Wall Street's new term; Risk On/Risk Off

Wall Street's new term; Risk On/Risk Off

Posted on March 15, 2012

Say what you will about Wall Street’s business practices, but we have to admit that they are creative. Wall Street is known for inventing new and sometimes exotic products. They are also good at coining terms to help describe the current market environments. For example, the new terms “risk-on and risk-off.” So how do we determine the difference between relatively safe verses a risky stock market?

The Canterbury Portfolio Thermostat identifies 12 different Market States or market environments. Of the 12 Market States, 6 are Bullish Market States “risk-on”, 4 States are Bearish, and 2 States tend to precede a transition to a Bearish Market State, meaning caution “risk-off.”

According to our Thermostat the stock market’s Market State shifted from Bearish “risk-off” to Bullish “risk-on” on 1/3/12. The following is an excerpt from my January 9th blog:

“Good news! Our Portfolio Thermostat Matrix has improved to Bullish (Market State 7) on 1/3/12. Prior to last week, our Matrix had been in a Bearish Market State since 8/4/11.”

From the time our Portfolio Thermostat matrix changed to Bullish on 1/3/12 through today 3/15/12, 50 trading days and counting, the stock market has been in a low risk environment. During that time the Dow Jones Industrial Average has only seen 2 days, out of 50 days, trading 200 points or more.

Contrast the last 50 days with the prior time when our Portfolio Thermostat Matrix reflected a volatile “risk off” period beginning on 8/4/11. From 8/4/11 through 1/3/12, 103 trading days, we saw 31 days, or 30% of the days, up or down 200 points plus. There were two daily changes over 500 points! And 10 days closed up or down between 300 and 500 points.

We can’t control the market’s volatility but we must manage our portfolio’s volatility. Our primary objective is to maintain stability in our portfolios. Successful portfolio management requires a dynamic process that can adapt and potentially benefit from volatility and bearish market environments.

3/15/12 – Portfolio Thermostat - Market State 1 = Bullish

Canterbury Volatility Index (CVI) 78 = Positive

Canterbury Investment Management: Tom Hardin

More About Tom Hardin

As Chief Investment Officer, Tom Hardin, Chartered Market Technician (CMT), makes all the final decisions on all investment and portfolio management decisions for Canterbury Investment Management. Tom has more than 30 years experience in the investment management industry and has broad breadth of knowledge. He is known as an innovator, educator and been revolutionary in the advancements in portfolio and risk management.

Every effort was used to provide accurate data and mathematical calculations to provide, what we believe to be, accurate results. Canterbury Investment Management, LLC, and its principal owners, make no guarantee of completeness or accuracy of data or calculations as well as conclusions of any statistical data or information contained in the simulation illustrated on this page. Past results or performance is in no way a guarantee of future results.