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The momentum monitor was designed to help investors with risk management, asset allocation, and position sizing. Alexander Ineichen, founder of IR&M said: “Tail events do not always happen out of the blue. Gold collapsed a couple of weeks ago. However, momentum has been very decisively negative many weeks prior to the 8 standard deviation event. Negative momentum makes hedging more important and suggests position sizing should be more conservative.”

Equity markets are currently in a liquidity induced and driven bull market. Risk is on and the sovereign debt crisis seems “like being taken care of” with the authorities doing the hedging. At the moment, “Don’t fight the Fed” is clearly the piece of wisdom most applicable. However, Herbert Stein’s Law might apply too: “If something cannot go on forever, it will stop.” The IR&M momentum monitor will indicate early, as it did with gold, when the tide has changed and a more conservative position sizing and/or hedging is in order. Ineichen: “The screening takes both politics as well as emotions out of the investment decision making and risk taking; which at the moment is probably a good thing.”

The momentum monitor also allows assessing correlation. Ineichen: “QE infinity and the current monetary race to the bottom are lifting all boats. The momentum and tenure of the current trend in for example equities, corporate high yield and hedge funds are nearly identical on the way up. It seems as highly likely that correlation will remain high on the way down too.”

Alexander Ineichen was recently interviewed on Opalesque Radio. You can read about the interview here and listen to it here. Press release

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