UBS called the bottom of the recent downturn to the exact day on February 9th (see here). They’ve been bullish since then, but are now warning of extreme risks in the market. According to their Risk Appetite Indicator, risks are surging as the market advances and investors turn increasingly complacent:
“Our Risk Appetite Indicator edged higher last week, moving up to 1.21 from 1.15. After briefly dipping into negative territory in early February, the indicator has risen 5 out of the last 6 weeks (with one week unchanged) and is nearing the +1.30 level, which we define as extreme risk seeking territory. Last week, each component ticked marginally higher as the MSCI AC World index was up 1.9%.”
Their index has proven quite timely. Based on UBS data going back over a decade the market’s have returned about 1% over the following 12 months after a “sell signal”. 12 month returns following a “buy” signal were over 6%.
“When the index is greater than +1.3 standard deviations from its mean, the index is showing investors are very willing to take risk, which is when historically the index has given its best “sell signal”. Equity returns 12 months on from such high risk appetite are typically very poor, just 1% on average.”
The content on this site is provided as general information only and should not be taken as investment advice. All site content shall not be construed as a recommendation to buy or sell any security or financial product, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of firms affiliated with the author(s). The author(s) may or may not have a position in any security referenced herein. Any action that you take as a result of information or analysis on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.