Australian Investment Blog

Risk v Reward Good Morning everyone U.S Markets were sold off overnight; -174pts on the DOW and the S&P fell -1.20%. It’s not a huge drop, but it’s interesting to think it’s the biggest one day decline since Feb 23. Cleary the market has been in bullish mode – and the rally has been strong and unrelenting. That said, we now see an imbalance between the potential risk of a market fall v the potential reward of further upside. We’re constantly looking at markets, stocks, sectors etc on the basis of risk v reward. Make an assessment of the potential upside v the potential downside for a given period. The potential reward should be a multiples of the risks. Right now, we see limited upside in U.S stocks and elevated risks of a downside move, primarily because of the recent market rally, and the upcoming Q3 earnings reports in the States – which start next week. That doesn’t mean the market can’t go higher, and we’ll be deemed wrong if it does, it simply means it’s prudent, sensible whatever else you want to call it to increase cash in such an environment. Not a lot of new information to ponder this morning, so a reasonably short report… Here’s the moves in the U.S overnight by sector – the defensive sectors seeing most money …and the S&P 500 – seems to be topping out. The questions remains whether we’ll get one more blow off top before it rolls over or we’ve now started the pullback. ….and the Volatility Index – which has been extremely low. Buying Put Options has been very cheap due to low volatility Summary