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Investors can use risk management tools to overcome fear

Due to negative news regarding the market, a recent USA Today article suggests many Americans are still worrying about worst-case scenarios that prevent them from investing properly.

Due to negative news regarding the market, a recent USA Today article suggests many Americans are still worrying about worst-case scenarios that prevent them from investing properly.

On April 10, USA Today published an article entitled "Is fear factor hurting returns of risk-averse investors?" which discussed how investor sentiment about the markets has not yet turned positive despite the recent all-time highs seen in the Dow Jones and S&P 500. 

The article suggests that, in spite of the recent rallies, the bear market of 2007 to 2009 has left much of the American public in doubt  about investing, fearing that the current risk of the market as a whole is simply too great. 

Citing research from Strategas Research Partners, which found that the S&P has only suffered calendar losses of more than 20 percent in six years since 1926, the article suggests that "many investors, fearing the worst, have been ignoring the fact that the stock market goes up two-thirds of the time." Instead they have deserted equities opting for "cash, bonds and gold, or any other asset deemed safer than stocks."

"As a result, worrying about worst-case scenarios, such as a second financial crisis, a breakdown of the global financial system, a bank run in Europe, a looming stock market correction or the U.S. economy suffering a major relapse, might have caused more harm than good," the article posits. 

Instead of running from risk, which is often tied to return, investors could choose to simply manage risk better. Investing tools are available to help them do just that, such as SmartStops' Risk Management Service which monitors a user's portfolio throughout the market day watching for signs of elevated risk. If a position falls and triggers its SmartStop, an indication of elevated risk, an alert is sent enabling timely protective action.

While the fear generated from the recent market turmoil and the subsequent run toward "safe" assets may be overblown, "Sargen says investors shouldn't let their guards down, as he "can't entirely rule out Financial Crisis Round Two," given continued risk due to Europe's debt crisis, other geopolitical risks and central bank monetary policy.

At SmartStops, we offer risk management tools that investors can use to make decisions that allow them to sidestep periods of abnormal risk exposure.  

Further, our SmartStops Risk Ratio (SRR) and Risk Barometer Index (SRBI) are designed to indicate the magnitude of risk and the direction of the change in risk in major markets. This tool allows investors to easily view the number of equities that are in an elevated risk state in markets like the S&P 500, Dow Jones Industrial Average, DAX and CAC 40 against historic factors. 

Spring clean your portfolio with the help of SmartStops

Just as you would with your home, investment professionals advise you to clean and organize your portfolio this spring.

Just as you would with your home, investment professionals advise you to clean and organize your portfolio this spring.

On April 1, Yahoo Finance published an article that reminded investors of the importance of "spring cleaning" their portfolio this year, encouraging readers to reassess their financial goals and analyze their equities accordingly. 

Robert Stammers, director of investor education at the CFA Institute, a global nonprofit comprising investment professionals in more than 100 countries, spoke to the source about this necessary task and offered his advice based on years of experience in the field. 

"The market, just like the seasons, is constantly changing, so as investors we need to review our position, make new decisions and adapt our outlook," he said in an interview. "It's a bit like going to the dentist – we don't particularly like to do it and we should probably do it more often, but the more regularly you do it the less chance of a painful surprise."

One key part of spring cleaning your portfolio, according to Stammers, is assessing the level of risk you're comfortable taking on. Stammers reiterated that higher returns are generally associated with increased volatility, and as a result, investors should take steps to ensure their positions are updated to better reflect how aggressive or conservative they wish to be with their equities in the coming year. 

Further, he advised readers to "be practical" by making decisions based on detailed analysis and not emotion. However, given the nature of investing, this last piece of advice can pose the biggest challenge. All too often, investors will hold on to equities that have provided returns in the past, even though they may now be part of sectors that aren't expected to offer the same risk/reward they once did. 

At SmartStops, our portfolio monitoring service is designed to help you make calculated decisions based on current and historic market factors, and tools like our SmartStops Risk Barometer Index (SRBI)™ can allow you better manage your risk in the face of changing market conditions. 

If you're thinking about spring cleaning your portfolio, consider doing so with the help of SmartStops. Find out why using the risk management methodology powering SmartStops is better than other methods by reviewing our performance studies today. 

Market Risk Barometer

Simplify your market and sector analysis with SmartStops' effective market risk barometer.

Simplify your market and sector analysis with SmartStops’ effective market risk barometer.

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
• Energy
• Financials
• Healthcare
• Industrials
• Technology
• Telecommunications
• Utilities.

Be rewarded for the risk you take and maximize your return per day in the market!

Get started with a free trial today!
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?

Despite The Recent Run Up, Could This Be A Good Time To Buy?

The markets experienced a period of excessive turmoil and uncertainty this past year.  However, despite facing the “Fiscal Cliff”, a continued European debt crisis, high US unemployment and a presidential election, the S&P 500 managed to produce a gain of 13.47%.

So, what can we expect for the year ahead?  Nobody knows for sure, but measurements of market risk are sending signals that this may be a good time to buy.

The VIX, a measurement of implied future volatility, remains low at just 13.26.  This has partly been influenced by the continued quantitative easing by the Fed which results in a great deal of liquidity in the markets and lower volatility.VIX

According to’s market risk signals, the percent of S&P 500 components currently in the above normal risk state is down to 14%.  This is historically very low and below the 100 day risk ratio average of 42% producing an SRBI of 0.33.  An SRBI below 1 indicates risk has been on the decline.

S&P 500 SRBI

Visit the SmartStops Market Risk Barometer

When we review 2012 and compare the SmartStops Risk Ratio for the S&P 500 to its performance, we clearly see the inverse relationship between risk and performance.  The current low risk ratio of just 14% indicates it may be a good time to buy.

S&P 500 Risk vs Performance

Published previously in the SmartStops Members Year End Letter.

As always, market and equity performance are influenced by many factors and their direction can change on a dime.  We should all invest accordingly.

To learn more about sidestepping periods of elevated risk and improving returns per day in the market, Visit

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 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, an intelligent risk management service, two proven alternatives to the VIX were found. 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 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 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 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 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…

Forget Buy & Hold – Here are 3 Easy Steps to Actively Manage Your Investment Risk


An important debate is still unfolding amongst investors and advisors – Is Buy & Hold dead? Does it really still make sense to buy a stock or ETF and ignore statistically significant signs that risk could seriously threaten your returns? While some say “Don’t do anything, just stand there!!” others, like, argue that technical indicators are an effective way to continually monitor your equity investments be ready to respond to risk. The trick is how to most easily and effectively monitor a broad portfolio and quickly respond to the most relevant statistical trends.

Buying and then holding (ignoring all market trends, often until your personal situation dictates the need to sell) is an investment strategy that worked when the economy was stable and consistent growth was the norm, but that was then… Now, we investors face a range of threatening factors, such as: historically low interest yields, unemployment, housing sector troubles, slowing growth in foreign markets, governmental gridlock, and the list goes on.

US stocks are now less than 10% away from its historic closing high achieved in October, 2007. The CBOE’s Volatility index (VIX), a.k.a. the fear index, is over 15, which is up 3% over the last 5 days, but down 35% from exactly a year ago. SmartStops’ Risk Barometer Index (SRBI), which tracks statistical market and sector risk based on triggered exit signals, is at .91 for the S&P 500, recently moving below its 100 day moving average. The financials SRBI at .70 is one of the few sectors that has also moved below its 100 day moving average.

Let’s not yet forget the unpleasantness experienced only last year, where the S&P 500 finished the year only a point away from where it started, with its highest point up 8% and lowest level down 12%. Going back further than last year, shows much greater volatility that erased profits from unprepared investors and advisors.

The bottom line: if you have stock or ETF investments, don’t ignore them. Economists are sending a consistent message that the economy and equity markets face a tough uphill battle with increased volatility. If you want to earn and protect profits, keep a vigilant eye on your stocks and ETFs. Make sure you are always prepared to respond when abnormal volatility is present and a downtrend can be detected.

Here are 3 easy steps you can take with to maintain continuous risk perspective on your portfolio and be ready to take action if needed:

1) Register your portfolio with to be continuously monitored. continually monitors member portfolios, sends alerts or places sell orders through partner brokers when a position displays significant risk of further decline. SmartStops exit triggers are calculated each market day using sophisticated analytics that dynamically adjust based on technical market factors, historic trends and optimal exit methodology.

2) React to statistically significant risk probabilities with automated alerts.
Once you get a SmartStops RiskAlert, your next step is to take a look at related market news and data. Consider alternative steps you might take such as: selling all or part of a position, hedging with options, buying more (sometimes the market overreacts!), or talking to your advisor.

3) If you are ready to sell, use SmartStops BrokerLink to automatically and immediately lock in profits. has partnerships around the world that integrate the intelligently adjusting exit triggers into leading broker platforms so continuous and effective sell triggers can be easily maintained. The latest broker to introduce this risk control service integrated with a trade platform is TradeKing.

So, stop reliance on Buy & Hold! If you don’t make the effort to manage your investments when volatility starts to increase and momentum goes negative, you are making the choice to participate in a downtrend that can be avoided. Why participate in major downtrends when you can take action and improve your profit or minimize loss? Services like provide an easy, effective way to manage your own investment risk.

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Is The Chinese Consumer A Risky Bet For U.S. Investors And Corporations?

Targeting the Chinese consumer is considered to be a low-risk market bet by many corporations. Wal-Mart (WMT) is one corporation that has been forging into the Chinese marketplace since 1996 and recently showed their continued commitment to investing in China with the announcement of their intent to buy 51% of Yihaodian for an online retail presence. With a population of 1.3 billion people, China is expected to emerge as the largest consumer market in the world by 2020 with half the Chinese population having arrived to middle class status. However, China recently announced a revised growth rate of 7.5% after a seven year stretch of seeing year after year of 8% growth. Couple this with their intention to reduce exports and increase consumer spending, and we are left asking if the market environment has shifted dramatically for U.S. corporations already entrenched in the Chinese economy.

If U.S. companies can successfully navigate through the increased competition coming from within China’s domestic marketplace, the long term upside potential is huge. How can investors navigate the possible risk involved when investing in an emerging market such as China? One way would be to invest in U.S. corporations that are successfully investing in China, while having a strategy to sell during periods of abnormal risk and reinvest when risk conditions have returned to normal.

Many forward thinking multinational corporations have expected the shift away from the export market and towards the Chinese consumer by China’s manufacturers. Invariably, this will lead to increased competition from within China’s domestic borders for U.S. corporations. Wal-Mart has been successful with the Chinese consumer by adhering to their own core mission of saving people money. It obviously resonates well with the older Chinese consumer who is accustomed to saving much of their income and has more recently just started learning to consume. According to recent studies, after being the beneficiary of years of economic reform, the young Chinese have become the consumer with the most spending ability and are becoming the driving force of the Chinese economy. The younger Chinese consumer loves to spend money and tends not to save as much as the previous generation. There is opportunity in all price points within the Chinese marketplace. High prices are often equated with higher quality and many U.S. corporations have successfully raised prices on products sold within China as a marketing strategy targeting the luxury market. Tiffany & Co (TIF) and Coach (COH) are both luxury brands positioned to profit from China’s new, young, rich consumer.

For anyone that has been to China, the visual image of consumerism is often in conflict with many analyst opinions. With China’s rising standard of living, the approaching change in leadership and slowing exports, it’s often difficult for an investor to make the best decision regarding the potential for investing in the Chinese consumer. There are risk assessment tools to help investors manage their portfolio during periods of uncertainty and volatility in an emerging market. One option investors could use is provided by and is a portfolio protection service which provides an investor with risk alerts that identify periods of above normal risk. Another alternative indicator is the SmartStops Risk Barometer IndexTM (SRBI) TM . The SRBI can be used as a predictive indicator as abnormal price movements often precede extended periods of equity and market risks.

For example, if we look at the consumer services sector on the SmartStops Risk Barometer IndexTM (SRBI), the consumer services sector has an SRBI reading of .99 meaning that the current risk ratio for this sector is below the 100 day moving average. An SRBI below 1 infers that the percent of equities in the group experiencing above normal risk is below the 100 day average. A reading above 1 indicates tht the risk is on the rise and the above normal risk percentage is above the 100 day moving average. Note that the consumer services sector risk ratio has been on the decline as the consumer and U.S. economy has begun to recover over these last several months. Now, if we look at the risk chart for Wal-Mart, we see that the first exit trigger in the most recent above normal risk series occurred on 21-Feb-12 at $60.41.

(Learn More At

Although an investor who is invested in Wal-Mart might not want to sell at this point, the fact that the consumer service sector is close to approaching risk above the 100 day average at the same time that WMT is experiencing above normal risk, a stop loss order should be considered to minimize loss.

The Chinese consumer market is not a risky bet for investors that conduct proper due diligence and place well thought out stop loss orders.

Do you want to receive equity risk alerts? Join SmartStops today!

European Default Inevitable — Sell Your Gold?

By Christopher Georgopoulos

 What if, hypothetically, fear of a Greek default cannot be contained? What will be the aftermath to the markets? To gold?

 In the prequel to this article (European Default Inevitable — Sell Your Gold?), I discussed the fact that safe-haven-seeking investors could be in for a surprise when they run to buy gold after a Greek default and find huge sellers in the form of European sovereign nations. That article focused on events that would occur if a Greek default could be contained and the contagion that’s brought so much fear to the global system could be defeated. But what if, hypothetically, that fear cannot be contained? How will it happen, and what will be the aftermath to the markets? To gold?

The first signs of a detrimental contagion will be surprise losses, initially centered within the European banks and financial institutions. Articles such as, “European Stress Tests Underestimated Greek Exposure” will catch front-page attention. Quickly after, multiple small banks will become insolvent and the names of those banks — which many Americans have never heard of — will become as well-known as Citibank (C). Those defaults will spread to the larger European institutions that many of us know, and emergency midnight conferences will be highlighted on CNBC wherein the global financial community will be assured that all is sound. Sooner than later, a major default of one of these institutions will be revealed, and the bomb will be detonated.

This is when a 2008-type Lehman event reemerges, but this time on steroids. The fear driven from individual financial institutions will quickly morph into a fear for the nations of Europe. This fear will be derived from the recent questions concerning the lack of growth to combat their immense debt-to-revenues ratios. Anyone holding the bonds of these debt-ridden countries (i.e. Ireland, Portugal, Spain, and Italy) will panic and sell, driving their yields even higher and their credit-worthiness even lower. Those countries will find that trying to fund their needs through bond markets has become even harder and more expensive, and their risk of default will skyrocket. Deep recessions will set in as they will impose even deeper austerity plans, and unemployment — already high — will grow. Because these country’s economies are co-dependent upon each other as trading partners and consumers, even the more financially stable countries will be adversely affected. The viability of the entire Union will be questioned, their currency devalued, and talk of secession will be popular. Even worse, the spread of these losses will not be restricted by their coastal boundaries. Many American and global banks still have exposure to their European counterparts as well as money market and mutual funds. New losses, which could include massive losses on European credit default swaps, must be accounted for, which could cause a new round of credit freezes. Just like a repeat of the 2008 financial crisis, the foundation of the rapidly spreading fear will be a lack of confidence. Although this time around the solution won’t be as easy: Who will have the money to back-stop the back-stoppers?

If this were the scenario, the panic that the markets around the world would experience would be historic. The first wave of heavy selling (besides the aforementioned European bonds and stocks) would be centered in your most risky investments — the high-yielding and high-return emerging markets. Equities of the most stable markets would quickly follow. Money would flow from there to the “safest” of investments, such as US treasuries, US currency, and gold. As mentioned in my previous article, the price of gold would initially fall as Germany and the ECB try to contain the Greek default, but if the world’s confidence erodes and the defaults spread, the gold markets would once again be one of the few safe alternatives and could offer substantial upside.

The coming volatility of the markets could be unprecedented and swift. My firm has highlighted that the risks of serious market deprecation are likely with its SmartStops Risk Barometer Indicator.

SmartStops Risk Barometer Indicator (SRBI)

You need to monitor the SPDR gold Trust (GLD), SPDR S&P 500 (SPY), Rydex Currency Shares Euro Trust (FXE) and the Vanguard MSCI Europe ETF (VGK).

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…

Taking Advantage of Fear In The Market

By Chris Conway

Economic uncertainty in the US and Europe has resulting in fear dominating the market these last few weeks.  In the flight to safety, almost all equities suffer. We have seen this before and we will see it again. While these broad and dramatic market moves can wreak havoc on ones nerves and peace of mind, they inevitably produce some great buying opportunities. Wouldn’t you love to pick up shares in Google (GOOG), Ford (F) or General Electric (GE) on the cheap? The challenge is to be in a position to buy once the dust settles.

A great way to position yourself to take advantage of these down drafts is to be well diversified and to follow a sector rotation strategy which includes a money market fund as one of your sectors. Sectors do not always move in tandem (in fact some sectors are negatively correlated) and some sectors, such as technology, are more volatile than others.  As a result, when fear ravages some sectors, others often hold up quite well and leave you in a position to shift some assets from the relatively unscathed sectors to the ravaged sectors and take advantage of the artificially low prices.  A key to following this approach is to rebalance your portfolio once the ravaged sectors have recovered so you don’t become overly concentrated in one particular sector and are once again positioned to take advantage of a future buying opportunity.

Could you have taken action ahead of the pullback to be in a better position to take advantage of it?

Hind sight is 20 / 20 and no one knows where the market is heading on any given day, but investors continue to leverage many market indicators in an attempt manage probabilities and improve their odds. The CBOE Volatility Index, VIX, is one such metric which measures the general volatility in the S&P 500 and is commonly used as an indicator of overall market risk. As seen in this chart, the VIX did spike on August 4th jumping from a previous close of 23.38 to a high of 32.07. However, the VIX is viewed by many as a reflection of real time market moves and therefore does not provide much forewarning.

VIX Chart through Friday, August 5th

An alternative indicator is the SmartStops Risk Barometer IndexTM (SRBI) TM published by The SRBI is derived from the SmartStops individual equity short term risk signals which watch for abnormal price movements to categorize equities as being in a state of normal or above normal risk.  Because equity and market declines are often preceded by abnormal price movements, the SRBI is viewed by many as a predictive indicator. As seen in the S&P 500 SRBI chart below, the above normal risk percentage crossed above  the 100 day average on July 18th resulting in an SRBI above 1.0 indicating that the market risk was increasing. The above normal risk ratio has been on the rise all spring moving from just under 20% to over 40% and the current S&P 500 SRBI is 1.56 indicating an above normal risk environment.

S&P 500 Above Normal Risk Percentage - Chart Through Friday August 5th.

By comparing the current and historical “above normal risk” ratios for different sectors and their resulting SRBI’s, investors can be proactive and take protective action as risk increases in one sector by rotating to a lower risk sector or rotating into a money market fund. For example, based on the SRBI charts below rotating out of Telecommunications and into Energy at the end of June or early July would have been prudent.

SRBI Sector Comparison - Telecom vs Energy

SmartStops currently publishes SRBI data on the S&P 500 (GSPC) and the Dow 30 (DJI) as well as on ten market sectors including Basic Materials, Consumer Goods, Consumer Services, Energy, Financials, Healthcare, Industrials, Technology, Telecommunications and Utilities.  Click to view current SRBIs.

In conclusion, when fear rules the market, take advantage of the opportunities presented to lower your cost basis and protect capital by proactively rotating between sectors and investment vehicles.

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