Gauging Fear to Fuel Superior Returns

We measure the key variables that have historically sparked good returns in stocks and bonds. Once we know where they stand we can skew risk/reward in our favor.

There are only a few things we need to know to determine when there is good money to be made in stocks and bonds:

• In stocks we measure how scared people are and whether interest rates are rising or falling. There may be other factors involved in a long term trend but these two factors are the keys to significant positive returns.
• For bonds, we must measure inflation and economic growth. If the former is benign and/or the latter is weak, we can expect good returns.

It’s that simple. Paratrade’s fuel gauges boil these factors down to two simple indices for each market – one is daily and the other is weekly. There are also two such gauges for the “risk parity” position where you are long both stocks and bonds.

We can study the historical performance of the market when the fuel gauges are at varying levels. The table at my site shows filtered S&P and bond returns for different ranges of the indices. There is a clear skew.  

By subscribing to Paratrade’s daily commentary, you will receive an update about where these indices stand. Can you afford not to know?