Risk Model Up and Running
We have been working nearly non-stop on the risk model since the close on Friday. We have looked at a few major scenarios: bottoms we would “like to buy”, corrections we may want to ignore (relatively shallow and short in terms of duration), peaks that required some defensive action, and peaks that required significant defensive action. We have seen enough to begin drawing some lines in the sand: (a) leave it alone, (b) pay closer attention, (c) reduce risk incrementally, or (d) move to defensive posture. The current reading is a mix of (a) and (b), with a higher weight on (a). This model is much more sensitive than the CCM BMSI and 80-20 Correction Index, but not overly sensitive.
Regardless of what we want to invest in (dividend stocks, ETFs, commodities, precious metals, bonds, CDs, etc.), the first and most important thing to get a handle on is the market’s tolerance for risk. The risk model is a mechanism to monitor the battle between “risk on” and “risk off”. We have more data to analyze and more scenarios to review, but the model is already in a useful form. Our goal is to have the model generate a daily report based on firm rules.
