The Stock Market Risk/Reward Asymmetry Has Shifted
The stock market is a constant battle between buying pressure and selling pressure, and recently, that battle has shifted asymmetrically.
After a strong start to the year, with the S&P 500 gaining 4.5% by late February, the index peaked on February 19 and subsequently declined by -8.6%, erasing those early gains.
The index is now down 4.5% for the year.
This shift in risk/reward asymmetry isn’t just about price action—it reflects a broader change in market dynamics.
When an uptrend weakens, it can mean either:
- A temporary pause before resuming higher, or
- A more significant shift where sellers start to gain control.
This time, the latter appears to have unfolded, as selling pressure increased, leading to a drawdown in the stock market.
This highlights the importance of monitoring not just price, but the underlying trend strength and risk profile—a concept I addressed in my February 11th article, The Trend Remains Up for the Stock Market, But Risk is Increasing as the Trend is Weakening. By February 20th, I had taken a more defensive stance in Weakening Trend, Options Expiry, and Systematic Flows Create an Asymmetric Risk-Reward Skewed to the Downside.
Adapting to Market Shifts
Recognizing these shifts in advance is an edge. It’s not just about predicting what happens next, but structuring positions asymmetrically to account for different outcomes. A proactive risk management approach helped me avoid most of this recent decline.
At the same time, some sectors have now reached extreme oversold conditions, which can create asymmetric opportunities for countertrend moves. But timing those moves requires discipline—just because something is oversold doesn’t mean it will immediately reverse.
When we've already exited early in the stage of the downtrend, we're left with funds to reinvest after prices have fallen and markets, sectors, or stocks become quantitatively oversold.
De-risking doesn't always work out as well as it did this time, but when it does, it puts us in a position of strength.
The Bottom Line
Markets are always evolving, and one way to create asymmetric investment returns is to stay ahead of major shifts. When risk increases, protecting capital becomes the priority. When new opportunities emerge, the focus shifts to structuring trades with limited downside and exponential upside.
This recent change in risk/reward asymmetry is a reminder that no trend lasts forever. The ability to adapt dynamically—rather than simply reacting after the fact—is what separates skilled portfolio managers from those who get caught on the wrong side of a move.
Mike Shell is the founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Managed Portfolios, a separately managed account program with trade execution and custody at Goldman Sachs Custody Solutions. Mike Shell and Shell Capital Management, LLC, a registered investment advisor focused on asymmetric risk-reward and absolute return strategies, and profivides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as investment advice to buy or sell any security. This information does not suggest in any way that any graph, chart, or formula offered can solely guide an investor as to which securities to buy or sell, or when to buy or sell them. Securities reflected are not intended to represent any client holdings or recommendations made by the firm. In the event any past specific recommendations are referred to inadvertently, a list of all recommendations made by the company within at least the prior one-year period may be furnished upon request. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities on the list. Any opinions expressed may change as subsequent conditions change. Please do not make any investment decisions based on such information, as it is not advice and is subject to change without notice. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but are not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations and Asymmetric Investment Returns are those of the authors and do not necessarily reflect the position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.