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The Wall of Worry


...this is the kind of thing that makes me nervous.

One of the themes that has been a focus on this site over the past year has been the willingness of investors to take risk. We have generally seen an increasing willingness to do just that, and it's no surprise that equities have risen in concert.

I'm seeing more and more signs that that's beginning to change. I've shown two examples recently, that being the Investor's Intelligence survey and the Rydex asset flows. Despite an overall positive market, some investors are becoming less tolerant of exposing themselves to risk.

That is especially highlighted in today's action. The major indices are masking some important underlying moves. Breadth is absolutely horrid, but more notable to me is what is moving.

I monitor a watchlist of the most liquid ETFs and sort them by beta. They include everything from the typical U.S. major-market funds to growth/value style funds to emerging market funds. Today, the funds with a beta of 1.5 or more (the "riskiest" funds) are down across the board - every single one of them - and by an average of -1.9%.

On the other hand, the "safest" funds with a beta of less than 0.5 show an average move today of +0.04% with 75% of them being positive. That wouldn't be surprising to me on a day the market was getting hit, but with the S&P in the red by less than 2 points, it sticks out.

We can't extrapolate much from one day's activity, but this is the kind of thing that makes me nervous. Risk appetites have to grow for the market in general to rise, but I'm continually finding evidence to the contrary. One could argue that this is the "wall of worry" that bull markets climb, but if no one is willing to climb, then the wall is just a wall.

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