Upside Risk Returns - Is Buyers' Panic Next?

Mar. 07, 2010 9:09 AM ETDIA, SPY, QQQ10 Comments
John Tobey, CFA profile picture
John Tobey, CFA

Early Release of Monday, March 8, Write-up

This week’s news reports have been filled with better-than-expected news about the economy, industries and companies. Importantly, this good news has made its way beyond the “leading” indicators to the “coincident” ones, confirming the economy’s recuperation is on track.

The risks we are used to hearing about – e.g., depression and deflation – are about to fade away. This change exposes two very powerful drivers: upside risk and panic buying. These forces can create an atypical bull market. Rather than the usual pattern of three steps forward and one step back, the picture is like a rocket launch: vertical.

Let’s start with the definitions of each driver:

Upside Risk:

The extent to which the value of a security or other investment may increase beyond forecast levels.

(Financial Times; Online Lexicon)

Panic Buying:

A flurry of security purchases accompanied by high volume and sharp price increases. During a period of panic buying, buyers do not have time to evaluate fundamental or technical factors because their primary goal is to acquire securities before the prices rise even more.

(Wall Street Words: An A to Z Guide to Investment Terms for Today’s Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company.)

In “The Fed to Investors: ‘Time To Jump Aboard!‘” I used 1982 as a comparable period to think about. At the time, institutions and individuals were significantly out of the US stock market – just like today. Then, the positive signs came together, overriding the negative risks, making the US stock market’s values stand out. Institutions jumped in and, with their large orders, caused the initial spike. Individuals followed, and the stock market continued up, setting gain and volume records. Here is the result:

Note that the market had only

This article was written by

John Tobey, CFA profile picture
I am the founder and editor of Investment Directions. My career has been managing and consulting to multi-billion dollar funds. Using the widely accepted “multi-manager” approach, I have worked with top investment managers throughout the country, gaining a high level of expertise. My career has spanned many market environments, and I have hands-on experience searching out opportunities and avoiding risks in all of them. I now devote my time to Investment Directions, with the goal of helping investors further their understanding and improve their investing skills. I am currently serving on: The AAUW Investment Advisers Committee and The City of Vista Investment Advisory Committee.

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