It is common practice for investors to analyze the risk and reward potential of individual equities as part of their buying decision and to review market risk levels to help time their purchase. However, despite the fact that risk continues to fluctuate over time, once the purchase is made, risk monitoring and awareness are often neglected. A major contributing factor is the lack of easy-to-use tools to assess risk.
One popular method of measuring market risk is the Volatility Index (VIX) published by the Chicago Board Options Exchange. Often referred to as the investor fear gauge, like many risk gauges, the VIX equates volatility with risk. The VIX provides a 30-day, forward-looking measurement of expected stock market volatility by using weighted average prices of out-of-the-money calls and puts of the S&P 500 index.
Following the VIX is easy. The VIX produces a number that represents expected S&P 500 market volatility, and most financial news networks publish the VIX daily. Interpreting the VIX and taking action on it is more problematic. One challenge is that the VIX does not differentiate between volatility caused by upward price movement versus downward price movement. In addition, while VIX levels are easy to read, they can be interpreted differently.
For example, while it is agreed that a low VIX indicates cheap option prices due to expected low volatility, some analysts view this as a period of low risk while others view it as a complacent market and a good time to buy cheap protection. Finally, many factors can influence expected volatility that are unrelated to risk, and many factors or events that do influence risk in your investment may not be reflected in the expected volatility of the S&P 500. Clearly more is needed.
Introduced in 2011, our SmartStops Risk Barometer Index™ (SRBI™) is an easy-to-use risk metric that can be used in conjunction with the VIX and has been helping investors assess the relative level and direction of risk in major markets and sectors to great success. Our SRBI allows investors to easily monitor the risk level of popular markets and sectors, and helps them take control of risk by enabling timely, informed decisions when risk is on the rise.
Based on the SmartStops individual equity risk states, the Market Risk Barometer provides two numbers to indicate the current risk of the market or sector. The first number is the risk ratio or the percent of the components of the market or sector that are currently in the elevated risk state. The second number, the SRBI, is this risk ratio divided by its 100-day average to provide some insight into the direction of change in risk. An SRBI greater than one indicates that the risk ratio is above its 100-day average, and an SRBI below one indicates a risk ratio below its 100-day average.
Breaking down the SRBI
To access our market risk barometer, click here.
There, you'll find an interactive page that allows you to view metrics regarding the markets and sectors of your choice. For example, by selecting "S&P 500" in the market dropdown box, the page will automatically display this market's current risk ratio, historic risk ratio and SRBI.
Unlike the VIX, which is based on a measurement of expected volatility, the SmartStops Market Risk Barometer is based on our SmartStops Risk Signals, which watch for elevated price weakness in covered equities. When an equity falls to a price below its expected trading range, as determined by the SmartStops risk algorithms, and triggers its SmartStop, it is placed in the elevated risk state until strength in its trading pattern is detected and a SmartStops reentry is triggered. This elevated risk has shown to be a further indication of downside weakness. The SRR risk ratio then reflects the percent of equities in the market or index that are currently in the elevated risk state on any given day
What markets does the SRBI cover?
Using two crucial factors, the SmartStops Risk Ratio (SRR) and the SRBI, investors can easily gain an overview of the magnitude of the risk of an entire market sector, as well as gauge the rate and direction of the change. Available sectors include the S&P 500, Dow Jones Industrial Average, CAC 40 and DAX.
What sectors does the SRBI cover?
Gaining an overview of a specific sector is just as easy. Our SRR and SRBI are available for the following sectors:
• Basic materials
• Consumer goods
• Consumer services
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At SmartStops, we know that investors are always on the lookout for innovative and effective new portfolio management tools that allow them to easily quantify and track their risk exposure. With SmartStops Portfolio Monitoring, you can feel at ease knowing we are watching your portfolio, even when you can't. If any of your covered positions fall and trigger their SmartStop, an indication of elevated risk, you will receive an email alert prompting you to review the position so you can make a timely and informed decision. In addition, at the end of each market day, you will receive a portfolio report indicating the current risk state of each of your positions and an optimized number reflecting quantitatively the price point at which risk would be considered elevated if it was hit.
To see how we've helped our clients, review the performance studies we've compiled. These reports show how our methodologies are able to help investors preserve more, by allowing them to access the same techniques that have been used by major wealth funds for decades.
Whichever service you choose, at SmartStops, we know how concerned you are with managing your risk. That's why we allow all new customers the chance to enroll in a free 14-day trial. Isn't it time you focused on increasing your returns through improved risk management?