The risk in the markets is 4 times bigger than the possibility for profit

It's not how high the S&P 500 index is, it's how long the index will stay near its high.

Here is a small and non-inclusive list of issues that may provide market headwinds and are ignored by many:

* a likely substantive delay/dilution of the administration's initiatives, and the failure of the president to keep his worst

* the multi-month low in the (U.S.) Citigroup Surprise Index

* peaks everywhere

* rising credit risks in China

* an exponential increase in geopolitical risks

* the lack of cooperation around the world

I am a student of history and I see a rhyme with 1987, 2000 and 2007.

As I noted in my Bloomberg interview Thursday morning, with the proliferation of passive investing, the explosion in ETFs and the expansion in quant strategies everyone is on the same side of the boat. So, when a correction occurs, who will be left to buy when most of the aforementioned strategies are selling?

As mentioned above, The Fed, which has provided huge liquidity, is changing its stripes now. So the same people who told us Not To Fight the Fed when it was easing now should be saying to sell stocks and Don't Fight the Fed.

But these voices, many of whom led the lambs to slaughter in 2007-08, are not even considering a change in market view though the facts are changing.

Humans have left the room and the influences are one-sided and unusual, posing risks last seen in October 1987, when portfolio insurance wiped out the market in a brief period of time.

By my calculation, the markets' risk/downside is roughly four times as large as the reward/upside -- a rare and unattractive occurrence.

From my perch, this is not the time to take shots in direction calls, in speculative stocks or in an overweighting in equities. Rather, it is a time to be more concerned with return of capital than return on capital.

I am uncomfortable in what I see in our markets, in our country and around the world.

Source: Bloomberg

Junior Trader Stefan Panteleev

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