Market Risk: Why Upside Moves Will Not Be Easy

George Leong takes a look at the current market risk with the stock market and why upside moves will not be easy.October was one of the best months for the stock market in history in spite of the market risk. Everyone was buying and it didn’t matter if it was technology, industrial, or some new never-heard-before-technology. Everything went up, which is why we are now facing some selling pressure.

Up we go, down we go. Traders are currently jittery following the strong October. The month ended on a ghoulish note on Halloween. November looks like it will also begin sour, with a jump in market risk.

European stocks got hammered. The FTSE 100 moved down over three percent, while other key European bourses plummeted as much as five percent. The selling was driven by a major surprise when the Greek Prime Minister said the country’s new bailout plan resulting from the debt crisis would have to pass a national referendum—adding more market risk and unknowns to the European and global situations. The reality is that there are revolts on the streets of Athens, as people are fighting to safeguard their previous benefits and lifestyles. I mean, why would you not fight to protect a cushy job with early retirement?

But, as I have said on numerous times in the past, Greece is not the only country in trouble. The other members of PIGS also add to the market risk. Speculation is swirling that Italy may be vulnerable to default. The country is undergoing their own austerity strategy, but I expect some surprises to pop up and this will prop up the market risk.


There is also the renewed concern towards the slowing in Asia, as China’s factory activity declined to its lowest level since February 2009. The economic weakness in Europe is negatively impacting exports in China and other Asian countries and adds to market risk.

Going back to the U.S., the key stock indices have each breached their respective 200-day moving average (MA), while the S&P 500 has moved back into the red for the year.

The downside break is worrisome and could point to more weakness to surface on the charts, especially if the non-farm jobs reading this Friday are poor, as many expect them to be.

On the plus side, based on the seasonal trends, market risk may decline, as the months from November to April have resulted in the biggest gains for the DOW and S&P 500 in the past, according to the Stock Trader’s Almanac.

Technology has been better, with stocks advancing in eight months from November to June.

So, while there are the market risk and volatility, if you trade the historical patterns, ride the gains, but make sure you also take some money off the table.

I continue to recommend using put options or buying short-based exchange-traded funds (ETFs) as an offset to the weakness. It’s easy and cost-effective as a hedge.

Just take a look at the various indices that closely reflect your holdings or put options on individual stocks that you have a large position in. Index Puts include the SPY (S&P 500), QQQ (NASDAQ), or IWM (Russell 2000).

Take a look at what I had previously said about the global economy stalling in Stocks Facing Many Hurdles Ahead.

An area that has been under some pressure, but which I really like longer-term, is China’s travel sector; you can read about it in China’s Travel Market: Why It’s an Attractive Chance for Investment.