Most investors know about bull markets and bear markets. The terms “risk on” and “risk off” are analogous but have some key differences.
They are short-term in nature. Bull and bear markets tend to span months, quarters, even years. The market often transitions from risk on to risk off in days.
Specific assets are more impacted than others. Stocks like Kroger (KR) don’t depend much on whether the market is risk on or off. But a stock like Virgin Galactic (SPCE) or DoorDash (DASH) respond a lot. The more speculative the instrument, the more it will vary based on this market condition.
Everything in a class tends to move in the same direction when we see these changes. The shot below shows a bunch of SPAC warrants held in a brokerage account. In a risk off market they all go down. The only green are some that have always been out of favor so nobody has been speculating in those.
The chart below shows the kind of daily action you’ll observe in a “risk off” market. What you see below is the daily action in a new SPAC IPO featuring Doma being brought public via Capital Investment V (CAP). It jumped on the news with people expecting great things, only to begin to fall back sharply from the initial highs.
Look at the huge spike of sale volume shortly after the open, that’s a classic signal that holders were eager to reduce risk and sold without caring about the potential for further upside.
(As an aside I think this is a good one in the real estate technology space and despite a high valuation I was buying this one with both hands at $10.15. Almost zero downside from those levels.)
Personally I prefer the risk off markets because they reward research and due diligence. In risk off markets you often don’t even have any time (or incentive) to dig in and do work because things move so fast the “investment opportunity” is over before you can open up Microsoft Excel.