Doug Kass: Measures of Risk Extended

Doug Kass over @ TheStreet.com penned this observation the other day citing a First Boston September research report:

"On Dec. 31, 2008 the risk appetite index bottomed and has been climbing since, increasing from two standard deviations below its long-term mean to two standard deviations above its long-term mean in the last eight months. This upward trend in the risk appetite index accurately predicted the current low-quality rally we have experienced since the beginning of the year. The CRX index is currently two standard deviations above its long-term mean. The index has only reached this level three other times in the index's history (going back to March 1980) and has never remained at this level for longer than three months. Given the currently elevated level or risk appetite and the mean-reverting nature of this time series, we believe that the low-quality rally is loosing steam. If we are correct and we see a subsequent fall in risk appetite over the coming months, we expect outperformance of low-beta, low-volatility, low-earnings variability, large-size and cheap valuations. -- First Boston research, September 2009

Kass went on to note that "speculation often moves to an extreme, and time invariably destroys the speculation of investors and traders. Nevertheless, while today's interest in low-quality and high-beta stocks does not necessarily signal an immediate market top and is not binding to a lower market, it is a warning sign of possible consequence."

http://www.thestreet.com/b/dps/te/theedge1.html {Subscription required}.