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Stock Market Risk is Higher Today than it was in the Dot-Com Era

13 Jan 2015 9:11 AM

Customer Caution Notice: Stocks and Funds mentioned are NOT buying or sell recommendations. The opinions and views on events, market direction and price targets provided by others in this article are not necessarily shared by ShareTradingEducation.com. Refer to our Terms and Conditions for more.  

Mark Hulbert has been tracking the advice of more than 160 financial newsletters since 1980. On Friday 9 January 2015 Mark wrote: 


Risk-taking rises and falls with the market, which is why you should be worried right now 

The risk of a major bear market in stocks is now higher than it’s been in years. 

That, at least, is the message of an indicator that keys off the amount of risk incurred by the top-performing advisers. On average, the top 10 finishers in the 2014 Hulbert Financial Digest performance scoreboard recommended portfolios that were more than three times riskier than the stock market itself. 

That is one of the highest levels to have emerged from the Hulbert Financial Digest’s more than three decades of performance tracking.

In calendar 2011, in contrast, the comparable risk level among the top 10 finishers was less than a quarter as much. It’s been growing more or less steadily ever since.

What makes this trend so alarming is that the stock market has been near a major top whenever the top performers’ risk levels were at or close to current levels.

In 2006, for example, the last calendar year prior to the 2007-2009 bear market, it rose to slightly higher than current levels: 3.85 times riskier than the market versus last year's 3.32 times.

In 1999, the last calendar year prior to the bursting of the dot.com bubble, the comparable level was 2.58.

Risk-taking is correlated with the market cycle since bear markets are so punishing to those incurring lots of risk.

After big market drops, when memories of recent losses are particularly fresh, relatively few advisers are willing to incur big risks. As those memories fade, however, more and more advisers venture further out on the risk spectrum.

The process keeps going until the next bear market, when this risk-taking cycle begins all over again. 

In fact, the current market environment is what Adam Smith called a “kids market.” I’m referring to the pseudonymous author and his investment classic from the late 1960s titled “The Money Game.”

Smith introduced the concept of a “kids market” to describe an investment environment in which the advisers and traders making the most money are those too young to remember the last bear market. 

“Memory can get in the way of such a jolly market,” Smith wrote. 

Smith created a fictional character called The Great Winfield, who exploited kids’ markets by only hiring investment managers who were not yet 30 years of age:

“The strength of my kids is that they are too young to remember anything bad, and they are making so much money that they feel invincible.

Now, you know, and I know, that one day the orchestra will stop playing and the wind will rattle through the broken window panes, and the anticipation of this freezes [the rest of] us” who are old enough to remember. 

The bottom line? Almost by definition, this bull market will end when the fewest amount of people are acting out of fear of another bear market. 

And that’s just another way of saying it will happen when we least expect it.

Click here to:

1. Download this week's FREE Wrap, as a PDF, including this Article

2. Enquire about  subscriptions to the Hulbert Sentiment Indexes.


Editorial Note from ShareTradingEducation.com: 

In ‘Where to From here?’ in Edition 491 of our mentoring-style ‘Investing & Online Trading’ Report we wrote: 

 “Jim Berg believes that no one can accurately predict which way the market will go. 

That’s why over the past 30 years of successfully trading the market he has developed his JB Volatility Indicators and common sense ‘Weight-of-Evidence’ approach with a set of thoroughly tested and documented Rules, so that if the Market: 

1)   Continues up, Jim will continue to show how he trades and invest in stocks which pass his rising trend entry criteria; or 

2)    Has a correction, Jim will show how he progressively exits open positions as exit signals are given using his Initial, Adjusted, Trailing or Emergency Stops (as applicable) and switches to cash; or 

3)   Continues to fall, Jim will show how to trade falling trends e.g. using inverted Exchange Traded Funds (ETFs) 

If a falling trend is confirmed, Jim will look to trade the downside in his new Signals Service, using Inverted Exchange Traded Funds.

These are not leveraged instruments and are designed to rise while the market falls. We will also initiate education on this initiative in this Report

However, if this latest correction has now stopped and the market continues up from here in 2015, then Jim will trade the upside to take advantage of and profit from the rising trend, using his JB Volatility Indicators and ‘Weight-of-Evidence’, as developed by him over the last 30+ years of successfully trading the market. 

There will always be losses, so if market conditions improve next year, the aim in 2015 (as always) will be to keep those losses small and to have more profits overall than losses.”

Click on these links for info on Jim Berg's:

1. Evening seminars in Brisbane, Gold Coast, Sydney and Melbourne

2.  Weekly mentoring-style 'Investing & Online Trading' stock market Report ==>

Jim Berg and John Atkinson are Authorised Representatives (AR Nos. 322724 and 1251439) and ShareTradingEducation™.com Pty Ltd (“STE”) is a Corporate Authorised Representative (CAR No. 322726) of Maven Capital Pty Ltd, Australian Financial Services Licence AFSL 418504. Examples from the Australian and USA markets are provided to demonstrate that Jim Berg’s principles may be used globally. This educational material is from an Australian source and complies with Australian law and not necessarily any other (local) law. Direct investing in the stock market can result in financial loss. STE products have been prepared for the general information of investors and do not take into account the investment objectives, financial situation and particular needs of any particular person. Persons intending to act on information in STE's products should seek professional advice to confirm that the investments or strategies mentioned are appropriate in the light of their particular investment needs, objectives and financial circumstances prior to taking any action. Refer also to the full Customer Caution Notice in our Terms and Conditions.