5 Signs That Investors Just Can’t Get Enough Risk

by Daniel Putnam | October 16, 2013 8:04 am

So much for autumn being the worst time of the year for the stock market. Despite the political wrangling in Washington, investors continue to embrace higher-risk assets with open arms.

While this might be a longer-term cause for worry, for now it’s a sign of the robust underlying health of the market. Consider these five telling signs of investors’ hearty appetite for risk:

What does all of this tell us about the markets here? Most likely, the preference for higher-risk assets is driven by the convergence of ample global liquidity, renewed concerns about “safe assets,” and — perhaps most important — the need for lagging institutional money managers to play catch-up. The well-documented underperformance of mutual funds and hedge funds in 2013 has created a cohort of managers that needs to take on added risk for a chance to finish the year ahead of their benchmarks. Mega-cap stocks aren’t going to get the job done, but small caps and the Teslas of the world will.

The performance gap between high- and low-risk assets also provides investors with a clear reference point for the market’s health. As long as the five trends noted above continue, stocks in general are likely to remain in good shape. Conversely, any slippage in these trends is a warning signal — particularly if it’s accompanied by other potentially negative signs, such as lower volume, weaker breadth, or technical breakdowns.

The bottom line: Take advantage of these trends as long as the opportunity presents itself, but be wary. When the tide turns on a risk trade, the outcome is rarely benign.

As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.

Endnotes:
  1. IWM: http://studio-5.financialcontent.com/investplace/quote?Symbol=IWM
  2. MDY: http://studio-5.financialcontent.com/investplace/quote?Symbol=MDY
  3. SPY: http://studio-5.financialcontent.com/investplace/quote?Symbol=SPY
  4. SPHB: http://studio-5.financialcontent.com/investplace/quote?Symbol=SPHB
  5. SPLV: http://studio-5.financialcontent.com/investplace/quote?Symbol=SPLV
  6. NFLX: http://studio-5.financialcontent.com/investplace/quote?Symbol=NFLX
  7. TSLA: http://studio-5.financialcontent.com/investplace/quote?Symbol=TSLA
  8. FB: http://studio-5.financialcontent.com/investplace/quote?Symbol=FB
  9. PCLN: http://studio-5.financialcontent.com/investplace/quote?Symbol=PCLN
  10. BBY: http://studio-5.financialcontent.com/investplace/quote?Symbol=BBY
  11. EEM: http://studio-5.financialcontent.com/investplace/quote?Symbol=EEM
  12. EWI: http://studio-5.financialcontent.com/investplace/quote?Symbol=EWI
  13. EWP: http://studio-5.financialcontent.com/investplace/quote?Symbol=EWP
  14. GREK: http://studio-5.financialcontent.com/investplace/quote?Symbol=GREK

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