June 5, 2018

Individual stocks and sectors have some favorable risk reward ratios

Doug Kass is not so upbeat on the S&P500 but has switched from being Short the SPY to slightly net long stocks. He writes on RealInvestmentAdvice,

"Most of my market concerns ......... remain intact.

Importantly, the ECB is still ending QE by year end so Italy might be just a dress rehearsal of what’s to come as junky credit exists everywhere in the EU. And in one month, QT (over here) ramps to $120 billion in 3Q2018.

The market continues to have limited upside, but an elongated economic cycle (and less interest rate stress) likely means my pessimistic scenario (S&P 2200) has been negated for 2018.

Here are the current reward versus risk parameters (based upon the +13 handle rise in S&P futures, 2705 S&P equivalent):

1. There is 280 points of downside risk against 95 points of upside reward (compared to the top of the expected trading range) in my new pessimistic case (2400-2450)

2. Compared to “fair market value,” (2500) there is 205 points of downside risk versus 95 points of upside reward.

3. Against the expected trading range, there are 155 handles of downside risk and only 70 points of upside reward.

As you can see – all the ratios of risk are negative. The rationale for my current net long exposure (given the above risk/reward ratios) – is that I believe I have found individual stocks and sectors (like banks) with favorable reward vs risk."

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