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Even Advisors are promoting better Risk Management – Down Markets Matter!

SmartStops comment:  We couldn’t agree more!  It is exactly why we brought this service to the marketplace.

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http://www.onwallstreet.com/video/?id=2679576&page=1

Look at the money protected by SmartStops recently on AAPL, CMG, NFLX etc.

A New Risk Indicator To Sidestep Market Downturns: Is It Better Than VIX?

By Chris Georgopoulos, originally published on 11/14/11

Without question the most popular model to predict market crashes is the VIX, commonly referred to as the “Fear Gauge,” a market index that measures the implied volatility of the S&P 500 index options. Its concept is quite simple, when the uncertainty and fear among investors rises, they commonly run to the S&P 500 options to either hedge or speculate. The increased interest in the options usually leads to higher premiums and as the premiums increase so does the VIX. However, predicting the future isn’t 100% accurate, most of the time it’s not even close. Every forecasting model has its flaws and the VIX is not an exception. There are many problems skeptics have found with the VIX such as; its population study is limited to only the 500 stocks of the S&P 500 and” {the} model is similar to that of plain-vanilla measures, such as simple past volatility” (Wikipedia). A blog post on sensibleinvestments.com summarized the VIX as “simply an indicator of actual volatility in the market but one that is very sensitive to changes in actual volatility particularly if it is on the downside.” Is there a better way?

An elementary statistics theory states that the larger the population size, the greater the likelihood that the sample will be represented. If markets are graded by the performance of popular indexes such as the S&P 500, why limit a forecasting model’s population to only 500 stocks? The economy has become global; interactions from every corner of the world’s businesses affect every other business. If there is a model that forecasts market direction, should it limit itself to just the largest companies? As for only using a month or two of short term option premiums to garner a prediction, as the VIX does, it seems to limit itself to only a single variable. Instead of short term options premiums and limited samples what if we could measure real-time individual stock trend alerts on thousands of domestic and foreign stocks and ETFs? Or simply what if we analyzed the micro components (every stock) to develop a macro forecast of the market based off trends and risk?

By studying the history of risk alerts from SmartStops.net, an intelligent risk management service, two proven alternatives to the VIX were found. SmartStops.net has developed their own proprietary risk model that monitors the trends and risks to over 4,000 of the most popular stocks and ETFs. If the risks grow on any individual investment SmartStops.net alert their subscribers with both long and short term exit triggers. However not only do these alerts help individual and institutional investors manage specific investment risk, the reviews of the alerts themselves have predictive capabilities. By back-testing every alert that SmartStops.net has issued from their inception versus the S&P 500 performance, there is proof of this and the results speak for themselves.


There have only been 7 days for which the amount of Long-Term Exit Triggers (stop alerts) as a percentage of every stock and ETF covered by SmartStops.net has been over 20%. The subsequent market action of the S&P 500 has averaged a negative return for the time periods of 1 week, 1 month, 3 months, 6 months and a year. The 6 month average return is over -7% and when examined from the absolute lows of the S&P 500, the returns average over -19%. If you remove the knee-jerk market reactions caused by “Flash Crash” on 5-6-2010, the returns are even lower.
Another metric offered by SmartStops.net is their SRBI(tm) (SmartStops Risk Barometer Index); this index measures the current percentage of stocks and ETFs that are in “Above Normal Risk” state (ANR) divided by the 100 day average above normal risk percent. By definition, a stock that is listed ANR experienced a risk alert as its last SmartStop alert identifying a downtrend. Conversely, a stock that is listed in a “Normal Risk State” experienced a reentry alert as its last SmartStop alert indicating trading strength and an upward trend. Back-testing historical SRBI data since inception shows that the repercussions to the market when the percentage of downtrends increases to over 40% of all stocks and ETFs covered are profound. Below you will see that there have been only five occasions where this has happened. In each case the S&P returns for the following year were all negative.

Is this a better way?

Before a concrete conclusion can be determined, the predictive capabilities of the VIX must also be analyzed. Read More…

How Can Advisors Build a More Modern Portfolio?

Originally published By Matt Ackermann on May 16, 2012 at OnWallStreet.com  

SmartStops comment:   The fear of investing in traditional assets due to volatility can be minimized for an advisor’s clients by the use of a SmartStops methodology.  SmartStops was created because of the need for a more Modern Portfolio approach that could better manage traditional assets.      

 How Can Advisors Build a More Modern Portfolio?

Following a pair of bear markets, advisors know the days of buy-and-hold investors with 60/40 portfolio allocations are over.

From the mass affluent to the ultra-wealthy, investors want more than just equities and fixed income in their portfolios. Clients expect their advisors to bring innovative alternative investments to the table.

“A lot of investors and advisors have moved their assets to cash or into lower yielding asset classes,” said David L. Giunta, the president and chief executive officer of Natixis Global Asset Management’s U.S. distribution. “To get them off the sidelines, advisors can’t just bring these clients back to traditional approaches. There is just too much volatility.”

According to the 2012 Natixis Global Asset Management U.S. Advisor survey, the global financial crisis and uncertain market recovery has accelerated interest in alternative investing. According to the survey, 49% of advisors are uncertain that the traditional 60/40 allocation between stocks and bonds is still relevant, and 23% said the traditional approach isn’t close to meeting the needs of investors in contemporary markets.

But if a 60/40 allocation is no longer relevant, what is the right mix?

Dick Pfister, an executive vice president and managing director of global sales and consulting at Altegris Investments, A La Jolla, Calif., based provider of alternative investments, said modern portfolio theory has shifted dramatically in the past decade. He said that large institutional investors and endowments have “dramatically” increased their allocation to alternative investments.

According to a national study of endowments by the National Association of College and University Business Owners, the average endowment had 52% of its portfolio investments in alternative assets in 2010, up from 24% in 2002.

Pfister said he doesn’t expect advisors to shift their portfolios that dramatically, but anywhere from 10% to 35% of an individual investor’s portfolio should be held in alternatives.

“We are seeing a lot more on the upper end of that range,” he said. “With more mutual funds trading like hedge funds, more people are allocating to the alternative space.”

Giunta said clients are getting more comfortable with alternative investing because more alternative options are available within the comfortable and familiar confines of a mutual fund, but he says the right portfolio allocation varies on a client-by-client basis.

“We have to create portfolios based on each risk and volatility scenario,” he said. “Advisors need to talk to their clients and understand how much of a dip they can stand. Advisors need to be having those conversations and educating their clients about a variety of alternative options.”

Read More…

The New Oil Dynamics

originally posted by Tony Daltorio at http://wallstreetmess.blogspot.com/

The oil market changed back in 2009, but most Americans did not notice.

That was the year, for the first time, China temporarily surpassed the United States as Saudi Arabia’s biggest and most important customer.

At the time, Saudi oil minister Ali Naimi said “Ten years ago, China imported relatively little crude oil from us. Now, it is one of our top three markets, and is the fastest growing market for us globally.” He added that this showed the increasing “depth of Saudi-Chinese relations”.

Today, when oil tankers leave Saudi ports with their load of crude oil, they increasingly travel eastward to the rapidly growing economies of Asia rather than to the established markets of western nations.

When looked at historically, this new trend is significant. Remember that the most of the oil industries in the Middle East were originally set up by western companies with the sole aim of providing oil for western economies.

The day when Saudi oil exports to China permanently overtake those to the U.S. has not arrived yet.  But it will soon. Read More…

Hedge fund leverage in the industry – how its grown

SmartStops comment:   Who watches out for the little guy?

A chart from MIT’s Andrew Lo of the growth of assets and hedge fund leverage over the last 20 years. You can see the expanding leverage in the 2001-2005 period.  originally posted at Infectious Greed blog.

Hedge Fund Leverage how-its-grown

Hedge_Fund_Leverage how-its-grown

European Default Inevitable — Sell Your Gold?

By Christopher Georgopoulos

 What if, hypothetically, fear of a Greek default cannot be contained? What will be the aftermath to the markets? To gold?

 In the prequel to this article (European Default Inevitable — Sell Your Gold?), I discussed the fact that safe-haven-seeking investors could be in for a surprise when they run to buy gold after a Greek default and find huge sellers in the form of European sovereign nations. That article focused on events that would occur if a Greek default could be contained and the contagion that’s brought so much fear to the global system could be defeated. But what if, hypothetically, that fear cannot be contained? How will it happen, and what will be the aftermath to the markets? To gold?

The first signs of a detrimental contagion will be surprise losses, initially centered within the European banks and financial institutions. Articles such as, “European Stress Tests Underestimated Greek Exposure” will catch front-page attention. Quickly after, multiple small banks will become insolvent and the names of those banks — which many Americans have never heard of — will become as well-known as Citibank (C). Those defaults will spread to the larger European institutions that many of us know, and emergency midnight conferences will be highlighted on CNBC wherein the global financial community will be assured that all is sound. Sooner than later, a major default of one of these institutions will be revealed, and the bomb will be detonated.

This is when a 2008-type Lehman event reemerges, but this time on steroids. The fear driven from individual financial institutions will quickly morph into a fear for the nations of Europe. This fear will be derived from the recent questions concerning the lack of growth to combat their immense debt-to-revenues ratios. Anyone holding the bonds of these debt-ridden countries (i.e. Ireland, Portugal, Spain, and Italy) will panic and sell, driving their yields even higher and their credit-worthiness even lower. Those countries will find that trying to fund their needs through bond markets has become even harder and more expensive, and their risk of default will skyrocket. Deep recessions will set in as they will impose even deeper austerity plans, and unemployment — already high — will grow. Because these country’s economies are co-dependent upon each other as trading partners and consumers, even the more financially stable countries will be adversely affected. The viability of the entire Union will be questioned, their currency devalued, and talk of secession will be popular. Even worse, the spread of these losses will not be restricted by their coastal boundaries. Many American and global banks still have exposure to their European counterparts as well as money market and mutual funds. New losses, which could include massive losses on European credit default swaps, must be accounted for, which could cause a new round of credit freezes. Just like a repeat of the 2008 financial crisis, the foundation of the rapidly spreading fear will be a lack of confidence. Although this time around the solution won’t be as easy: Who will have the money to back-stop the back-stoppers?

If this were the scenario, the panic that the markets around the world would experience would be historic. The first wave of heavy selling (besides the aforementioned European bonds and stocks) would be centered in your most risky investments — the high-yielding and high-return emerging markets. Equities of the most stable markets would quickly follow. Money would flow from there to the “safest” of investments, such as US treasuries, US currency, and gold. As mentioned in my previous article, the price of gold would initially fall as Germany and the ECB try to contain the Greek default, but if the world’s confidence erodes and the defaults spread, the gold markets would once again be one of the few safe alternatives and could offer substantial upside.

The coming volatility of the markets could be unprecedented and swift. My firm has highlighted that the risks of serious market deprecation are likely with its SmartStops Risk Barometer Indicator.

SmartStops Risk Barometer Indicator (SRBI)

You need to monitor the SPDR gold Trust (GLD), SPDR S&P 500 (SPY), Rydex Currency Shares Euro Trust (FXE) and the Vanguard MSCI Europe ETF (VGK).

GOP To Fed: Let Economy Fail

from posting at  Capital Gains and Games , author is Stan Collender

 The headline above is not what GOP congressional leaders actually said today to Federal Reserve Board Chairman Ben Bernanke, but they might just as well have used that precise language in the letter CNBC reports they sent to the Fed. According to CNBC, the letter instructed the Fed “to refrain from further ‘intervention’ in the economy. In other words, now that the GOP has made it all but impossible for fiscal policy to be used to improve they economy, they want to make sure that the only other tool the government has at its disposal — monetary policy — isn’t used either. Why take on the Fed? The Republicans have some direct control over fiscal policy because they can either refuse to consider a proposal in the House where they are in the majority or can filibuster legislation in the Senate where they are in the minority. Because the Fed is an independent agency, the GOP can only do what they did today in the letter by threatening to bring down the wrath of god if it dares take any action to get the economy moving. If you’re surprised by this you haven’t been reading CG&G. I first posted back in August 2010 that Bernanke had “painted a big bulls eye on the Federal Reserve” when he spoke at the annual conference in Jackson, Wyoming, about the Fed providing additional stimulus if the economy needs it. My exact words were: It’s not at all clear, however, whether Bernanke realizes that the same political pressure that has brought fiscal policy to a standstill in Washington is very likely to be applied to the Fed if it decides to move forward. With Republican policymakers seeing economic hardship as the path to election glory this November, there is every reason to expect that the GOP will be equally as opposed to any actions taken by the Federal Reserve that would make the economy better, and that Republicans will openly and virulently criticize the Fed for even thinking about it. The criticism is likely to come both before any action is taken to try to stop it from happening and afterwards to make the Fed think twice about doing more. Three months later, I referred back to that exact post when a number of GOP economists and political strategists began to criticize the Fed exactly as predicted. Today’s letter is far worse than anything that happened last November. This warning is directly from the Republican congressional leadership instead of just outside economists and strategists, and the letter is almost sinister and ominous in its tone. The treat that terrible things will come to those who help the economy when the GOP is not in charge of the White House sounds very real. My question: If Rick Perry — one of the wanna-be GOP candidates for president — says that Bernanke’s actions to date have been treasonous, what do you call today’s Republican demand that the federal agency with the legal responsibility and the potential power to help GDP grow and unemployment to fall not do anything to help the American economy?

BS is the mildest term I can think of for this situation.

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