Stock Exchange: Is It Time To Lever Up On Market Momentum?

The Stock Exchange is all about trading. Each week we do the following:

  • discuss an important issue for traders;
  • highlight several technical trading methods, including current ideas;
  • feature advice from top traders and writers; and
  • provide a few (minority) reactions from fundamental analysts.

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Review: You Risk How Much Per Trade?

Our previous Stock Exchange asked the question how much do you risk per trade? We noted that risk management is an important part of any trading program and that concentration can lead to great success, but also great disasters. We shared some suggestions on sizing and concluded with the importance of knowing your needs as well as balancing prudence and aggressiveness.

This Week: Is It Time To Lever Up On Market Momentum?

Speaking of aggressiveness, when times are good (such as the current bull market), using leverage (borrowed money) to trade can magnify positive results. But leverage also has historically been one of the key ingredients to major market blow-ups throughout history (for example the housing crisis and Long Term Capital Management, to name a couple).

And despite our current strong market rally, the yield curve has recently flashed a warning sign in many investors’ minds. In particular, long-term rates have dipped below shorter-term rates, which is often a signal of a recession on the near horizon.

However, according to Michael Strobaek, Global CIO at Credit Suisse, we should be getting ready for an uptrend–not a downturn. According to Strobaek:

“We estimate the probability of a recession in the U.S. at less than 10% in the next 12 months, less than 20% in two years and just over 30% in three years.”

And in perhaps some corroboration with Strobaek’s view, trading psychologist and TalkMarkets contributor Dr. Brett Steenbarger suggests that this market can still go higher. In particular, he shares data and stats on the historical likelihood that this rally continues, and also shares anecdotal evidence of more pent up buying power waiting on the sidelines. Specifically, he notes many frustrated traders have missed this year’s rally, (because they were waiting for a pullback before buying), and that:

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