On the subject of risk….

December 23, 20194 Comments

At ValueTrend, we try to control risk in a variety of ways. They include:

  • Trend analysis: This trumps all other risk controls. We tend to be mid-termed traders, so we watch weekly charts. If the market or a stock remains above its support zone, or, if it remains in an uptrend (higher highs, higher lows) we stay in the trade. We also keep an eye on the 200 day SMA (Simple Moving Average)  in a trending stock. We sell if support is broken or the trend breaks – ie a lower high and low, and a break of 200 day SMA. We use a minimum 3-day rule to trigger a sell upon a breach of a trend or support.
  • Macro risk assessment: We pay attention to a variety of risk indicators, compiled in our Bear-o-meter indicator. This indicator focuses on the US market (SPX) due to its significance as the world’s leading stock market.  Risk and reward are both ever-present on the markets. The Bear-o-meter measures the relative balance between these two realities. If we get a signal suggesting higher risk vs. reward, we adjust our cash holdings in the Equity Platform up or down, according to the Bear-o-meter’s current levels. BTW– on January 10th we will be holding a webinar on how the Bear-o-meter is constructed.Please sign up using this link where all the information for the upcoming webinar will be.
  • Sector weighting and position sizing: No matter how much we like a sector or stock, we realize that there is always a potential for our assessment to be incorrect. Or for unforseeable bad things to happen. So we limit our risk by adhering to some rules. For example, in our Equity Platform we hold no more than 30% in a sector (we actually rarely get close to that weighting), and no more than 7% in an individual stock. Our typical weightings are closer to 15% in a sector and 3-5% weightings in most of our stocks. So, should we get spanked by one of our positions, the impact is never devastating. Yet, our position sizing  gives us enough of each position to earn a reasonable upside for the overall portfolio when the security rises.


As many of my regular readers know, I try to get a Bear-o-meter report out each month. As noted above, its my way of assessing potential risk on the markets. It does not overshadow the trend. But we do take the risk readings provided by the Bear-o-meter seriously.  For today, I thought I would present a compilation of sentiment indicators that Sentimentrader uses. Many of the indicators in this compilation are found in the Bear-o-meter.

Take a look at the Optimism/Pessimism spread report below. To quote Jason Goepfert on the indicator:

“This is the spread between the percentage of our indicators showing excessive optimism and those showing excessive pessimism. The higher the spread, the more likely stocks are seeing too much optimism and will struggle going forward.”

I’ve highlighted points where his compilation showed excessive optimism vs pessimism. Remember, pessimism is good – it indicates an oversold condition. Optimism, also a contrary indicator, indicates overbought market. It seems that “buy” signals come in at around -0.2 on his compilation (excessive pessimism). The better “sell” indications start at around +0.4. The market has been flirting with the “sell” signal for a while. Investors are excessively optimistic right now.



To be fair, this indicator can stay overbought or oversold for many months at a time. A runaway market like 2017 (not shown) had the indicator screaming sell for the latter half of the year. Eventually, it proved correct. The SPX had several 20% negative swings with little upside progress in 2018. Perhaps that’s where we are right now. A runaway market that is likely to correct – but that correction may take longer to materialize than one might suspect. So, as I noted above, the trend trumps all.

We’re long the markets. But we’re holding our nose while doing so, and keeping a sharp eye on the potential for any negative developments.

To all of my readers– I wish you all the best over the holidays. I appreciate your ongoing support of this blog (last count was close to 4000 individual readers each month!). And keep those comments coming!

Off topic blog this Friday December 27th

Every year I write an off-topic blog. This year’s version will be posted this Friday.


I’ll be focusing on the topic of wealth distribution on Friday’s blog – a hot topic these days. Obviously, this topic is not related to stock charts. The regular blog on technical analysis will be back on Monday December 30th.



  • Is there a prize for noting “January” 30th vs December 30th for the next technical blog?
    All the Best for a Great Holiday and Happy and Prosperous New Year to all the fine folks at Valuetrend.

    • Thanks Don! Me and my sausage fingers…I shall fix that mistake…and yes, there is a prize. Its a free mint, collectable from the bowl of mints on the counter at the front desk of our office. Happy holidays to you too!

  • Hi Keith,

    Would you apply your risk controls in the same way to a portfolio of stocks chosen for dividends as to a portfolio chosen for capital gains?

    • Good question Paul. The answer is “yes and no”. We have an Income Platform (see https://www.valuetrend.ca/equity-platform/income-platform/)
      In that strategy, we have about 50% weighted in high div stocks, with the other half in short duration bonds and cash-equivalents. For the stocks, we dont look for trends–we often look for stocks that are more or less trapped in a wide band of support / resistance. More important to us is the companies ability to withstand economic changes and still maintain, if not increase, its dividend. So we are much more forgiving on the movements of the stock. That being said, we still pay attention to major support zones. If they are broken, then yes, we sell. But our sell rules are nowhere near as tight as they are for our growth platforms.


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