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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 U.S. unemployment and a presidential election, the S&P 500 managed to produce a gain of 13.47%.

These gains have continued into 2013 with the S&P 500 up 9.5% year to date. International Business Machines (NYSE:IBM), Johnson & Johnson (NYSE:JNJ), Walt Disney Co. (NYSE:DIS) and Chevron Corp. (NYSE:CVX) have all recently hit all-time highs. So, what can we expect for the remainder of the year? Nobody knows for sure, but measurements of market risk are sending signals that despite the recent upward momentum, it may be a time for caution.

The VIX, a measurement of implied future volatility, remains low at just 11.30. But this has partly been influenced by the continued quantitative easing by the fed which results in a great deal of liquidity in the markets.

S&P 500 Volatility


(Click to enlarge)

According to SmartStops.net's market risk barometer, risk is on the rise. After hitting a recent low back in February with only 13% of the S&P 500's components placed in the SmartStops Elevated Risk State, the S&P 500 Risk Ratio now stands at 35%. This is above its 100 day average of 31.0% resulting in an SRBI above 1 at 1.13. (An SRBI above 1 indicates that risk is on the rise).

SmartStops Market Risk Barometer

SmartStops Market Risk Barometer - S&P 500
(Click to enlarge)

When we review the 2012 performance of the S&P 500 and chart it against its SmartStops Risk Ratio for the period, we clearly see the inverse relationship between its risk ratio level and performance. The S&P500 began to climb each time the risk ratio fell below 45% and began to pull back each time the risk ratio climbed above 45%.

S&P 500 Performance vs SmartStops Risk Ratio
(Click to enlarge)

With the current SmartStops Risk Ratio for the S&P500 at 35% and on the rise, it would be prudent to be cautious and consider taking actions to protect your gains such as hedging your positions with out of the money puts or rotating into more defensive or lower risk sectors.

Currently the sectors experiencing the highest risk ratios include Basic Materials, Telecommunications, and Energy. The sectors experiencing the lowest risk ratios are Utilities, Financials and Consumer Goods.

Market Sector

Beta

(against Standard index)

SmartStops Sector Component Risk Ratio

Basic Materials (NYSEARCA:IYM)

1.31

70%

Consumer Services (NYSEARCA:IYC)

0.82

42%

Consumer Goods (NYSEARCA:IYK)

0.61

31%

Financials (NYSEARCA:IYF)

1.10

29%

Healthcare (NYSEARCA:IYH)

0.62

36%

Industrials (NYSEARCA:IYJ)

1.08

38%

Energy (NYSEARCA:IYE)

1.18

56%

Technology (NYSEARCA:IYW)

0.97

48%

Telecommunications (NYSEARCA:IYZ)

0.70

67%

Utilities (NYSEARCA:IDU)

0.30

17%

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

Source: Rising Market Risk Ushers In A Time For Caution