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Market Update: The Big Reset of Risk

08.10.2011

And summer is supposed to be the slow, boring time of the year for the markets! Here we are again with another monster sell-off to the downside after a vicious rally at the end of trading on Tuesday. Readers of our blog for the past two months will remember we sounded the alarm bell on June 15 "Market Update: Proceed with Caution" and, even with additional data to analyze since then, our Market Navigation Model is still negative. 

Why are we seeing these huge swings in the stock markets over the past couple of weeks and what should we do about it?

At Infinium, we believe it is very important to understand the landscape in order to protect your money during bad times, and make money in good times. Recent market action indicates that the big players in the markets - particularly the hedge funds that move around billions of dollars each day - are generally having a bad year and they are scared to death of finishing out 2011 with negative performance numbers. This is not a conspiracy theory, but rather, we believe this dynamic is causing a manic environment of violent moves as the Hedgies scramble to profit on the upside and rush to avoid more losses in down markets.

The problem for the average investor out there is this whipsaw action really has very little to do with the fundamental value of the companies that comprise the stock market, and is driven more on fear or greed. We discussed the idea that the market will trade on a variety of inputs in our recent post entitled, "Market Update: Post-Debt Crisis Outlook." As long as emotion rules the day, expect the roller coaster ride to continue and challenge the wisdom of tradtitional buy-and-hold strategies.

The Big Reset of Risk is happening right now and we maintain that investors should consider staying on the conservative side until the current level of uncertainty comes down. It's not time to play the hero just yet.

 

Mark S. Starosciak, Managing Partner

Infinium Investment Advisors

 

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