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!
Is your investment portfolio more like a roller coaster with no exit strategy, just going round and round and up and down, arriving right back to where it started? Don’t just go along for the ride, use a managed approach to limit downside risk and to capture gains. Incorporating a managed approach to risk with standard portfolio management methodologies will put you in the driver’s seat. Some common portfolio strategies that many of you are familiar with are diversification, buy and hold, stop losses, and the last and least effective strategy that many of you may be using, I like to call management by loss aversion behavior. Using a managed approach to risk within any portfolio strategy is easier with the proper tools.
Managing Risk With A Diversification Strategy
Managing portfolio risk through diversification is usually achieved by investing in a variety of equities that are negatively correlated such as large cap stocks, commodities, emerging markets and global equities. Recently though, it’s becoming more difficult to achieve this type of diversification as correlations aren’t constant and many global markets are becoming more similar to U.S. markets.
Reviewing sector risk is a good way to manage risk when using a diversification strategy. Investors can allocate funds to equities in leading sectors which are experiencing lower risk within the overall economic environment. There are many tools available for measuring sector risk including a free tool called the SmartStops Risk Ratio (SRR)™, useful in identifying the magnitude of risk by sector. For example as of March 26th, 2012, the healthcare sector on SmartStops Risk Ratio (SRR) is showing a 30% risk factor meaning 30% of equities in this sector are in an above normal risk state. If we further research using this tool, we find that the telecommunications sector has a 64% risk factor, meaning 64% of equities in this sector are experiencing above normal risk. In this scenario, an investor could rotate out of the telecommunication sector and focus on the healthcare sector, selecting individual healthcare stocks that are currently in the normal risk state.
Many investors choose individual stocks with either a growth or value objective in mind. Growth stocks are corporate stories with rising sales and profits and usually dominate their marketplace. For example, if you buy a stock for its growth potential, review the risk possibilities through data and risk charts. Data might include new information regarding large expenses allocated to expansion, often called “return on invested capital”. Return on invested capital measures whether companies can find profitable projects to inject future growth. A value objective focuses on underpriced bargains which investors expect will return to a “normal” state. A risk chart with re-entry trigger points provides valuable information for knowing when to buy an underpriced bargain.
And don’t forget the number of stocks that you should be holding in your portfolio to assist with risk reduction. In today’s markets, it takes even more positions to achieve a lower risk based on diversification alone. According to Rodney Sullivan, editor of The Financial Analysts Journal, “as recent as 1997, whereas it used to take 20 stocks to eliminate most of the likelihood of enduring more risk than the market as a whole, today, it takes 40 stocks to diversify.”
Managing Risk With a Buy and Hold Strategy
Investors have been taught for years that a buy and hold strategy for portfolio management is guaranteed to outpace the market when comparing rates of return. However, the amount of risk a stock is experiencing has no relation to time and holding the stock for an extended period of time does not eliminate the risk associated with that particular stock. To best manage for risk, if you’re using a buy and hold strategy, one must know when a specific stock is experiencing unusual risk and be willing to sell. Putting your hard earned money to work in a stock that has a normal risk state will achieve higher returns in the long run. On a risk chart provided by SmartStops, if you were invested in Netflix, Inc (NFLX) prior to 2011 and had sold at any of the 6 alert signals from Dec. 2010 until Jul 26, 2011, ranging in price from $184.92 to $262.85 per share, you would have saved yourself from a significant loss. Today, the share price is still hovering around the $120 range. Within the buy and hold strategy, without managing for risk, you would have just ridden that roller coaster down and then hopefully back up again.
Managing for NFLX risk, you could have exited the ride at the first risk alert, waited for the ride to bottom out, and then repurchased at the reentry price (triggered at $81.00 on Jan 5, 2012), thereby increasing protection on your NFLX capital and significantly increasing your returns.
Managing Risk With a Stop Loss Strategy
Managing an investment portfolio using a stop loss strategy is effective. The difficulty lies in correctly identifying the optimum exit points. Choose an exit too close and you could be exiting prematurely and an exit choice too far away gives up significant gains before your protective exit triggers. Optimized exits should be tailored to each individual equity, taking into account its daily volatility and current trading pattern. SmartStops publishes updated optimized exits each market day and through its BrokerLink service, maintains stop loss orders with broker partners such as TD Ameritrade and TradeKing. Using an automated risk assessment decision tool that intelligently adjusts each day for the optimal exit and re-entry points manages risk effectively and more profitably.
Managing Risk With Loss Aversion Behavior Strategy
Managing a portfolio using loss aversion behavior is not a very effective strategy but one that many investors utilize. When purchasing a stock, we often become not only financially invested in the equity but also psychologically invested. As a result, we view the act of selling this equity as an admission of guilt of a poor decision. Instead, we often look for information to validate our initial buying decision, even in the face of losses and overwhelming evidence to the contrary.
By trying to find information that confirms the buying decision, investors discount other meaningful information and often hold the loser position hoping for a rebound. Investors could eliminate the loss aversion behavior by taking the emotion out of the investment and relying on analytical tools for direction. SmartStops is one of the few companies offering an automated risk assessment decision tool that notifies investors when a stock is experiencing unusual risk. With the information gained in the risk alert, the investor can then do further research and make a rational, timely decision based on facts and not on emotion.
Whichever investment strategy you choose to use, further manage the risk within your portfolio. Don’t get taken for a ride.
by Raghu Gullapalli, contributing writer
This morning news came out courtesy of All Things Digital that Netflix (NFLX) the provider of on demand internet streaming video and flat rate DVD-by-mail. was expanding its operations into Latin America.
Upon the break of this news the stock gapped up in the pre market and looks ready to launch its booster rockets once again in attempt to break the $300 barrier.
This is a prototypical example of a long gap trade.
- Netflix gaps above a long-term resistance level, in this case the all time highs of $277.70.
- The premarket volume in the stock exceeded 500,000 shares, ensuring liquidity.
- The stock gapped up more than 3%
- Netflix gapped on a strong catalyst that did not involve earnings, i.e., the news of its impending expansion into the Mexican, Caribbean and South American markets.
This expansion into these markets south of the U.S. borders, gives credence to Netflix’s (NFLX) foreign expansion plans and lends credibility to the company’s overall strategy. If you will recall, just last fall the company expanded into the Canadian market and in just a few quarters of operations it has is emerged as the market leader.
With the equity markets reacting well to the news of the Greek bailout and the strong surge over the past week, I have little doubt that the tailwinds from the market could be enough to push the stock into the hallowed $300 territory. An area occupied by precious few technology companies.
If all that wasn’t enough, how about a cherry on top? In the form of an “F” for Facebook the social media behemoth, that has been considering a joint venture with Netflix. Facebook recently added Reed Hastings, the CEO of Netflix to its board of directors.
But a word to the wise, in this dynamic market landscape, today’s darling could well become tomorrow’s dud, as is well represented by the misfortunes of Research in Motion (RIMM). And market sentiment could change very quickly and could become headwinds blowing in the face of upward momentum.
SmartStops intelligent risk management software has the short-term and long-term stop for Netflix at $239.64
Over the recent holiday period, the e-commerce sector witnessed exceptional growth as many consumers opted to shop on-line, as opposed via the traditional brick and mortar storefronts, paving the path to opportunity in the near future for the sector.
According to a recent article in Barron’s, U.S. e-commerce spending accelerated 13% during the holiday season, pushing total e-commerce growth in 2010 to 10% year-over-year. Furthermore, the article also contends that US e-commerce is expected to witness another 10% year-over-year growth in 2011, pushing spending to over $150 billion for the year. Read More…
Despite declines in consumer confidence, a relatively unstable labor market and the G-20 emphasizing deficit reduction, three Internet retailers are illustrating a spark of light and could pose an opportunity.
The first is Netflix (NFLX). The Los Gatos, California-based online movie rental subscription company offers consumers a relatively cheap form of entertainment which can be streamlined directly to a personal computer or television with the touch of a button. Additionally, the company does not charge late fees or impose due dates on movies that are delivered via mail, enabling a consumer to be flexible without being charged. Thirdly, the monthly subscription fees charged by Netflix are much lower than the cost of watching a movie at the movie theater or renting one from a local movie store. Lastly, Netflix is trading above both its 50 and 200 day moving averages and is up nearly 104% year-to-date. Read More…
By Kevin Grewal
The retail sector posted its third consecutive monthly sales gain as department stores posted sales revenues which beat analyst expectations; however, the road ahead still remains bumpy.
Department store giant Macys Inc. (M) as well as discount store Target (TGT), both reaped the benefits of an increase in traffic and a jump in the average amount spent by consumers, pushing increases in sales by 4% and 2.4%, respectively. Additionally, Wal-Mart (WMT) stated that it is expecting to pay back its investors by increasing its annual dividend by 11%.
Increases in consumer spending, and hence retail sales, have been linked to an expected increase in average hourly earnings and average hours worked, giving a boost to disposable income. Additionally, some sector experts suggest that an increase was inevitable due to such poor sales figures in the month before. Read More…