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.
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…
NETFLIX Investors – Did you Protect Yourself?
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!
See chart at: http://www.smartstops.net/PublicPages/SmartStopsOnDemand.aspx?symbol=NFLX
How Can Advisors Build a More Modern Portfolio?
Originally published By Matt Ackermann on May 16, 2012 at OnWallStreet.com
SmartStops comment: The fear of investing in traditional assets due to volatility can be minimized for an advisor’s clients by the use of a SmartStops methodology. SmartStops was created because of the need for a more Modern Portfolio approach that could better manage traditional assets.
How Can Advisors Build a More Modern Portfolio?
Following a pair of bear markets, advisors know the days of buy-and-hold investors with 60/40 portfolio allocations are over.
From the mass affluent to the ultra-wealthy, investors want more than just equities and fixed income in their portfolios. Clients expect their advisors to bring innovative alternative investments to the table.
“A lot of investors and advisors have moved their assets to cash or into lower yielding asset classes,” said David L. Giunta, the president and chief executive officer of Natixis Global Asset Management’s U.S. distribution. “To get them off the sidelines, advisors can’t just bring these clients back to traditional approaches. There is just too much volatility.”
According to the 2012 Natixis Global Asset Management U.S. Advisor survey, the global financial crisis and uncertain market recovery has accelerated interest in alternative investing. According to the survey, 49% of advisors are uncertain that the traditional 60/40 allocation between stocks and bonds is still relevant, and 23% said the traditional approach isn’t close to meeting the needs of investors in contemporary markets.
But if a 60/40 allocation is no longer relevant, what is the right mix?
Dick Pfister, an executive vice president and managing director of global sales and consulting at Altegris Investments, A La Jolla, Calif., based provider of alternative investments, said modern portfolio theory has shifted dramatically in the past decade. He said that large institutional investors and endowments have “dramatically” increased their allocation to alternative investments.
According to a national study of endowments by the National Association of College and University Business Owners, the average endowment had 52% of its portfolio investments in alternative assets in 2010, up from 24% in 2002.
Pfister said he doesn’t expect advisors to shift their portfolios that dramatically, but anywhere from 10% to 35% of an individual investor’s portfolio should be held in alternatives.
“We are seeing a lot more on the upper end of that range,” he said. “With more mutual funds trading like hedge funds, more people are allocating to the alternative space.”
Giunta said clients are getting more comfortable with alternative investing because more alternative options are available within the comfortable and familiar confines of a mutual fund, but he says the right portfolio allocation varies on a client-by-client basis.
“We have to create portfolios based on each risk and volatility scenario,” he said. “Advisors need to talk to their clients and understand how much of a dip they can stand. Advisors need to be having those conversations and educating their clients about a variety of alternative options.”
In Defense of Market Timing – a study that will shock you!
SmartStops comment : As we dig up other studies we’ll add to article.
Missing Best and Worst Days in Stock Market 1984-1998
The article was originally published in 2008.
SmartStops comment on 08/4/11: Markets have dropped 9% in last nine days with the whole debt ceiling “show” going on in U.S. government. Do you think you needed to have given back your gains? Think again!
Market timing is the art of making investment decisions using indicators and strategies to observe and determine the direction of prices. Many believe that market timing involves predicting the future, when in reality, the goal of market timing is to participate in periods of price strength and avoid periods of price weakness.
The general investing public has been told that market timing is a high risk proposition. Most of what has been written about the topic focuses on its failure and the risk investors take when trying to time the market. A typical study focuses only on the negative consequences of missing a few particular up days in the market – calculating the negative financial impact of missing those days and concluding that attempting to time the market is foolish. The biggest fallacy with these studies is Read More…
Tax Loss Harvesting – using sector ETFs to continue the exposure
Talking about underwater positions is never fun as the end of the year approaches but realizing losses has a “silver lining,” said Rande Spiegelman, vice president of financial planning at the Schwab Center for Financial Research, in a conference call with reporters Friday.
“The good news is losses can be used to lessen the tax bill and position for next year,” he said.
Realized losses can be deducted from ordinary income by up to $3,000 a year, while any additional losses can be used in future years.
However, investors need to be aware of the “wash-sale” rule. Investors cannot claim the loss if they buy a “substantially identical” security within 30 days of the sale.
This is where ETFs can help out if investors want to keep exposure to the market.
For example, an investor may be sitting on a loss this year on a financial stock, explained Michael Iachini, managing director of ETF Research at Charles Schwab Investment Advisory. The investor can sell the stock and take the loss, but they might miss any rebound rally in the financial sector over the next month.
To maintain exposure to the sector, the investor could buy an ETF indexed to financial or bank stocks, Iachini said on Friday’s call. ETFs are a “good fit” for the strategy if investors don’t want to be out of the market for a month.
Some financial advisors use tax-loss harvesting strategies featuring ETFs that track the same sector but are pegged to different indexes.
The IRS hasn’t provided a hard definition of “substantially identical,” and investors should consult a tax advisor about the wash-sale rule.
Also, investors need to consider any ETF commissions or other trading costs associated with the strategy.
Finally, Schwab’s Spiegelman said not to lose sight of the overall investment plan and let the “tax tail” wag the dog. “Don’t upset the long-term investment plan or asset allocation just to get a tax break,” he said.
“ETFs have made tax loss harvesting a lot simpler than it used to be,” said Charles Zhang of Zhang Financial in a recent Reuters report. “It’s not that hard to find one that’s a good stand-in.”
The New Oil Dynamics
originally posted by Tony Daltorio at http://wallstreetmess.blogspot.com/
The oil market changed back in 2009, but most Americans did not notice.
That was the year, for the first time, China temporarily surpassed the United States as Saudi Arabia’s biggest and most important customer.
At the time, Saudi oil minister Ali Naimi said “Ten years ago, China imported relatively little crude oil from us. Now, it is one of our top three markets, and is the fastest growing market for us globally.” He added that this showed the increasing “depth of Saudi-Chinese relations”.
Today, when oil tankers leave Saudi ports with their load of crude oil, they increasingly travel eastward to the rapidly growing economies of Asia rather than to the established markets of western nations.
When looked at historically, this new trend is significant. Remember that the most of the oil industries in the Middle East were originally set up by western companies with the sole aim of providing oil for western economies.
The day when Saudi oil exports to China permanently overtake those to the U.S. has not arrived yet. But it will soon. Read More…
Hedge fund leverage in the industry – how its grown
SmartStops comment: Who watches out for the little guy?
A chart from MIT’s Andrew Lo of the growth of assets and hedge fund leverage over the last 20 years. You can see the expanding leverage in the 2001-2005 period. originally posted at Infectious Greed blog.
Hedge_Fund_Leverage how-its-grown
Chicken or Egg? Risk Tolerance as a Driver of Financial Success
There is a temptation to think that higher income and/or higher wealth lead to higher risk tolerance. However, there is always a danger in trying to read a cause and effect relationship into a correlation. To know for sure we would need to conduct a longitudinal study measuring risk tolerance, income and wealth as we went along.
Failing that, we can conduct a thought experiment. Suppose that Bill and Bob have different appetites for risk. Presented with a choice between taking a certain $100 and a 50/50 gamble of winning $0 or $X, Bill will take the gamble when X is $250 but Bob won’t take the gamble until it reaches $300. Looking at any single $250 gamble choice, Bill has a 50% chance of being no worse off than Bill. However, if Bill and Bob are presented with a series of such choices, the longer the series runs the more certain it is that Bill will finish up better off than Bob. With a series of 10, Bill has an 83% chance of being no worse off than Bob and by the time we get to a series of 100 that chance has increased to 98%. Over 10 choices, Bill will finish with $1,000 but Bob could expect to have $1,250, though he may have nothing or $2500.
Now suppose that Bill and Bob both started with a kitty of $1,000 and that rather than the choices being framed from a base of $100, they were framed from a base of 10% of the kitty at the time. For 10 choices, Bob’s kitty grows to $2,593 but Bill’s grows to an expected average of $3,260 and 62% of the time will be greater than $2,590. At worst Bill will have $1,000 and at best $9,300.
Overall, by taking more risk Bill can expect to be significantly better off.
So how does this relate to real life? Clearly, life’s choices are rarely as simple as in our example and rather than a series of identical choices we face a series of mainly different choices where there are usually more than two alternatives—and those alternatives will often include the possibility of losses. Further, the range of outcomes is often not clear and they must be estimated rather than calculated. Finally, we may make cognitive errors in assessing the situation and in identifying and evaluating the alternatives.
As we know from experience, risky choices take many forms and occur in different contexts including employment, borrowing, insurance and investment. For the riskier alternatives to be considered there would be a commensurately greater expected reward, but this will come with the possibility of an unfavorable outcome. The more risk tolerant amongst us will need less of an incentive to take the riskier alternatives. If we continue that pattern over time, all other things being equal, we should finish up better off.
So my hypothesis is that risk tolerance is a driver of financial success rather than the converse.
