When looking at trading markets in general – I always consider a single (and very important) overlaying theme. Superceding all others, and guiding my decision making process – regardless of asset class, current news headlines, technical indicators, price and sentiment (which has now become a commodity itself – being “resold” across the internet at any number of bogus websites) I will always look for the answer to one fundamental question.
Are investors currently considering taking on risk? – or looking to protect themselves against. Very simple and to the point.
Is risk on or is risk off ?
When risk is considered “on” – money flows to those assets where investors feel there is opportunity to see a return on their hard earned dollar. A time when things are “looking up” and investors feel somewhat safe in taking their money out of savings – and placing it elsewhere (the biggest measure of risk on this planet is currently the U.S stock market).
When risk is “off” – money flows back into savings accounts, back into “security” (out of risk and U.S equities) – and subsequently back into currencies such as the U.S dollar and the Japanese Yen ( are you starting to see how this works? ).
So……if nothing else – a fundamental knowledge/feel as to weather or not the current investment environment is “risk seeking” or “risk averse” can go a long way in keeping an investor / trader on the right side of the market.
And the question begs to be asked – is it risk on? – or risk off?