A Decline In Market Risk Is Indicating Buy Buy Buy!

Kevin Grewal
updated | Author's Website

The markets experienced a period of excessive turmoil and uncertainty this past year.  However, despite facing the “Fiscal Cliff”, a continued European debt crisis, high US unemployment and a presidential election, the S&P 500 managed to produce a gain of 13.47%.

So, what can we expect for the year ahead?  Nobody knows for sure, but measurements of market risk are sending signals that this may be a good time to buy.

The VIX, a measurement of implied future volatility, remains low at just 13.26.  This has partly been influenced by the continued quantitative easing by the Fed which results in a great deal of liquidity in the markets and lower volatility.VIX

According to SmartStops.net’s market risk signals, the percent of S&P 500 components currently in the above normal risk state is down to 14%.  This is historically very low and below the 100 day risk ratio average of 42% producing an SRBI of 0.33.  An SRBI below 1 indicates risk has been on the decline.

S&P 500 SRBI

Visit the SmartStops Market Risk Barometer

When we review 2012 and compare the SmartStops Risk Ratio for the S&P 500 to its performance, we clearly see the inverse relationship between risk and performance.  The current low risk ratio of just 14% indicates it may be a good time to buy.

S&P 500 Risk vs Performance

Published previously in the SmartStops Members Year End Letter.

As always, market and equity performance are influenced by many factors and their direction can change on a dime.  We should all invest accordingly.

To learn more about sidestepping periods of elevated risk and improving returns per day in the market, Visit www.smartstops.net.

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