatility disappeared and will stay gone if market continues to move higher.  IBM collapse being ignored as managers put cash to work and see a chance to be fully invested by year end.  Now these guys do not have a great track record but they could replace share buy backs for awhile. 

If you are an absolute return manager with 50% or better, stop here and wait for last trading day of year or Jan.

IBM Fall Not Surprising

IBM lists among the worst risk opportunities on the CoverRisk Q8.

What is Risk?

Understanding markets is tough.  Creating adaptive strategies generating excess returns year after year is even tougher. CoverRisk does it.  But because most managers, most investors, are so bad at understanding risk and how to play it, there has been an industry created in constant vigil to protect the market's upside.  This reaction to every downside event, fretting and worrying the market may have a  pathetic 10% correction shows how fragile long term investors truly are.   The horror of a 50% correction is beyond all comprehension. 

A companies stock performance now more than ever is protected through buy backs and market gaming analysts complicit in creating an illusion of value.  Legions of retirement portfolio participants are sucking onto the side of the great float boat provided by Greenspan to Yellen, Paulson to Geithner.  All holding on to notions of a comfort zone lugging stock portfolios dependent on strategies which require only that you wake up in the morning and pray great acts will appear from the Fed and Treasury.

I talk about risk all the time to a lot of people.  Most don't get it.  Most don't believe it.  Many have watched year after year of astounding gains simply complacent to be emasculated by missing great returns.  

There are two rules in life as you probably well know.  
Rule number one; it is always about the money.  
Rule number two; it is always about the money. 

Understanding risk is not just owning an investment knowing it might go down.  It is the probability that an investment will succeed compared to the probability its substitute will not.  Risk is balancing the uncertainty of an outcome with a utility comparing one thing to another.  Finding a measure where they are both equal and then looking at the probability of returns.  

Five Down Three To Go

	AAPL	BAC	GOOG	GS	IBM	MSFT	F	PFE
Last	96.26	16.08	524.51	172.58	179.84	42.74	13.98	27.70
Change	-1.28	0.32	-5.52	-4.66	-1.91	-0.48	0.36	-0.49
YTD	16.11	0.51	-35.85	-4.68	-7.73	5.33	-1.45	-2.93
%YTD	20.11%	3.28%	-6.40%	-2.64%	-4.12%	14.25%	-9.40%	-9.57%

Eight Stocks

Twenty thousand invested in each of these stocks at the beginning of this year gets you this.

 

	AAPL	BAC	GOOG	GS	IBM	MSFT	F	PFE
Shares	250	1250	36	113	106	541	1333	645	4274.13
On20000	4650	1188	-801	163	-401	3416	-2200	-1400	4615
									160000
									2.88%

Deep Discount

Interesting technical data appears.  Never has the S&P500, in our collective data running over 20 years, ever had such discount as to what we call riskvalue.  Deep discounts usually can be corrected consolidation or by sharp short covering rallies where pockets of nothing for sale appear.

Selloff

Markets acting scared.   Big volume, big enough volatility, and late sell off action are classic signs active participants know how to get paid.   Investors online statements starting to show decent losses with lots of October left.  As posted before,  volatility was due to appear without necessarily changing the long term trend.  But now that it has picked up, you have to rely on either deep positive trading performances, such as CoverRisk models have provided, or consider what you can tolerate.

Here is the Q8 on today's close.

	AAPL	BAC	GOOG	GS	IBM	MSFT	F	PFE
Last	99.81	16.40	533.21	178.77	183.52	43.65	13.54	28.47
Change	-0.92	-0.08	-11.28	-1.61	-2.41	-0.38	-0.25	-0.66
YTD	19.66	0.83	-27.15	1.51	-4.05	6.24	-1.89	-2.16
%YTD	24.54%	5.33%	-4.84%	0.85%	-2.16%	16.68%	-12.25%	-7.05%