Tharp's Thoughts Weekly Newsletter (View On-Line)

  • Article March Madness: Is Risk On, Risk Off Trading Dead? by D. R. Barton Jr.
  • Trading Education Many workshops are selling out. Reserve your seat now.
  • Trading Tip On the Importance of Saying "Thank You" by Van K. Tharp, Ph.D.
  • Mailbag Reader Feedback and More from Ken Long on Trading like a Firefighter
  • Ken's Class Gathering Acorns by Dr. Ken Long

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March Madness: Is Risk On, Risk Off Trading

Dead or Just Taking a Nap?

March Madness is upon us.  For the non-sports fans and readers outside the US, it refers to the national excitement over the NCAA (college) basketball tournament that happens every year in March.  Both men’s and women’s varieties are being played — and while the quality of play in the women’s tournament is exceptional, most of the nation is transfixed on the men’s bracket.

This annual postseason tournament is now one of the premier sporting events in America — that’s right, even bigger than the Super Bowl on some of the most important metrics.  TV advertising revenues during March Madness far surpass all of the NFL post-season, including the Super Bowl.  When it comes to betting, in 2012, “official betting” in Las Vegas on March Madness was 20% higher than on the Super Bowl, as reported by USA Today.  Then, the official numbers in Las Vegas pale in comparison to the all of the money wagered in local office pools.  The number of people playing unofficial office pools for March Madness are abundantly bigger than any similar participation for the Super Bowl.

What is the big deal?  There are several angles that make the NCAA tournament a fan favorite:

  • David vs. Goliath — Every year, underdogs knock off some of the biggest names in college basketball.  This year, #14 seed Harvard (who had never won an NCAA tournament game before this year) beat a highly touted, #3 seed New Mexico, only to be overshadowed by completely unknown Florida Gulf Coast University (FGCU).  A #15 seed and playing in the “Big Dance” for the very first time, FGCU gave perennial powerhouse Georgetown (a #2 seed) a thorough beating, then went on to knock off a #7 seed in the next round. If you get a chance to catch their game against in-state rival, University of Florida this weekend, don’t miss it! Man, is that FGCU team fun to watch!
  • Broad Participation — 19.5% of all NCAA Division 1 basketball teams qualify for the tournament (68 out of 347).  This allows lots of fans to pull for their alma mater or a regional team.
  • Democratic and Egalitarian — Your team has to earn its spot, but once it does, it has the same opportunity to win the National Championship as does any other team.  This is very different than college football, where the odds are stacked far in the favor of a few power conferences — underdogs need not apply.

With so much going for it, the tournament has become a cultural phenomenon.  Many people fill out their brackets predicting winners for each game, all the way up through the championship.  As a result, the nation becomes fascinated for a short time in a sporting activity that few watched during the regular season.  In fact, an MSN survey showed that 86% of employees spent part of their workday last Thursday checking tournament scores!

Winning a March Madness Pool – Risk On or Risk Off?

As I filled out my bracket this year, I was struck by the similarities between my March Madness thought process and the “Risk on, Risk off” trading mindset. In general, there are only a couple of strategies you can use to win a NCAA basketball tournament pool: you either have to pick almost all favorites or brazenly pick upsets. Picking favorites is a relative “risk off” strategy where you hope your competitors’ upsets picks don’t work.  Picking upstarts anticipates that you make a winning pick that others in the pool did not make — a risk on approach. A lot depends on how strongly the favorites play as a group in any given year but both styles can work.

In the markets, institutional money rarely uses the latter strategy by going against the crowd and making lots of upset picks.  That has especially been the case in the last four to five years as the “Risk on, Risk off” trading mentality has dominated the investing world.  Let’s take a minute to review exactly what is meant by “Risk On, Risk Off” (RoRo) trading and then investigate if this trading style is at work in today’s financial environment.

What is the Risk On, Risk Off Thought Process?

In short, RoRo trading implies that money flows to riskier asset classes during up-trends (greed-based markets) and then switches and flows to risk-averse assets during down time (fear-based markets).

In a series of articles in Tharp's Thoughts last year on RoRo trading, I provided an extended quote by Jeremy Grantham of GMO, a global investment management firm.  It’s so insightful that, instead of me explaining why almost all professional investors keep rushing from one side of the “risk on, risk off” boat to the other, I’ll allow Mr. Grantham to do it:

“The central truth of the investment business is that investment behavior is driven by career risk. In the professional investment business we are all agents, managing other peoples’ money. The prime directive, as Keynes knew so well, is first and last to keep your job. To do this, he explained that you must never, ever be wrong on your own. To prevent this calamity, professional investors pay ruthless attention to what other investors in general are doing. The great majority “go with the flow,” either completely or partially. This creates herding, or momentum, which drives prices far above or far below fair price. There are many other inefficiencies in market pricing, but this is by far the largest.”

Most analysts would agree that the RoRo mindset and trading process has been a central force in the financial markets since the 2008 market meltdown.  Is this still the case in the loose-money, news-driven markets of today?  Let’s take a look at some charts and asset relationships to see if we can draw any conclusions.

Is RoRo Still Evident in the Markets?

As a baseline, let’s look at an S&P 500 chart for the past six months and mark the clearly defined down period (Risk off) and up period (Risk on):

Chart 1

Now we’ll look at traditional RoRo pairs across several asset classes.  In the following charts, we’ll put a price chart of the riskier asset in the top pane, the less risky asset in the lowest pane, and the middle pane will show the ratio of the top (Risk on) asset divided by the lower (Risk off) asset.  Any time the ratio is sloped up would be classic “Risk on” behavior; a down-sloped line would show us classic Risk Off behavior. 

Our goal is to compare our RoRo pairs to the time-frame from the chart above and see if September— November, 2012 was a Risk off period, while late November, 2012—March, 2013 exhibits Risk on behavior. 

First up:  we’ll stick with equities.  Let’s compare the Emerging Markets (EEM, Risk on) to the U.S. Blue Chips, the Dow Industrial Average (DIA, Risk off):

Chart 2

Wow! — The blue vertical line shows the approximate time that the equities markets reversed from a Risk off posture to Risk on.  This relationship between the markets and blue chip stocks shows an almost complete decoupling from RoRo action.  In fact, since the beginning of the year while the blue chips have driven higher, the emerging markets have actually lost significant ground.

Let’s drill down to the sector level.  Another classic RoRo pair is consumer discretionary spending (Risk on) versus consumer staples (Risk off):

Chart 3

Here we see more of a mixed bag.  The September—November, 2012 Risk off trade ended early for this pair and likewise, the Risk on trade ended early — by late January, 2013.  Since then, it’s been a bumpy, up and down relationship with a downward (Risk off) bias.

Let’s jump over to currencies.  The traditional Risk off currency is the Japanese yen, but with the Bank of Japan actively devaluing the yen to spur exports — that relationship is not useful. The other “flight to quality” currency is the Swiss Franc, so let’s compare it to the darling of Risk on currencies, the Australian Dollar:

Chart 4

Here we see only two somewhat short periods of classical RoRo behavior — during the early part of the September—November, 2012 down move, and during the later stages of the current Risk on market.  During the strong equity market moves in between — this currency pair was largely ambivalent…

What Are Other Analysts Seeing in Regard to RoRo?

Some top analysts are also seeing a decoupling from RoRo behavior across whole asset classes.  For example, JP Morgan currency strategist, John Normand, calculates correlation in currency markets at five-year lows.

Likewise correlation between global equities markets was down more than 30% since June, as calculated by Societe Generale — and those correlations are now at the lowest point since 2007.

Reuters reports that some institutional managers are starting to discount classic RoRo relationships. They are turning toward more traditional sector rotation and individual stock picking and away from the “global macro hedge fund manager” style that has been dictated by RoRo markets.

Once we finally get a meaningful market correction, we’ll be able to see if traditional RoRo relationships are rekindled.  Until then, news flow and loose monetary policy will continue to rule the day.

If you’ve found this article useful or thought provoking (or both), I’d love to hear your thoughts and feedback – just send an email to drbarton “at” Until next week…

Great Trading,

D. R.

About the Author: A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena. He is a regularly featured guest on both Report on Business TV, and WTOP News Radio in Washington, D.C., and has been a guest on Bloomberg Radio. His articles have appeared on and Financial Advisor magazine. You may contact D.R. at "drbarton" at "".


Trading Education


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Trading Tip

Van TharpOn the Importance of Saying "Thank You"

One of my Super Traders recently mentioned that he was doing the 28-day course by Rhonda Byrne from her newest book, The Magic.  I was quite curious, what is this 28-day course? I was in Australia at the time and Byrne is Australian so I knew that I would be able to find the book in the local bookstores.  

Once I found it, I photo-read the entire book in about 15 minutes and decided that I needed to buy it. I worked on the Magic program while I was conducting the Peak 202 workshop and then went on a five day vacation. The book turned out to be all about gratitude.   I am very interested in gratitude because when I first became a Oneness Blessing Giver over five years ago, I was told that the fastest way to increase my level of consciousness was by increasing the amount of gratitude in my life.

When Peak 203 came around a week later, I decided to incorporate The Magic Program into the workshop follow-up program.  In addition, my Internal Guidance told me to add an exercise to the course itself.   That exercise became one of the most powerful I’ve ever given in terms of its impact.

Here’s the exercise, so that you might try it yourself:   At lunch time today, go outside and say, “thank you” to at least 50 people in one hour.    You must be able to give a different reason to thank each person so that the “thank you” is sincere.   So, how do you feel at the thought of doing that exercise?

It’s not such a daunting task in Sydney when you consider that as soon as you go out into the streets, you can meet around 10-20 people each minute.   All you have to do is pick one and say, “Thank you.”   If you live in an area where there aren’t many people, you’ll have to say thank you to everyone.

When we debriefed the exercise after lunch, the feedback ranged from:

  • “This was the most powerful exercise I’ve ever done.”


  • “That was the most awesome hour of my entire life.”

That was the kind of impact it had.   Here is a specific recount of the exercise that one of my Super Traders gave at his end of the week report to me:

One of the most uplifting experiences of my life happened today. Van changed the lunch time exercise to one where we had to go out and give 50 “thank you’s” to people. It could be for anything, but each one had to be for a different reason.

So anyway, for the FIRST time I decided to NOT do this alone, but to do it with a partner. I teamed up with D in the tunnel at Central Railway Station. D and I had bought four pieces of cardboard, and we were going to pin them to our front and back, when two other class participants turned up and asked for a piece of cardboard. The universe certainly provided, and was perfect (well, from their perspective I guess).

What followed I can only describe as pure magic. We stood as a group in the tunnel, and started thanking people. The goal was to get 50 each. We were able to thank over EIGHT HUNDRED people!!! But that wasn’t the point. A lady who was an opera singer, looking quite down with the world on her shoulders, just suddenly burst into song.  There were people who were uplifted. People would walk up to us and give us hugs; we lost count of the number of high fives.

Words fail me, but I know the other guys were totally in agreement that — for that hour or so — magic truly happened. It was like the energy in the whole walkway where we stood was raised an entire level on the David Hawkins scale of consciousness.

What also makes this exercise particularly poignant for me is that it was almost two years ago to the day (actual date: 18th of March) that I approached Van about being a Super Trader. It was at Peak 203 in Sydney, March 2011. I remember it well, because when we had to do the exercise where we went out to get hugs. I was shaking, almost throwing up in the bin and paralyzed with fear. I couldn’t wait for it to end. D summed it up that day by saying that I looked like Mr. Burns out of the Simpsons, half dead.

Now here I am, two years later and experiencing something that was completely transformative, pure magic.   If that’s the kind of Matrix I am creating now, then “I want more of that.”

While this article has little to do with trading, it has everything to do with being a happier person and raising your level of consciousness.   So, if you want an experience with Magic, then go out and do it.   And if you need to recruit a couple of friends to do it with you, be my guest.

About the Author: Trading coach and author Van K. Tharp, Ph.D. is widely recognized for his best-selling books and outstanding Peak Performance Home Study Program—a highly regarded classic that is suitable for all levels of traders and investors. You can learn more about Van Tharp at His new book, Trading Beyond The Matrix, is available now at


Reader Feedback and More from Ken Long on:

Trading like a Wildland Firefighter


No, No, No. You do not want to trade like a fire-fighter!

I’ve been a professional fire-fighter for nearly 30 years and I can tell you that I have not met one fire-fighter who can trade profitably long-term with a fire-fighter’s mindset! You’ve also identified why in your article — the fire-fighter’s number one quality, a pre-occupation with failure.  If you understand Van Tharp’s work and his idea of “quality”, you may understand how hard it becomes for a fire-fighter to trade.

All the best,
B, Australia

I am grateful for your insights.

The fire-fighter’s code has much in common with my personal trading principles which were the source of the adaption in the article.  Let me explain a little more about the aspect you bring up. 

The principle of "pre-occupation with failure" has a very specific application and mindset in High Reliability Organizations and is diametrically opposed to the idea of "zero-defect mentality" — which can be very useful in other environments. 

Although I am not a fire-fighter, I spent my formative years as an Army Ranger infantryman, walking point at night in combat.  Those experiences imprinted lessons into me about risk management, care for equipment, planning/ rehearsal/ disciplined execution and a "pre-occupation with failure" that reminded me a great deal of the fire-fighter rules when I read them recently. 

The essence of "pre-occupation with failure" in HROs is not to look for blame, but to keep very mindful of the difference between the plan and what's actually going on in a dynamic environment. This foundational principle emphasizes the idea that NO plan can account for everything the world can do or will do.  Even while we must have a plan to guide our actions, once in action, we should focus on how the plan might be unraveling.  Looking for the first evidences of failure helps us continually adapt to the changing world and prevents any assumptions about the quality of the plan from blinding us to the reality of new risks which we might not have foreseen.

HROs assume that all plans are incomplete or, at best, approximations of what might happen.  Constant attention to detail and constant vigilance are required to stay successful in the HRO environments.

In other words, you put the plan into action and then start looking for evidence that it no longer fits the situation well.  When it doesn’t, that recognition identifies a need for adaptation rather than a focus on evidence that confirms your assumptions. If your plan is good, then there ought to already be lots of evidence of why it should work. HROs trust those plans, but are looking for evidence of failure in time to act.

90% of businesses fail in the first 5 years, but aircraft carriers, nuclear reactors and other HROs have such an extraordinary record of success in a world of maximum uncertainty because of how they look  at "the plan" and how their redundant systems identify failures early enough to act to avert crises. 

I have been developing a set of trading principles for 30 years and the more I trade in alignment with them, the better I have done.  I will also add that it has taken a lot of work with "Tharp Think" to sort out just how to effectively apply the ingrained principles of my infantryman experience in the world of trading and this effort remains an ongoing process.  Writing about these ideas, exploring beliefs and assumptions is a major piece of that work. So, I am grateful for your willingness to raise the flag. :)



Ken's Classkens video

Gathering Acorns

In this 4 minute video, Ken reviews several trades from Monday, March 25.  While Ken was prepared for a volatile day, the market offered the opportunity for a number of only small R trades.  Rather than reaping any big windfalls, it was instead a day for gathering acorns. 

Click Here to Watch the Video


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Mar 27, 2013 #622


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