Written by Stephen Aust
Risk levels are still higher than average despite the fact that it is generally not recognized as such; market internals are still showing some weakness, although this improved during the last week of September. Higher risk levels may eventually reduce without a correction but the odds are still higher that a correction will occur before the end of the year. This is a time for caution; stay with one’s stock positions but temporarily hedge the position. Luckily, MarketCycle’s chosen protective hedge, which has had the potential to protect all of its strong stock position this past quarter, has moved higher since taking the position, right along with stocks. We are making profit and we have literally almost no downside risk. This is good.
Market RISK has nothing to do with news or mass killings in Las Vegas or politics or war or even with “world leaders” calling each other childish names like “Dotard” or “Little Rocket Man.” Risk has to do with either the economy or corporations losing their tailwinds, for various reasons, or from market internals weakening in response to an over-heated market needing to let off a little steam. This steam release can come in either the form of a rapid but temporary downward market correction or by a more prolonged sideways malaise… or by vastly slower upward gains (which is what has been happening over the past couple of months).
RISK is not being currently acknowledged or even recognized by the gigantic and highly leveraged hedge fund industry. Hedge funds, which have the word “hedge” in their name for a reason, are currently at record NON-HEDGED levels. Even Long-Short hedge funds hold almost no short positions. This is not good; this is dangerous. If everyone rushes for the door at the same time, it will be extremely difficult for them to put protection on their client’s accounts at anywhere near a good price or a good time (and it may induce panic). If risk is recognized as being higher than normal, then one must hedge before any drop, not after.