What do you do when the stock exchange light turns yellow?
The election is coming up shortly in Italy, and the markets show little concern before the event. Very different from the sentiment with respect to Brexit or the presidential election in the USA or France. The more surprising is it that Ray Dalio, the fund manager of the biggest hedge fund worldwide, has come into the spotlight of the media with his huge short positions in European stocks. The economy is doing well worldwide, and everything seems to be just fine.
Yet, the stock exchange light in our risk system has turned yellow at the beginning of the month.
What does that mean for your stock investment?
From our point of view, three aspects are worth mentioning:
I. Crossing while the light is yellow is less relaxed than a “green wave.”
[The term “green wave” describes the event in which a driver experiences a series of green lights every time (s)he arrives at a traffic light during a drive.]
In a long line of cars, the last car usually has it the hardest. While the first cars still easily cross the intersection on a green light, those at the end of the line face the challenge of not falling behind. Yellow, dark yellow, or red are the colors of the traffic light that dominate at that point. Accordingly, the drive feels more hectic and, as a result, sensitive passengers may get nauseous very quickly.
II. Why has the light turned yellow?
We barely remember the turbulence at the stock exchange in early February anymore. Everyone is either only talking about how long it takes until the recovery has led to the charts forming a perfect V (prices are back up just as quickly as they went down before). Or they spin a yarn about why the all-time lows in February will end up getting tested one more time.
What is more important:
This movement of the market has thrown many trends off balance. You may call it chart marks, moving average, or relative strength. Especially the long-term indicators in our risk system are in shambles, and it will take a long time until the fog has lifted and there are clear signals from this area again.
The market participants are currently preoccupied with
forming an opinion about where the journey is heading:
- What does rising interest mean in an environment where central banks buy less securities?
- Are the Saudis firing up inflation together with the Russians, so that their revenue from oil is straight?
- Will labor be so scarce due to the demographic development that for the first time in a long time there will be a phase of drastically rising salaries?
Unfortunately, I can’t answer all these questions as of today, but one thing is clear:
Yellow at the stock exchange means that the long-term capital is assessing how to position itself for the future. And when the long-term capital pulls out of certain markets, then the peaceful times there are over. Make sure that you don’t notice these changes only once there’s a flash at the traffic light.
New technologies have an uncomfortable side to them, especially because what is familiar now works in unexpectedly different ways. Just take the speeding and red-light cameras that are more and more prevalent in traffic and that don’t even visibly flash anymore. You just get a ticket afterwards when you weren’t mindful enough to drive the speed limit.
At the stock exchange, modern technology produces results whose outcome looks like a ticket to you. You look at your stock portfolio and see: I’ve apparently overlooked a red light. However, at that time there aren’t many options left.
III. What we recommend when the light is yellow
Slow down and look for products and strategies with a built-in risk management. You certainly don’t have to do everything yourself. The quality of good drivers means that the passengers enjoy a pleasant ride even when the road has many turns and the vehicle doesn’t wind up in a ditch or on a cliff.