View from the driver's seat

We moved back to wealth accumulation within the past two weeks. As a result of that I am taking this opportunity to communicate what I see in the markets at this time…

-Opportunities in international equities continue to look attractive versus other asset classes. Specifically, emerging markets are exhibiting positive relative strength versus the developed countries; therefore, we are going to focus our international exposure in the emerging market countries.

-For the most part, all of the major market indexes, like the Dow Jones Industrial Average and S&P 500 have returned to positive trends. Within the confines of domestic sectors there are clear leaders; Technology is one of the strongest sectors right now, and an area of focus.

-While the commodity markets in general have taken a breather over the past few weeks, there are some interesting looking opportunities here among the metals. For instance, Copper, Nickel, and Aluminum are among the metal-based commodities that look attractive here, all of which can be bought through an ETF. Feel free to give me a call if you want to take about specific ETFs to use in this area.

-The US Dollar continues to trade in a long term negative trend, and after a period of consolidation over the course of the past couple of weeks the US Dollar broke down again at $79. All in all, the picture for the US Dollar is not a positive one.

I will continue to diligently review your account(s) making the necessary adjustments to keep you positioned in the right direction. Additionally, as this offensive session progresses I will be monitoring the overall market, looking for any other potential areas of leadership. We will adhere to both the buy and sell side of our decision making process and let the discipline successfully navigate this market. If you have any questions regarding these strategies, or any other strategies for that matter, feel free to contact me and I would be happy to discuss them in further detail with you.

Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence.This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations.

risk vs reward when initiating an investment

Today I am revisiting a topic that is at the core of the analysis that I perform for clients before initiating an investment position; this being risk-reward analysis. Risk-reward analysis is especially apropos now given the rally in the market over the past few months.
Due to the rally that we have seen in the market, many stocks & ETFs have become extended and overbought, with many now a good distance from a viable stop or support level. Because of this, the risk to enter an extended stock can be much greater than the potential reward. Please realize, in keeping with my disciplined risk management, that it is essential to your portfolio's health that I conduct a risk-reward analysis on each stock & ETF we choose to buy. Below, I have laid out this process for you.

Risk-Reward is just what the name implies; it is the process of evaluating how much risk you will take on, compared to how much reward you can expect to have on any given investment. Or said another way, how many points could the stock fall if the trade doesn't work out, versus how many points could you expect to see should the investment in fact go in our favor. Typically when evaluating Risk-Reward, we like to see a 2 to 1 ratio, at a minimum. In other words, for every point at risk, we want to have 2 points potential reward. So as the above sentences suggest, I need to be able to figure out what is the expected reward, and what is the potential risk. How do I calculate whether we should buy a stock or ETF at the current level, or wait for a pullback in price?

• Determine where significant resistance lies (ahead), or where the stock would be overbought on its trading band.
• Determine where significant support resides (below).
  Calculate the price objective for the stock.
• Determine a stop loss point - where the stock will break a significant bottom or trendline - basically, a point at which we no longer want to own the stock.

I also want to mention that market and sector risk should not be ignored; of course, I want to narrow the list of potential buy candidates down by focusing on strong stocks in strong sectors.
Following, is an example of evaluating risk-reward using BJ Services (BJS), which is a member of the currently favored - Oil Service Sector.

Buying BJS at Current Level (15.50):

This stock has broken out of a base of consolidation and has run straight up from $11 to $15.50. This rally has taken the stock right up to the top of its weekly distribution where the stock is considered to be 100% overbought. This suggests a pullback could be in the offing. Such a pullback would be welcomed from a risk-reward standpoint.

Risk-Reward Calculation:

Current Price = $15.50
Price Objective = $20.50
Stop Loss Point = $10.50
Reward = 5.00 points (20.50 price objective – 15.50)
Risk = 5.00 (15.50 – 10.50 stop loss)
Risk-Reward = 1 to 1 (5.00 / 5.00)

So as the calculation above suggests, the current risk-reward ratio is 1 to 1, meaning for every 1 point of risk, there is 1 point reward. This is insufficient, as I typically like to have at least a 2 to 1 ratio. Now let’s look at how the risk-reward parameters change if we wait for a pullback.

Buying BJS on a Pullback:

Let’s assume the stock simply pulled back to $13, which is now an area of support on the chart. Also, the middle of the ten week trading band is at $11.

Risk-Reward Calculation:
Current Price = $13.00
Price Objective = $20.50
Stop Loss Point = $10.50
Reward = 7.50 points (20.50 price objective – 13.00)
Risk = 2.50 (13.00 – 10.50 stop loss)
Risk-Reward = 3 to 1 (7.50 / 2.50)

Note that if you wait to buy BJS on a pullback to 13 the risk-reward ratio jumps above the acceptable 2 to 1 as the risk-reward improves to a 3 to 1 ratio, assuming a stop-loss of 10.50. This means that for every 1 point of risk there is a potential for 3 points of reward. In summary, by waiting for a pullback, it greatly improves the “Reward," and reduces the “Risk” and suggest that you don't chase stocks here, but instead be patient and let them pullback so that we have a reasonable risk-reward working to our advantage.

Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence.This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations.