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.
Trefis (www.trefis.com) enables investors to quickly develop and share a forecast of a company’s share price based on the anticipated contribution and performance of each of the company’s product or service lines. Trefis creates models for each company and provides simple levers allowing the investor to change a few basic assumptions and instantly view the impact on the forecasted share price. For example, Google’s stock price is broken out into contributions from Search Ads, Ad Partnerships, YouTube, Google Phone, Gmail & Blogs, Google Apps, Orkut social media, Search Appliances and Cash net of debt. For Search Ads, the investor can adjust assumptions on revenue per search, market share, global internet users, Google searches per internet user and search EBITDA profit margin. Investors can view the Trefis forecast, make adjustments and create their own forecast, and view the forecasts created by other investors as well as the community average. Trefis also provides a community bearish / bullish sentiment indicator which currently shows 87% of the Trefis community bullish on Google. By using Trefis to analyze the prospects of each individual product, investors can identify risks that may otherwise have been overlooked.
Online service Sentigo (Sentigo.com) aims to quantify market sentiment and present it in a simple, actionable format. Sentiment on the market, sectors and individual equities is calculated for 3 categories: online news, social media, and expert opinions. The results are then presented using very simple visuals as being positive, neutral or negative. Sentigo crawls the web analyzing the content of over 2 million web pages from over 17 thousand sources each day to generate their sentiment results
Currently, Sentigo is showing a neutral sentiment on all three categories for Google. To help protect assets, investors can use Sentigo to identify periods of negative sentiment enabling early defensive action.
SmartStops (SmartStops.net) leverages technical analysis to provide insight into an equity’s risk state. Under the SmartStops mantra, we all make purchase decisions based on risk reward analysis, but risk does not remain constant through time. Why subject yourself to periods of above normal risk if you don’t have to? At the end of every market day, SmartStops analyzes the trading history of over 4,000 stocks and ETFs to determine an expected “normal” price range for each during the next market day. SmartStop risk alert prices are set at a point below this expected range and further influenced by current trading strength and direction. If an equity falls and triggers its SmartStop, it is an indication of abnormal price movement and above normal risk. An email warning alert is automatically sent out to the investor initiating a decision process and enabling timely protective action. Once a SmartStop is triggered, the equity remains in the above normal risk state until the trading pattern once again indicates strength has returned. According to SmartStops, Google is currently in an above normal risk state which it entered on August 5th at $567.86.
SmartStops also publishes a Market Risk Indicator which tracks the percent of equities in the S&P 500 that are in the above normal risk state on any given day. As seen below, this indicator showed market risk steadily increasing as summer progressed with the above normal risk ratio for the S&P 500 reaching 80% in July and briefly touching 100% in August. It is currently historically high at 77%.
Market volatility, accelerating product and company life cycles, and global economic uncertainties have resulted in widespread fear in the market. The tools highlighted above are just a few of the new online solutions helping investors address these fears by enabling improved analysis of opportunities, better risk management and timely protection of capital.