Downside risk is extremely high

The market is far from capitulating here.

By Stock Traders Daily Jun 5, 2012 6:05PM

Our stock market can fall aggressively, and anyone ignoring the risks can see their wealth wiped out in a hurry.


I am not saying this to strike fear into anyone, but if you are blind to the risk you definitely should open your eyes. There is considerable downside risk based on a number of factors and nothing speaks louder than visualization. 

 

The chart below is for the SPDR S&P 500 (SPY), but similar risks appear for the Dow (DIA), Nasdaq (QQQ), and Russell 2000 (IWM). In all instances, we are well off of the ideal shorting range, but the risks are exceptionally high. We short when everyone else is buying, that is the rule, and buy when the market capitulates, but the market is far from capitulating.

 

Furthermore, our macroeconomic work, "The Investment Rate," tells us the declines could be much worse than what is illustrated here. Be careful, be cautious, get a tight grasp on your risk controls, and remember that the stock prices of good companies fall when the market falls too, so there is no shelter except in proactive strategies that can make money in both directions. 

 S&P 500 chart. SPY

 


Tags: QQQSPY
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