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Risk Mitigation strategies as Fed Tapers

SmartStops Comment:   WisdomTree suggests its time to consider a strategy of hedging with ETFs to mitigate risk as the Fed begins to taper. That can be one approach to ensuring that a market correction will minimally affect your portfolio.  But determining when to hedge especially with the costs incurred, becomes the main question. That’s where SmartStops can help – by providing an objective analysis for when risk levels are increasing in the market.  

This excerpt from a white paper of WisdomTree:

Over the last nine months, the Federal Reserve (Fed) has gradually reduced the pace of its asset purchases in
conjunction with improving strength in the U.S. economy. With tapering on pace to conclude October 29, we believe that investors should now look beyond 2014 and start to focus on when, not if, the Federal Reserve will begin to tighten monetary policy. In our view, the way that investors have prepared their portfolios for tapering could be inadequate for the likely market reaction to increases in short-term rates. In the remainder of this discussion, we intend to focus on the following topics:
+ Preparing your portfolio for tightening is different than tapering
+ Traditional approaches to rising rates may not adequately insulate portfolios from losses going forward
+ Duration4-hedged and negative duration exchange traded funds (ETFs) may provide investors with
more comprehensive and intuitive tools to mitigate interest rate risk

For the entire white paper, click here.

Why You Should Shift From Profits To Protection

SmartStops Comment: We couldn’t agree more with this author.

From Seeking Alpha, Contrarian Profits
The bulls are back out in force, as the hiccups from a few weeks ago seem a distant memory. Indexes have resumed breaking records on a regular basis, and all seems right with the world.

Great – trust me, few things make me happier than a happy market. I like making money as much as the next guy.

But I’m also a little more suspicious than the next guy. And right now, that suspicion is warranted.

… Today, the average price-to-earnings ratio of an S&P 500 stock is a hair below 19. The long-term average is right around 15. We’re solidly sitting in overbought territory. Stocks are expensive right now.

More at:
More at Seeking Alpha: Why You Should Shift From Profits To Protection

Blackstone’s James Says Debt, Equity Markets Overvalued

“We’re between the bottom of the seventh and the top of the eighth,” Marks said in a Bloomberg Television interview last week. “It’s time for the seventh-inning stretch. You have to have plenty of defense on the field today.”

SmartStops Comment:  Defense is the best Offense!

View complete article at: http://www.bloomberg.com/news/2014-09-09/blackstone-s-james-says-debt-equity-markets-overvalued.html?cmpid=yhoo

Position Sizing: Key to Maximizing Returns

In a time when market volatility and equity preservation is of utmost importance, determining the correct number of shares to buy, or “position sizing”, is key to maximizing returns and minimizing risk.

The common investor generally doesn’t spend much time thinking about how many shares to buy or how significant of a position to take.  Instead, most investors use a common methodology of trading the same number of shares each time, which usually translates to a specific dollar amount.  Other, more sophisticated investors, opt to allocate a certain percentage of their portfolio value to a specific position. Following this train of thought, a new position in a portfolio of $100,000 would transcribe either a $10,000, or 10%, investment or a usual position of 50 shares.

Although these methods may work for some, using the volatility of a specific portfolio is likely to be the most effective decision tool.  Measuring a portfolio’s overall volatility enables an investor to decide on what percentage of that portfolio he is willing to risk losing on the new position.  This methodology is better explained through the following example. Read More…

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…

NETFLIX Investors – Did you Protect Yourself?

NETFLIX , NFLX, drops but SmartStops keeps investors and traders from major losses.

This is why Risk Management and Protection are a must in every investor and trader’s arsenal.   SmartStops triggered its short-term protection for Netflix at $74.13 at 9:32AM.  NFLX closes at $60.28 today, 7/25/12.

In the most recent Netflix downtrend SmartStops saved its clients  $42.46 per share!  

See chart at: http://www.smartstops.net/PublicPages/SmartStopsOnDemand.aspx?symbol=NFLX

 

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