Monday, December 21, 2009

Stay in Risk Aversion

WSJ.Com reports : "Analysts at Italian bank UniCredit are warning investors to keep their guard up even as the Christmas holiday approaches.

With the meeting of Dubai creditors today, uncertainty on Greece still looming and year-end seasonal factors, investors should stay in risk aversion mode,” they said in a note today."

What is Risk Aversion? says "Risk Aversion is the inverse of risk tolerance. Risk averse is defined as the behavior of a trader to stay away from risky trading practices, even if those have high chances of profits. Risk averse traders prefer low risk, often low profitable, products to trade. Risk aversion is seen in trading of all products including stocks, bonds, funds, options, futures and currencies."

Traders may move money from 'risky' assets to assets where risk is less. The stock market, usually classifies as a 'risky' asset, at least relatively. Money may move to Govt Bonds / Fixed Deposits, which are taken as 'safe' assets.

My Notes;
How do you become risk averse? Suppose you feel that markets may remain uncertain so you wish to avoid risk. What is the next step?
a) Sell exisitng holdings, and, do not invest further
b) Retain existing holdings, and, do not invest further
c) Sell some holdings, and, do not invest further

So, the common denominator is: 'do not invest further' - fresh money stops coming in the market. If this is so, money may stay away till (1) investors are willing to risk again, OR (2) Valuations become attractive to change risk aversion.

This narration does not have an ending. Nifty chart is suggesting a rounding top + a double top (unconfirmed). Maybe there is more downside.


SWEETY said...

Sudharshan ji,

Very timely / effective - sweet & simple notes u give.

It is true, Market will another opportunity to invest.. till then wait & watch is the best policy.

I remember prior to march 09 - when market was struggling - You gave us a hint -quoting rakesh JJ, as he indicated market may go to 3800++ - and you alerted us this is something serious & market will give us quick bucks..

And this bear market rally was so furious - beyond the imagination of well experienced traders / seasoned investors... all of us know it very well that huge money is still waiting on the sidelines to get invested at the right level, as they missed this bear market rally.

The only thing i request you is: Please alert us continuously, when the time is ripe either for investing in equities or divesting from it.

Thanks & Best regards

mbansalicy said...

i ask this some time ago also
what is the importance of RSI in technical anylysis.
if we trade using RSI as a tool.right or not??????

men said...

Mr. Sudarshan, was today's upmove reflected anywhere on the chart? If yes plseas show how and where and if no then are we wasting our time on charts or is my reading wrong on this? Please clarify as I am totally confused, though on ndtv Satkti Patra had highlighted on Tuesday evening around 435 pm of an up move which came this morning. Kindly throw some more light on this and thanking you in advance.