I think our pal Brian Hunt hits the nail on the head in his DailyWealth piece– he talks about the only thing you need to consider right now when placing a trade:
Knowing whether it’s “risk on” or “risk off” is the single biggest factor in any trade you make right now…
If you’re long risk right now, you’re making money in the handful of assets we’ve been recommending in DailyWealth… like coal, gold, and Hong Kong. If you’re not long risk, your portfolio isn’t doing much.
So, are you trading with the belief that it’s “risk on” or “risk off”?
The difference these beliefs will make to your wealth is extraordinary… as I’ll show in a moment. But first, let me explain…
Stock and commodity traders can place one of two labels on any given trade.
One label is “risk on.”
The “risk on” trade is where you place money into investments that will benefit from robust economic growth. You’re willing to bet on riskier assets like Brazilian commodity producers… Chinese travel companies… copper miners… microcap oil companies… and tiny junior mining stocks. Actually, stocks and commodities in general qualify as “risk on” assets.
The “risk off” idea is where you’ll pile into the U.S. dollar and U.S. bonds. While hating the dollar is a popular thing to do these days, it’s still the world’s reserve currency… It’s an asset investors jump into when they get worried about recessions and depressions. For example, the dollar skyrocketed in the 2008 credit crisis when folks dumped stocks and commodities.
For the past two months, “risk on” has been the place to be. The benchmark S&P 500 is up 12%. The CRB commodity index is up the same amount. Mining stocks have skyrocketed. Emerging markets like Russia and India are up big. Oil has climbed from $73 to $84 per barrel.
What most folks don’t realize is while all of these assets “sound” different, they are all the same bet. They all amount to “risk on.”
You can read Brian’s excellent full piece here.
He concludes that his S&A team believes the best place to be right now is “risk on”, as they are taking Ben Bernanke at his word that he’s going to run the printing presses. And he recommends a simple trailing stop as your cue to get out of the trade.
This “go long til you stop out” strategy certainly would have worked well from the March 2009 lows up until today. Sure, some markets – like perhaps the S&P – would have stopped you out during the violent, scary pullbacks. But if your stops were wide enough, you’d probably still be long something like gold – that is, if you’re trading gold.
Ed. note – While our similar observation that the asset markets are trading in tandem has held true, our position of “cash under our mattress” has been an underperforming one!
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