Managing Risk in an Emotional Market

The mania engulfing the 2021 trading year serves as a strong reminder that adherence to disciplined portfolio risk management is imperative.As evidenced by the record spike in trading volumes this year, interest in the financial markets has peaked into a mania reminiscent of the final season of Game of Thrones. And just like the compelling character arcs in that series, the stock market has seen its share of extreme peaks and troughs during the last 12 months. These days, a doubling in share price is barely news. Under the shadow of GameStop (GME) last week, few probably noticed that a little-known oil explorer (New Concept Energy, GBR) rallied more than 900% in a single session—from $2/share to over $20. During a normal year, GBR would have been front-page news. But it’s important to recognize these markets are anything but normal. The “fear gauge” clearly reflects that. After setting a new all-time high in 2020 during the height of the coronavirus correction, the CBOE Volatility Index (VIX) remains alarmingly high—especially when one considers that most stock market indexes recently hit all-time highs. The VIX shares a strong inverse relationship with broad-market indexes such as the S&P 500 and the Dow Jones Industrial Average. When the indexes are trading near historical highs, the VIX typically trades below its long-term average (roughly 19). When stock markets are correcting, it typically spikes—often rapidly. But during the most recent rally in the stock market, the VIX remained stubbornly high. It closed the month of January trading 33 and some change, with the S&P 500 only slightly off its all-time high. That alone is a strong indicator that risks in this market are high. And the sheer number of stocks making big moves on a daily basis provides further reinforcement of that reality. So while the excitement in the markets is palpable, it’s vital that market participants remain disciplined at this time, and avoid succumbing to knee-jerk emotional decisions. Long-time investors and traders are still in the game because they won the marathon, not necessarily the sprint. And above all else, these individuals understand that strong adherence to disciplined risk management is imperative. Sage Anderson is a pseudonym. The contributor has an extensive background in trading equity derivatives and managing volatility-based portfolios as a former prop trading firm employee. Originally published In Luckbox Magazine. Subscribe for free at
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