Tag Archive | volatility

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…

Listening For The Footsteps of A Pullback

With the market largely treading water over the last 10 years and investors experiencing several gut wrenching corrections over this period, it is no wonder that investment psyche has evolved from one of buy and hold to buy and protect.

Unlike a roller coaster, in investing the fun comes with the ride up, not with the nail biting ride down. Yet in the past 18 months alone buy and hold investors experienced a 30% decline in Google, a 46% decline in Ford, a 50% decline in Cisco and a 67% decline in Bank of America. Not a lot of fun here. Especially when you consider it takes a 43% gain to make up the ground on a 30% pullback.  As a result of this experience, investors find themselves asking, why ride out these storms if I don’t have to? How can I do a better job at identifying and sidestepping risk?

Traditionally, investors have turned to the VIX as a tool to help forecast market sentiment and risk levels. Unfortunately, the VIX often spikes in unison with significant market pullbacks providing little forewarning. The financial industry has responded with a slew of new and creative solutions that aim to help investors gain visibility and better listen for the footsteps of the next pullback. Following we take a quick look at three novel solutions, one which combines fundamental analysis with crowd sourcing, one which analyzes market sentiment, and a third that leverages technical analysis to identify periods of above normal risk. Read More…

Do leveraged ETFs move the market? SEC investigating..

SmartStops comment:    Interesting to see that the SEC is now investigating whether leveraged ETFs are a cause of increased market volatility.    When will the public realize that the basic underlying structures fueling our stock markets around the world have changed in our 21st century.   There are so many more instruments and derivatives that create the need for a more dynamic intelligent risk management approach.    Asset allocation and diversification, the tenets of modern portfolio theory are not enough in this day and age.  This is exactly why the SmartStops service was created.

originally published at ETF  Trends.

Leveraged exchange traded funds are being blamed for the wild volatility in stocks last month, but data and empirical evidence show the concerns are way overblown.

“With equity volatility doubling recently, some of the same topics that came up two years ago during the credit crisis have resurfaced as people look for possible culprits,” Credit Suisse said in a recent report. “ETFs have received some blame for the increasing volatility, although we believe it’s a case of confusing correlation with causation.”

The Wall Street Journal reports the Securities and Exchange Commission is looking into whether leveraged ETFs magnified the market’s wide swings in August. [SEC Reportedly Probing Whether ETFs Added to Market Volatility]

Many leveraged ETFs are geared to provide 200% or 300% of the daily moves in stocks. “Inverse” leveraged ETFs rise when stocks fall. These high-octane funds need to rebalance every day to provide the desired performance.

“Our findings show that the leveraged ETF rebalancing trades are unlikely to be the most influential factor in driving intraday swings into the close,” Credit Suisse said in its report. “Less liquid spaces like small caps and specific sectors may be more likely to be affected on rare days with extreme moves, but liquidity needs are often quickly met in the same way as for typical index rebalances that occur throughout the year.”

Read More…

SmartStops.net Introduces New Market Risk Barometer Indicator

 

PALO ALTO, Calif., Aug. 5, 2011 (SEND2PRESS NEWSWIRE) — SmartStops (www.SmartStops.net) announced today the launch of the SmartStops Risk Barometer Index™ or SRBI™. The SRBI is an easy to use metric that helps investors quickly gauge the relative level and direction of risk posed by a specific group of equities such as a particular market or sector.

Derived from the SmartStops individual equity short term risk signal which identifies equities as being in a normal or above normal risk state on any given day, the SRBI compares the current risk state ratio for a group of equities to the group’s 100 average. Unlike the VIX which uses volatility as a proxy for risk and rises when equities experience big moves in either a positive or negative direction, the SRBI leverages the SmartStop Above Normal Risk State which focuses only on abnormal price movements to the down side.

An SRBI greater than 1 indicates that the number of equities in the group experiencing above normal risk is higher than the average over the last 100 trading days.

An SRBI below 1 indicates that the number of equities in the group experiencing above normal risk is lower than the average over the last 100 trading days.

The SRBI can be used in conjunction with traditional market risk indicators such as the VIX to help investors gain visibility and better manage their risk exposure.

“Investors make purchase decisions based on risk/reward analysis. Unfortunately, risk does not remain constant through time,” explains Chris Conway, SmartStops’ Director of Product Management. “The SRBI can help investors quickly gauge a market or sector’s risk profile relative to its recent history, allowing for more informed and timely decisions. We expect the SRBI to be particularly helpful in strategies employing sector or market rotation.”

Financial Advisor Akber Zaidi welcomes this new risk metric. “Managing risk is fundamental to successful investing. I am always on the lookout for innovative and effective ways to quantify and track risk exposure and I look forward to adding the SmartStops Risk Barometer Index to my risk management toolbox.”

Currently SmartStops is publishing SRBI numbers for the S&P 500 and the Dow 30 as well as for ten market sectors including Basic Materials, Consumer Goods, Consumer Services, Energy, Financials, Healthcare, Industrials, Technology, Telecommunications and Utilities.

To learn more about the SRBI and to view today’s SRBI values, visit http://www.SmartStops.net/PublicPages/MarketRiskBarometer.aspx .

SRBI from SmartStops for SPY , August 04, 2011

About SmartStops:
SmartStops.net is dedicated to helping investors of all levels be more aware of changes in their risk exposure enabling timely decisions that protect assets, improve returns and provide peace of mind. SmartStops’ portfolio monitoring and risk alert services start at just $9.95 per month. For more information visit us at http://SmartStops.net or contact us at info@SmartStops.net.

NEWS SOURCE: SmartStops
This story was issued by Send2Press® Newswire on behalf of the news source and is Copyright © 2011 Neotrope® News Network – all rights reserved.

Is Russell becoming the manager of ETFs?

originally published by Tom Lydon at Seeking Alpha. 
 
Many exchange traded funds follow benchmarks from Russell Investments, such as its popular index for small-cap stocks, the Russell 2000.

Now the firm is trying to establish itself as a manager of ETFs.

Russell last month launched 16 new ETFs — six “investment discipline” funds and ten “factor” ETFs.

The Russell investment discipline line of ETFs is hand-tailored by manager research and doesn’t weight stocks solely by market cap. The six new Russell ETFs will try to optimize the investment styles that professional investment managers use when selecting securities in the various asset classes, the firm says.

“The unique process an investment manager uses to select stocks is at the heart of what differentiates a fund from its benchmark and other funds,” said David Koenig, investment strategist at Russell. “This is the crux of asset management. Though this may seem obvious, gaining full understanding of a manager’s process can be challenging for investors because the manager’s methodology is often not completely transparent.”

In a study based on large-cap growth in actively managed mutual funds over five years, Koenig reveals that varying investment manager styles may yield a wide range of resulting performances.

“Looking for exposure to specific types of companies—for example, the largest, fastest-growing companies—would need to know more about a manager’s approach than just the fund’s style classification to ensure that they were gaining the exposure they had targeted,” commented Koenig.

The new investment discipline ETFs include:

Read More…

Volatility with Oil – is it the Next Global Crisis?

SmartStops wants to remind you that it is important to stay protected in the markets.   There’s alot going on within the underlying infrastructure that you may not realize.

from inside flap of The Vega Factor: Oil Volatility and the Next Global Crisis  by Kent Moors

“There is a sleeping dragon at the heart of the financial system. Soon the beast will awake and rear its terrible head, and we will look back on the days of the subprime disaster with nostalgia. In this riveting book by oil industry expert Kent Moors, you will meet the dragon he refers to as oil vega, and you’ll discover why it poses such a grave threat to world economic and political stability.”

“Those familiar with the options and currency markets will recognize vega as the term traders use to denote the rate of price volatility. Expanding upon that traditional usage, Moors coined the expression oil vega to describe the dramatic increase of price volatility seen in the oil markets over the past several years.  In The Vega Factor, he describes how, contrary to popular belief, the current environment of runaway volatility in the markets is not the work of diminishing reserves, manipulation by oil producing nations, or increased competition among nations. Rather, it is a result of a structural flaw in the trading system itself.

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