Saturday, June 16, 2012

Stock Market Systems: On Hold + Notes on Greece (6/16/12)

With the stock market's recent rise, our intermediate-term (overbought / oversold) stock market indicators have turned slightly bearish near the close on Friday.  We last posted a stock market indicator update on May 21, 2012, when the S&P stood at 1308.  The S&P closed on Friday at 1342.84.

  • Based on market action, our intermediate models are slightly bearish.
  • Our long-term model is bullish.  
  • Net-net, that leaves us slightly bullish.  As usual, short-term market action and models also dictate our market positions.  
In addition, with the financial markets bracing for volatility -- based on the Greek elections on Sunday -- we took this as a welcome reprieve to be flat in markets (that are highly correlated to the situation, such as currencies and equity markets). had a nice summary of the Greece elections on Sunday.  For entire article, please click here:

Greece may be a small country, but its vote this Sunday may be the most important in the world this year.

PNC | Brand X Pictures | Getty Images

While the June 17 election is not directly billed as a referendum on Greece paying its debts and staying in the euro, its might as well be. If no party wins enough votes to form a coalition, as with the last vote, then the Greek situation may very well remain as it is now – a jumbled mess of no real leadership, no real plan and perhaps no real way to stay a member of the euro zone economic family.
Though seemingly complicated, this Greek drama is actually quite simple. In a nutshell:
  • Greece could run out of cash to pay its bills by the end of this month, thus...
  • Greece needs a bailout, however...
  • Greece likely can't get a bailout without agreeing to tough economic oversight (aka "austerity"), and...
  • Greece can't agree to anything without a majority coalition government, but...
  • Greece doesn't have a majority coalition government, thus...
  • Greece needs a majority coalition that wields the necessary power to push an austerity/bailout plan through.

Monday, June 11, 2012

Investment Strategy: Risk Parity

Some say that the benefits of diversification are enhanced by "risk parity" strategies.  The Financial Times had a good article on this increasingly-popular investment approach.

... (The) formula for diversifying is not to spread money equally between asset classes, but to spread risk, in a concept known as risk parity.

This approach allows investors to specify the risk they can accept, measured by volatility, then maximise the return they can get for that risk.

Please read more here:

Risk Parity approaches have been growing in popularity.  However, the use of leverage for some of the lower risk approaches means that this strategy is not for everyone.  Some investors -- and especially institutional investors -- prefer to avoid leverage.  Indeed, the investment policies of some large institutions prohibit the use of leverage.

Our work and investment approaches are similar to risk parity methods.  In addition, our strategies adjust portfolio allocations / mixes based on technical and fundamental indicators and market action.