How to Minimize the Risk Associated with Higher Returns

“What it means to be a successful investor in 2016 can be summed up in four words: bigger gambles, lower returns.” – Wall Street Journal

The Wall Street Journal just reported that investors need to pile on more risk just to get a reasonable return.

According to the WSJ and research by Callan Associates, in 1995, a portfolio of save bonds would return 7.5% with little risk and volatility.

Thanks to rock-bottom interest rates, and lackluster growth, investors are now forced to take on much more risk just to get close to a 7.5% return. How much more risk?

To eek out 7.5% in 2015, investors had to shrink their save bond position from 100% to just 12% and pump the remainder of their portfolio into much riskier assets.

The chart below illustrated the progression from high returns/low risk to high risk/low returns.

How to Reduce Risk

There are two approaches to reduce risk:

  1. Price: Only enter trades with a favorable risk/reward ratio
  2. Time: Not to be (fully) invested all the time

The Profit Radar Report utilizes both strategies to reduce risk.

Price

The Profit Radar Report recommends about 25 carefully selected trades per year. Trades that pass our intense qualifications are:

a) Low risk trades: Risk is reduced to a bare minimum or

b) High probability trades: The odds of being right are exceptionally high

This page explains our trade selection process.

The Profit Radar Report has outperformed the S&P 500 every year since inception. Performance details are available here.

Time

Because we only take the best trade setups, we are only invested a fraction of the year, and don’t have permanent default exposure to risk. For example, the Profit Radar Report did not have any equity exposure during the August 2015 and January 2016 mini-meltdowns.

If you are looking for a low-maintenance way to reduce risk and juice returns, the Profit Radar Report may be for you.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s profile of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, and 24.52% in 2015.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

S&P 500 – Stuck Between Bullish Seasonality and Technical Breakdown

Technical analysis suggests lower prices, but seasonality points towards rising stocks. Is it possible to find a worthwhile trade in this conflicting environment? Yes it is. Find out how here.

The S&P is caught between a (seasonal) rock and a (technical) hard place. How so?

Seasonality for the remainder of the year is predominantly bullish, but the recent selloff has caused some technical damage. The technical picture is bearish unless the damage is “repaired” by a move back above resistance.

There’s an obvious conflict between indicators, which makes identifying high probability trades more challenging.

What is a high probability trade? A high probability trade signal (buy or sell) needs to be confirmed by the three pillars of market forecasting:

1) Technicals
2) Sentiment
3) Seasonality

When all three indicators are in alignment, there’s a high probability of a profitable trade/investment. That’s why I call it a high probability trade.

The Profit Radar Report continuously monitors technicals, sentiment, and seasonality to find high probability trades. Prior high probability trades include going short in April 2010 and May 2011 along with buy signals in March 2009, October 2011, and June 2012.

Putting the Odds in Your Favor

Bearish technicals currently disagree with bullish seasonality. Sentiment is more or less neutral. The three pillars don’t align. There  is no high probability trade set up right now, but that doesn’t mean there aren’t any good trades.

When indicators don’t align for high probability trades, the Profit Radar Report looks for the next best opportunity: A low-risk trade.

A low-risk trade has a higher reward than risk potential. In fact, the risk is limited by a well-defined support/resistance level used as stop-loss.

The chart below shows the most recent low-risk trade for the S&P 500 (SPY).

The thick horizontal red line is the 38.2% Fibonacci retracements of the points gained from June – September 2012 at 1,395. This level is reinforced by the ascending red trend line from the October 2011 low and S&P 1,396, which provided support several times in August/September.

In short, S&P 1,396 is a key support/resistance level. The S&P’s drop below 1,396 triggered a sell (as in go short) signal with a stop-loss a few points above. This makes it a low-risk trade.

Next support outlined in Sunday’s Profit Radar Report is at 1,37, which is made up of the 50% Fibonacci retracement and the April 2011 low. The S&P hit this support on the nose this morning and bounced 19 points.

A break below 1,371 will unlock more bearish possibility, with the potential for a steep decline.

Foot in the Door (with Steel Toe Shoes)

Regardless the size of the down move, going short at 1,396 keeps the trading “foot in the door” in case there will be a waterfall decline. All with minimal risk. The stop-loss just above 1,396 protects the “foot” against any bruising.

This is important because there are some bullish possibilities. For right now, the down trend is our friend, but we are fair weather trend friends willing to shift with a move above resistance.

The VIX seasonal pattern shows a clear seasonal opportunity right after Thanksgiving. This may make for a juicy VIX and stock trade if technicals confirm the message of seasonality.

The Profit Radar Report outlines high probability and low-risk opportunities along with the support/resistance levels needed to manage an active trade effectively.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.