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Merrill Lynch: Time to Take Some ‘Risk Off’

Posted by Larry Doyle on April 13, 2012 2:40 PM |

With so many sectors of the market displaying significant correlation, investors and traders have come to define market movements, in general, as ‘risk on’ and ‘risk off’.

Despite the fact that central banks have provided endless amounts of fuel to prop markets, there are still points in time when indicators flash warning signals that markets are overextended. Is now one of those times?

According to Bank of America Merrill Lynch it is. 

I receive a daily commentary from Bloomberg’s Dave Wilson, and today he highlights this concern.

Concern about the global financial system’s stability has grown so much during the past two weeks that investors ought to take less risk, according to Bank of America Corp.’s Merrill Lynch unit.

The firm’s Global Financial Stress Index is derived from indicators of volatility, solvency, ease of trading, demand for hedges and money flows. Forty market-related gauges go into the Bank of America indicator, and 10 of them surged far enough to send a so-called critical stress signal three days ago. The “risk-off” warning was the first since July 12, just before a second-half retreat in stocks got under way.

We recommend caution,” Benjamin Bowler, head of global derivatives research, and two colleagues wrote in a report two days ago. The MSCI All-Country World declined by an average of 3.8 percent in periods when the signal was in place since 2000, the report said.

The stress index’s components reflects the potential worsening of a euro-region debt crisis, according to Bowler, based in San Francisco, and Anders Armelius and Abhinandan Deb, his London-based colleagues.

Credit-default swap rates for government borrowers are showing the most stress, according to their data. A CDS-based based indicator was at 4.1 three days ago. Readings above zero show stress is higher than normal.

Kudos to Mr. Wilson. His work always offers valued insights. If you would like to receive it, e-mail him directly at

Wilson’s work is very helpful in allowing us to … navigate accordingly.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

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