Are equities a good risk/reward at this point?

G

Ghost of Cutten

IMO they aren't. Valuations are somewhat pricey, the fundamental outlook is not really good enough to justify premium valuations, and there's the small matter of an 80% rally in just over a year.

I don't necessarily think we will have a bone fide bear market like 2000-2003 or 2007-2009, but it wouldn't surprise me at all to see 10-20% lower prices at some point in the next 12-18 months, and I would be surprised if we saw meaningful upside of the same amount (10% gains would put us at 1320, 20% would be 1440). IMO a more realistic upside is to around 1225-1250.

Furthermore, the VIX is now getting quite low, we are within 0.5% of the highs, and upward momentum is tapering off in the indices, compared to last year where momentum was strong. There are plenty of catalysts over the next 12-18 months that could spark a selloff e.g. Eurozone defaults, or just the economy stumbling back as the stimulus is withdrawn. I don't think we are quite at the top but I think we are pretty near.

Because of that, I think the best posture right now is to have on a fairly neutral market exposure (i.e. be mostly flat or hedged with index shorts), and maybe long a small amount of long-term puts. If we go up much further e.g. 1225-1250, or see some timing indications that a top is imminent, I would be tempted to go net short a moderate amount (e.g. 20-25% short).

Any thoughts?
 
Sounds like another bear who missed the boat and hoping for a drop off. Stocks may be up 80%, but thats still below break even. stocks are finally starting to go back to a stage of "narmalcy" and theres still tons of money on the sidelines and in bonds/fixed income. once interest rates start to increase (inevitably soon) you will see that money move into equities providing another boost to the market.

and just because the vix is at these levels doesn't predict a market going down. its showing volatility, and right now there isn't much, so the markets have made a move and now in a slower state of likely consolidation before the volatility increases again and we move to new levels.
 
Not an expert on VIX by any means but - can't remember his name, some bod with a following - explains that the VIX as a static indicator is worthless....a bit like the wife's rationale for continually buying stuff - but it was 20% off darling. The question is 20% off what.
He advises looking at the deviation from a 10 day MA.
I just fling a Bollinger Band (regular settings) and keep an eye out for
when it crosses the bands. Its quite good at signalling short term weakness in a longer term trend.
JMO


Furthermore, the VIX is now getting quite low, we are within 0.5% of the highs, and upward momentum is tapering off in the indices, compared to last year where momentum was strong. There are plenty of catalysts over the next 12-18 months that could spark a selloff e.g. Eurozone defaults, or just the economy stumbling back as the stimulus is withdrawn. I don't think we are quite at the top but I think we are pretty near.
 
VIX at the current level (below 16) implies that 4.5% drop within a month is unlikely.

a reasonable person would think that after the market went up 15% in 2.5 months, it is quite possible for it to give back 5% within a month. i conclude that the market is on the irrational side now.
 
Quote from SCI new york:

Stocks may be up 80%, but thats still below break even. stocks are finally starting to go back to a stage of "narmalcy" and theres still tons of money on the sidelines and in bonds/fixed income. once interest rates start to increase (inevitably soon) you will see that money move into equities providing another boost to the market.

and just because the vix is at these levels doesn't predict a market going down. its showing volatility, and right now there isn't much, so the markets have made a move and now in a slower state of likely consolidation before the volatility increases again and we move to new levels.
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I will now address your reasonable points:

Yes stocks are below breakeven, but breakeven is not typically achieved immediately after a bear market of that kind of size. For example the 1973-74 bear took until 1980 (5 years from the lows) to reach the previous bull market high. The 2000-03 bear took until 2007 (4 years from the lows) to reach the previous bull market high. The 1929-32 bear took until 1954 (22 years from the lows) to reach the previous bull market high.

I don't agree that increasing interest rates, which makes cash and bonds provide a higher return than before, would result in money going into the stock market - rather the opposite. At least that is what economic theory and financial history suggest is the most likely outcome, other things being equal. If I am earning 0% on cash balances and 4% on bonds, then equities are more attractive, compared to if I can earn 3% on cash and 5-6% on bonds.

You are right that a low VIX doesn't predict a market going down. Which is why I never said it did. A low VIX does however mean that there are no returns to be earned from fear evaporating, whereas back in late 08 and 2009 up until the summer, the dissipation of fear was a big driver of stock returns.

As for money on the sidelines, that could be a bull point - do you have any data to suggest that cash on the sidelines is higher than normal?
 
Quote from shortie:

VIX at the current level (below 16) implies that 4.5% drop within a month is unlikely.

a reasonable person would think that after the market went up 15% in 2.5 months, it is quite possible for it to give back 5% within a month. i conclude that the market is on the irrational side now.
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Actually, what it implies is that there is a large chance that in the next 30 days would/could show a range of 4-5%, in either direction. could be upside could be down.
 
GoC, in another topic you pointed out the potential outperformance of individual stocks versus the index and different sectors versus eachother and rightfully so.

Take a look at GDXJ for instance, a junior precious metals miners ETF.

It basically dropped 30% from january to february. Several individual miners even halved in value despite the metals strength! After which the ETF shot upwards again 30% till today.

I would say the same risks and rewards will present themselves troughout various sectors of the market going forward and risk willingness and emotional controll will determine each individual's rate of succes.
 
Quote from Debaser82:

GoC, in another topic you pointed out the potential outperformance of individual stocks versus the index and different sectors versus eachother and rightfully so.

Take a look at GDXJ for instance, a junior precious metals miners ETF.

It basically dropped 30% from january to february. Several individual miners even halved in value despite the metals strength! After which the ETF shot upwards again 30% till today.

I would say the same risks and rewards will present themselves troughout various sectors of the market going forward and risk willingness and emotional controll will determine each individual's rate of succes.
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Yeah but that would imply that a better risk-adjusted return would be earned by going long attractively valued stocks, and shorting the index (or stocks you are very bearish on) as a hedge, thus earning a decent amount on your longs whilst reducing market risk. Whereas 6-12 months ago, better returns were earned just by being long and not having any hedges in place.

In other words, a bullish posture either doesn't make sense, or is at least a lot less attractive than it was previously. Even if you are a bull, you should be less bullish than you were 6-12 months ago.
 
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