Tag Archives: risk management

Facts, Opinions & Risk Management

By Steve Saville

Commentators on the financial markets often make statements like “it’s a bull market” and “the trend is up” as if these were indisputable facts, but such statements are always opinions.

A statement of fact could reasonably be phrased along the lines of “the market was in an upward trend between date X and date Y”, because if a sequence of rising lows and rising highs occurred between two dates then the trend was, by definition, up during that period. However, it is impossible to know the direction of a market’s current price trend with absolute certainty, let alone the direction of its future price trend. The reason is that even if a market has just made a new high/low there will be some chance that this will turn out to be the ultimate high/low.

For example, it’s a fact that gold was in a bear market in US$ terms from its peak in September of 2011 through to 24th July 2015 (when it hit a 4-year low of $1072), but it is a matter of opinion as to whether gold is now in a bear market. The bear market could obviously still be in progress, but there is also a possibility that it ended on 24th July 2015. At the time of writing, nobody knows for sure.

Some market participants and commentators will draw a line on a chart and then make a statement such as “I will consider the trend to be up (or down) unless the market proves otherwise by moving below (or above) my line”. Fine, but there’s a big difference between claiming to know the direction of the price trend and working under the assumption that the trend is in a particular direction unless/until proven otherwise by some predetermined event. The valley of shattered financial dreams is littered with traders who were determined to stay ‘long’ or ‘short’ because they thought they KNEW the direction of the price trend.

The impossibility of knowing whether a bull/bear market or an up/down trend is going to continue, or even whether the market is currently in bull or bear mode, makes risk management essential. Someone who knew the future would never have to bother with risk management; they could, instead, risk everything on a particular outcome because for them it wouldn’t be a risk at all. But ordinary mortals always face a degree of uncertainty when making investment decisions and, as a result, always need to face the reality that these decisions could prove to be wrong. Be wary, then, of advisors who claim that there is only one possible direction for the future price of an investment.

But while unwillingness to acknowledge the possibility of being wrong is a defect in the approach of some investors, other investors suffer from the opposite problem in that they have a hard time maintaining a bullish or bearish view unless that view is continually being validated by the price action. That is, they are incapable of remaining confident in any opinion that doesn’t happen to conform to the current opinion of the manic-depressive mob. As a result they routinely get ‘sucked in’ following large price rises and ‘blown out’ following large price declines, as opposed to taking advantage of the mob’s proclivity to be wrong.

Therefore, as investors the challenge we all face is to strike a balance between staying the course in rough weather and preparing ourselves for the possibility that there could be unseen rocks up ahead.

A Rational Bet…

By Steve Saville

A Rational Bet You Hope to Lose

The types of bet a person can make can be categorised as follows:

  1. A bet where a rational bettor hopes to win and has a reasonable expectation* of winning. For example, someone who buys a stock following careful analysis of potential risk versus reward hopes to obtain a profit and believes that they have put themselves in a position where the expected outcome is a profit. This type of bet is called a speculation or an investment.

Continue reading A Rational Bet…

Risk ‘ON’

By Biiwii

We declared risk ‘ON’ weeks ago and today it remains on.  That is obvious, with the ridiculously over bullish sentiment.  Further, today brings a new recovery high the Junk Bond fund (HYG), while its ratios to Treasury and Investment Grade bounce.


As usually happens, momo oriented bulls come out to play well after the turn (after all, everybody on the planet knows the US market is in breakout territory now).  The question for markets remains in whether the indexes will correct when they reach short-term breakout targets (we are tracking them in NFTRH) or proceed forward to out of control mania?

I am trading now on a stock by stock, market by market basis locking in gains and remaining flexible in the short-term.  It is just not in my makeup to be comfortable setting it and forgetting it along side the kind of bull now at play.  Risk management is never out of style.


Time to take profits on a couple of over bought items.  Not to say they don’t go higher.  Just to say that I am satisfied for now.  Not going to be greedy.



NFTRH has some resistance parameters on the precious metals and I want to make sure I am taking some profits (on the above and on anything else that suits my needs) as we approach.  Let all the guys who were bearish until last week play bull hero for now.

Sometimes Safety is its Own Reward

What more needs to be said?  The stock market has been inflated along with the unsavory likes of Junk Bonds and many other ridiculously over valued items in this phase of ‘risk ON’ speculation.  3 Amigos of ‘risk OFF’ are also shown on the chart.


Continue reading Sometimes Safety is its Own Reward

Risk Still ‘ON’ by TLT-SPY Ratio, but…

TLT vs. SPY is but one indicator of the current ‘risk on’ condition for the stock market.  The broad market (unlike some individual stocks and sectors; seen retailers lately?) has not made any technical breakdowns and beneath the surface indicators like TLT-SPY have not made any definitive moves to rein in risk taking.

But it is indicators like TLT-SPY and several others that would ultimately tell the story of a ‘risk off’ situation.  For now, TLT-SPY has positive divergence and is grappling around with the 50 day moving averages.  It looks constructive at least with RSI above 50, although this has happened a few times previously before ultimate failure.

Conclusion:  We’ll just keep our mid-year plan (+/-) for a market top front and center until something triggers to change that.  This market could well have another mighty suck-in in store for the public.


Precious Metals: Risk Management to Opportunity

What Has Been

A solid 2.5 years of risk management (to varying degrees) has been required of precious metals investors.  It was most intensely required after the announcement of QE3, when the net commercial short position in silver began a relentless march toward a very bearish alignment in late 2012 and then the HUI Gold Bugs index lost an important support level at around 460.  Here is the chart of silver with a heavy commercial net short position from NFTRH 215, dated 12.2.12:

Continue reading Precious Metals: Risk Management to Opportunity

Safety Seeking Behavior @ 12 Year Low

Of course this makes great sense since it is the opposite, risk taking behavior, that the Fed seems hell bent on promoting.  Right Grandma?

Chart courtesy of Sentimentrader

Risk is Still ‘On’

While I would appreciate a market dump (puts still held) as much as the next guy and the anticipation that TLT is going to turn up at the trend line, the HYG-TLT ratio (bottom panel) is alive and well and showing no hidden ‘risk off’ behavior beneath the surface.


Let’s Own Our Bad Calls

Following charts keeps you on the right track in that it forces discipline.  But bad calls like “technically, a bounce toward the 50 day averages would be the ideal bear opportunity”, written right there on the chart, come with the territory; for we non-gurus anyway.  So let’s own this one…


…and all the others that have not worked out over the years.  Like oh I don’t know… like an HUI target of 888 maybe?

As with risk control on the gold stocks over a bigger picture, risk (with regard to the very real possibility that the short term bearish call on the SPX was wrong) was controlled at the noted resistance intersection on the chart.  SPX had ideas other than what I had projected.

It’s simple.  Nobody is going to be right all the time, but risk management always plays a role in success over the long haul.  Think of any given trade at any given time; half the people are on the wrong side of it.  Manage risk.

[edit]  This mess in the VIX helped with the risk management along with SPX’ break of resistance.  VIX formed a lousy looking pattern and pooped the moving averages.  Now it looks to the ‘higher low’ parameter to see if it can’t whip up some summer discontent.


HUI Wipe Out Highlights Risk Management

“In risk management, the smallest details matter.  This market is a war and you avoid the bullets first.  Then you win later.”

HUI Destruction – Surprised?

The damage in the precious metals began back in November when the critical 460 support level was broken on HUI.  Anyone who did not acknowledge that the violation of this level (the neckline to the 2011 topping pattern) was important – or as NFTRH called it “abnormal” to a bullish case – was looking through rose colored glasses.

After that came a bottoming attempt, a failure in January, numerous bottom calls from around the gold analyst spectrum and a series of bear flags that served to reset over sold status just enough to fuel each new plunge.

HUI daily chart, from NFTRH

The first inkling of the most recent warning sign was noted immediately, in real time in this NFTRH update.  There is also a target of HUI 250 in that update.  This target has been on watch for months now, as has another at 100, which has seemed improbable but for its measurement off of a massive topping pattern.  260 is a 62% Fib retrace of the entire secular bull market.  A trend line goes through the low 200’s.  100 is a cold, hard measurement.

To be ready for these targets, first you need to be intact.  Here is the key excerpt from last week’s update linked above.  This is all about discipline, not hope.

“I have used a combination of selling, cash raising and bear positions to squeeze out a small gain thus far this week.  But it gets tiring compared to the comfort of simply sitting in cash, which has been the recommended risk management position for most people.  If the HUI continues to look as bad as it does now my goal is to sit this one out as long as necessary.  We will keep tabs on what I think is going to be a great contrary play, but we will not force it.  We should let the technicals guide.

So wearing an unbiased technical analyst’s hat, we have a bear flag in the making.  If it breaks down, HUI would lose the 50% secular bull retrace level, which is also the 62% cyclical retrace out of 2008.  250 could easily be next up, as there is notable support there, just below the 62% secular retrace level.”

Why Manage Risk?

It is upsetting to see how many people maintained trust in the gold stocks because it is a sector that I believe suffers from way too much stagnant ideology and dogma.  Also, I think the sector is supported by people who are generally good and have a sense of right and wrong.  They are in a monetary revolution against corrupted and powerful entities after all.

But that is no reason to be a victim.  The gold sector has fiery leaders who command from a pulpit on high, as they chronicle the evil-doing of the banksters, cabals, central planners and other nefarious entities.  You will notice that I don’t use those terms except when trying to make a point that it never pays to be emotional in market management.

Your only real potential enemy in the market is yourself.  You are not on a team with a “community” of others.  Or if you are, you should not be.  You should be thinking for yourself.  The ‘other’ knows no more than you do, but if he thinks he does, then he is downright dangerous if you submit to him.

What Now?

When the action becomes impulsive as it is now, never mind the targets.  Watch the action.  Right now the action in gold is startling, but it should not be surprising.  When you invest in gold you understand that you are buying value and that you are committing to revolution against an entrenched system.  What is revolution?  It is war.  People get killed in wars.  They are trying to figuratively kill you if you are a gold bug.

I sit in 100% cash (outside of one stock market short position) looking forward to a buying opportunity that could be a big one.  Yet still I feel uneasy because I know lots of people just wanted to set it (the ideology) and forget it.  NFTRH even lost subscribers over the years who were gold bulls that did not want to hear the frequent updating/revising and the mental whipsaw it can induce.

‘Buy and hold’ is tough enough in the regular markets, but in this ground zero market to a monetary revolution, the intensity of the swings can be white hot.  I sometimes put a disclaimer into the interim updates that people who do not want the mental whipsaw of short-term management should disregard such updates.  But today’s events serve to tell me that more of this is required, not less.  So what now?  Day-to-day and week-to-week management in service to opportunity; that is what now.

Bottom Line

Unfortunately, this is not your grandfather’s market.  This is a market being ‘hands-on’ managed, massaged and outright violated by policy makers and their associates in the financial services industry and financial media.  Gold especially is a monetary instrument that would shine a negative light on current policies.  It is a digital and connected age, where anything is possible in the short-term.

That “anything” is now happening.  This most recent and climactic destruction began with one simple little creep by the Gold Bugs Index out of a little bear flag.  But the greater down trend began last November with a technical violation of an important support level.

In risk management, the smallest details matter.  This market is a war and you avoid the bullets first.  Then you win later.  The only way to do that is through constant checking and rechecking of assumptions and data points.  It is a lot of work, but if you don’t do the work you suffer the consequences.

Work is good.  Lazy thinking is not.  Do the work folks.

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