Risk and Reward: The Big Picture

The first step to successful investing is to identify the Market’s “Big Picture” Environment in terms of risk versus reward. This is critical to success over the long term because different “environments” require different strategies. For example, in Bull Markets the objective is to maximize returns, while success in Bear Market Environments demands an emphasis on capital preservation. By reviewing the Environment every single week, we are assured that we will remain “in-tune” with conditions and not be surprised by environment changes.At the center of our risk management work are our TopStock Exposure Models (see below). The models detail the current conditions for the Trend and Momentum of the Market and help guide us to the proper exposure to market risk.

  • Current Environment:Today are climbing higher for a third straight session after Greece’s Parliament passed its vote on the 5-year austerity plan. While it seems that the market had already priced in the vote to some degree, fears of contagion spreading throughout Europe are gone for the time being, which should at least keep stocks from retesting the summer lows in the near-term. Coupled with surprisingly positive Pending Home Sales data, the bulls took Wednesday’s opportunity to buy and pushed the S&P 500 above its 150-day ma. Assuming the Greeks will get their needed cash (a strong probability at this point), traders will likely turn their attention back to the U.S. economy. And if the downturn proves to be temporary, then we will argue that stocks can rally further. So, we’ll be watching the data.Loading chart ¬© 2001 TickerTech.com

Risk Management Models Summary

Our disciplined approach to managing risk is designed to keep our Portfolios “in-line” with the major trends of the market. We strive to keep portfolios mostly invested during Positive Environments and to Reduce Exposure to Market Risk during Bear Markets and severe corrections.

At TSP, we focus on our two proprietary Risk Management System Models. Both systems are robust market models incorporating the entire spectrum of market indicators. In short, our disciplined systems act as our primary guide to exposure to market risk. (For more details on each risk management system, see model summary below)

Current Readings – TSP Risk Management Systems

  • Graduated Risk Management System
    Recommended Exposure to Market Risk (Short-Term): 56.25%
  • Long-Term “Big Picture” Trend Management System
    Current Signal: Buy

Graduated Exposure System (Intermediate Term Time Frame)

The Graduated Exposure Risk Management System is our guide to determining the appropriate exposure to market risk.

The system is a “Model of Models” comprised of of 11 independent Models. Each model includes has proved successful in its own right and gives separate buy and sell signals, which effects a percentage of our exposure to the market. Our Trend models (Short-Term Trend, Intermediate Term Trend, and Trend & Breadth Confirm and Investor Sentiment models) control a total 40% of our exposure. The 3 Momentum Models control 10% each and our 4 Environment Models each controls 7.5% of the portfolio’s exposure to market risk. The model’s “Recommended Exposure to Market Risk” reading (at the bottom of the Model) acts as our longer-term guide to exposure to market risk.

TSP Risk Management Models
(Our Guide to Intermediate-Term Market Exposure)

Trend Signals (40%)


S.T. Trend Outlook Model Hold 5.00% Neutral
Int. Trend System Hold 5.00% Neutral
Trend and Breadth System Buy 10.00% Moderately Positive
Investor Sentiment Sell 0.00% Negative
Momentum Signals (30%)
Market Diffusion Index Buy 10.00% Moderately Positive
Short-Term Momentum Hold 5.00% Neutral
Long Term Momentum Buy 10.00% Moderately Positive
Mkt Environment (30%)
Monetary Conditions Hold 3.75% Neutral
Economic Model Sell 0.00% Negative
Inflation Model Sell 0.00% Negative
Valuation Model Buy 7.50% Moderately Positive
Recommended Exposure to Market Risk: 56.25%

Long-Term “Big Picture” Trend System

Designed for Long Term Investors who do not wish to make a lot of adjustments to their holdings (i.e. 1 to 2 adjustments per year), our “Big Picture” Trend System focuses on the overall Environment of the market. The goal is to identify the “Major Trend” of the market and keep portfolios on the “right side” of the market’s current cycle. The Model includes hundreds of indicators (both long term and short term) in the areas of “the tape,” monetary conditions, investor sentiment, economics, valuation, overbought/oversold conditions, and industry leadership.