Many seem convinced that market risk is elevated – perhaps at an all-time high. I know this from contacts on my vacation, where I see many high-net worth people, messages from my clients (an intelligent and cool-headed lot), and even some objective measures of angst. Whether it is uncertainty about the new President and policy, revisiting issues about valuation, or concern about foreign challenges – it is a popular time to be worried.

Charlie Bilello of Pension Partners looks at SKEW. While VIX has not generated warning levels, SKEW suggests an all-time high in crash risk.

Is this really important for trading? It is an excellent question for our experts.

Review

Our last Stock Exchange considered the role of valuation in trading. Deep value expert Robert Marcin provided some great observations. I thank him, and urge you to follow his regular observations at Scutify.

This Week—How Traders Can Cope with News-Driven Risk

We have a new participant this week – Road Runner. This beeping bird has a very specialized approach, but one that should be a favorite with traders. RR looks for stocks in an uptrend, identifies the trading range within that trend, and buys at the bottom. His holding period is only two weeks.

After extensive testing, we have invited him to join the group.

Road Runner

(Commentary translated from various pecks, rapid movements and beeps).

R: Look at Netflix (NFLX).

This sustained price growth provides a solid working range. I might look to buy around the 50-day moving average price, and sell just over $145. It’s not the world’s biggest gain, but it’s a great fit for my trading style.

J: Are you worried about a market crash?

RR: My holding period is only ten business days. Major selling takes me out of everything. My method requires finding some attractive stocks with uptrends.

Athena

My methods do not show any new choices. I look for short-term momentum picks with a solid base. The current market does not fit my style.

J: Is this a reflection of very high risk?

A: Not necessarily. The market has been pretty flat. It is less likely to find new short-term momentum opportunities.

J: Are you doing anything about headline risk and your current positions?

A: Only my normal measures. I will take note of alarming moves in the wrong direction, including both price and volume. Even a Goddess cannot anticipate what tomorrow’s tweet might bring. I am reactive, not anticipatory.

Felix

I will once again emphasize answers to reader questions. Here is the most recent list.

J: I did not see the list last week. What happened?

F: A small omission. Sorry.

J: When I am on vacation, this group is supposed to conduct business as usual. No dallying.

F: We were all working.

J: Do you have any new recommendations for us this week.

F: No, but that is no surprise given the market conditions.

J: OK, but please try to do better next week.

F: I have a question. Does adding the bird to the team mean that the rest of us will earn less?

J: Road Runner will have to earn his birdseed. It has no effect on you if you maintain your current performance.

Oscar

It’s no secret that the semiconductor sector (SOXX) is on a tear. Just look at this chart. The price looks like it’s ready to soar over the ivy at Wrigley field.

Usually it’s Athena who winds up taking flak for buying on a high. My approach is similar in that I don’t intend to hold onto this sector for very long. All I’m looking for is another 2-4 weeks of sustained growth, which seems likely at this point. In my program, I’m holding individual stocks within this sector. That opens opportunities for additional pops that might register as a small blip on the group as a whole.

J: Are you doing anything special about risk?

O: You mean my final round picks of Kansas and North Carolina?

J: No! Not your March Madness bracket. I mean the risk of a market crash.

O: There is no such indication in the data. If the situation changes, I will close positions and move on.

I also have my regular answers to reader questions about sectors.

J: Readers seem to be wondering about one of your favorite groups, chip stocks.

O: They are on the right track.

J: I see that you like regional banks (KRE), which had a tough week.

O: The sector is still strong.

J: The news emphasized lower used car prices. The reaction seemed overdone.

Holmes

CF Industries Holdings (CF) is my rebound pick of the week.

We’re well off of the all-time highs, with a flat 200 day moving average and a 50-day moving average that’s starting to trend downward. In my mind, that opens a big opportunity. If the stock climbs to its mid-February prices, I could exit this position with an increase of more than 15%.

J: Are you worried about a market crash?

H: No. My high-level indicators are quiet. Smaller moves are great for my dip-buying strategy.

H: One more thing – is that beeping bird really part of the group?

J: Yes. Some questioned the addition of a dog, so don’t complain. RR will be the last addition.

Conclusion

Markets always have news-driven risk. If you refuse to trade because of scary headlines, you should look for a new business.

A widespread perception of risk need not be accurate. And don’t be fooled by headlines calling it the “smart money.” Returning to Charlie Bilello’s fine analysis of SKEW, he demonstrates that it is not really a good predictor of large downside risk.

His powerful conclusion emphasizes that an indicator based upon perception may not reflect reality. This may seem obvious, but I doubt that many are aware of the underlying elements of SKEW.

Here are some key takeaways about news-driven risk and trading:

1. Headline risk may be exaggerated – perhaps by a lot.
2. Do not abandon your strategy and miss opportunities without confirming danger for your specific method.
3. For some trading approaches, perceived risk may represent opportunity.
4. If you are trading momentum, you should have a solid exit strategy. This is more than just a mechanical stop.

We welcome comments, suggestions, and followers for each character. Even Jeff. I try to have fun once a week in writing this, and I hope you get a chuckle or two from reading it.