Risk On/Risk Off Trade in Full Effect

One person I know has referred to these trading ranges as "student body left or student body right".  The meaning behind that old football adage is that everyone either moves left with the ball or right with the ball but everyone heads in the same direction.

This type of correlation makes it that much harder to put together asset strategies.  To hedge a position would be to go long certain asset classed while shorting others.  In a correlated market these types of strategies typically end up generating losses rather than protection they are designed to do.  They become ineffective.

Trying to time the market in these types of environments also tends to generate more losses than gains.  How do you know when to get in or just as important when to get out?  You are in essence guessing what direction the market is heading in.

As I have stressed before [see Perspective is Everything] it is imperative to know what you own and why.

Via the WSJ

• The "risk-on/risk-off" behavior of assets as disparate as equities and soybean is undermining the investment process. Investors of all stripes and sizes have been forced to rethink three long-held tenets of asset-picking: that markets are driven by their own fundamentals, that diversification reduces risk and that active management of a portfolio leads to higher returns than passively following indexes.
• "The macro picture tends to tell something different from the micro picture," says Mohamed El-Erian, CEO and co-chief investment officer of Pacific Investment Management Co., the giant fund manager. "When the micro dominates, the market is inclined to do well, when the macro dominates it does badly. It is as binary a situation as we have seen it."