Tag Archive | black swan

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…

VIX, Fear and maintaining Intelligent Protection

NEW:  SmartStops has just released its SmartStops Risk Barometer Indicator (SRBI) .   Click here  to check it out and let us know what you think.
 
SmartStops comment:    Why wait for VIX to go above a 200 day moving average in order to keep yourself protected?    There is a better way with SmartStops.

Are VIX ETFs Breaking Out?          originally published at ETFTrends  

Some traders have been keeping a close eye on the CBOE Volatility Index as a possible “tell” that the rally in risk assets since March 2009 may be due for a breather.

That’s why the VIX’s move above its 200-day moving average Wednesday drew the attention of investors with a technical bent.

The index, which measures the implied volatility of options contracts on the S&P 500, has been relatively subdued during the market’s recent rocky stretch. The benchmark is known as Wall Street’s favorite fear gauge.

However, the VIX was up 18% in the final hour of U.S. trading Wednesday to its highest level since March.

The largest exchange traded product following VIX futures, iPath S&P 500 VIX Short-Term Futures ETN (NYSEArca: VXX), rose 8%.

In stock ETFs, a Nasdaq-100 fund was pushed below a key indicator in Wednesday’s sell-off. [Nasdaq ETF Lower]

CBOE Volatility Index

VIX

Benefits to avoiding worst days in market

Again, moral is that Buy & Protect is a must in our 21st century markets.   Buy & Hold and modern portfolio theory are missing a key layer of risk management to be effective in our stock markets today.

SPY from January 1, 2006 – Dec 31, 2010.

5 Year SPY Study

5 Year SPY Study

100 year study shows following:

100 year study

read more too at:   http://smartstops.wordpress.com/2011/06/10/in-defense-of-market-timing-a-study-that-will-shock-you/

Nouriel Roubini issues ‘perfect storm’ warning for stocks

SmartStops commentary:   There are critics of his calls, but Roubini in July 2006 predicted a “catastrophic” global financial meltdown that central bankers would be unable to prevent. The collapse of Lehman Brothers Holdings Inc. in 2008 sparked turmoil that led to the worst financial crisis since the 1930s.   Of course predicting the markets future is challenging to say the least, with so many factors at play.  Its why investor’s methodology must evolve to have protection ready for themselves at all times.   You can’t survive our markets any longer by deploying a buy and hold methodolgy. 

‘Perfect Storm’ warning for stocks

A “perfect storm” of fiscal woe in the U.S., a slowdown in China, European debt restructuring and stagnation in Japan may converge on the global economy, New York University professor Nouriel Roubini said.

There’s a one-in-three chance the factors will combine to stunt growth from 2013, Roubini said in a June 11 interview in Singapore. Other possible outcomes are “anemic but OK” global growth or an “optimistic” scenario in which the expansion improves.

“There are already elements of fragility,” he said. “Everybody’s kicking the can down the road of too much public and private debt. The can is becoming heavier and heavier, and bigger on debt, and all these problems may come to a head by 2013 at the latest.”

Elevated U.S. unemployment, a surge in oil and food prices, rising interest rates in Asia and trade disruption from Japan’s record earthquake threaten to sap the world economy. Stocks worldwide have lost more than $3.3 trillion since the beginning of May, and Roubini said financial markets by the middle of next year could start worrying about a convergence of risks in 2013.

Read More…

The Next Crash Could Be Alot Worse

Lots of pessimism since QE2 is deemed a failure and no QE3 is coming.   Here’s one article that reminds us to ensure we are risk aware and maintain an intelligently adusting protection strategy.     Posted at Seeking Alpha by Michael T. Synder   http://seekingalpha.com/article/274478-the-next-crash-could-be-a-lot-worse

The Next Crash Could Be Alot Worse

here’s a lot of emotion in this market at the moment, and the conversations among traders are nearly all leaning toward the bear side

So what are some of the signs that this downturn on Wall Street may turn into a full-blown crash?

Well, according to the Wall Street Journal, junk bonds are being sold off at an alarming rate right now. Does the following quote from the Journal remind anyone of 2008 at least a little bit?….

A steep decline in prices of bonds backed by subprime mortgages has spread through the riskiest segments of the credit markets, ending rallies in high-yield corporate bonds and commercial real-estate debt.

Also, many of the big Wall Street banks are already laying off workers. In a previous article I wrote about the potential for Wall Street to go into “panic mode“, I noted that Goldman Sachs (GS), Bank of America (BAC), JPMorgan Chase (JPM) and Morgan Stanley (MS) are all laying people off or are considering staff cuts.

The truth is that the big banks on Wall Street are not nearly as stable as most people think that they are. Moody’s recently warned that it may downgrade the debt ratings of Bank of America, Citigroup and Wells Fargo.

Another major story on Wall Street right now is oil. OPEC recently announced that oil production levels will not be raised, even though the price of oil has been hovering around $100 a barrel.

World oil supplies are very tight right now. In fact, the globe actually consumed 5 million barrels per day more oil than it produced during 2010. This was possible because the difference was apparently made up by drawing down reserves.

But if oil supplies are this tight already, what is going to happen if a major war (as opposed to all of the minor wars that are already happening) erupts in the Middle East?

The world is sitting on the edge of a financial disaster.

Read More…

Preparing for the next Black Swan

Kevin Depew, editor of Minyanville posted an interesting article today at:    http://www.minyanville.com/businessmarkets/articles/collapse-financial-collapse-economic-collapse-depression/6/1/2011/id/34883

And we at SmartStops ask the same question – have people become immune to all the potential downfalls awaiting them?  Is that what causes them to try to ignore the risk around them?  As if they don’t acknowledge it , it doesn’t exist?    How do we get investors to feel that risk management is second nature to them when investing in the stock markets?  So they can invest wisely and with less “fear”.

..” It’s been 11 years since the dot-com crash. Our 2006 gloom no longer feels misplaced; it feels comfortable, safe. Yes, there are times to prepare for the worst.”    He ponders if we shouldn’t thus also have white swan focus, in seeing this Bloomberg ad:

“Preparing for the Next Black Swans”

Bloomberg Money Managers Conference

When 14-Jun-2011 (Tue) 07:45 – 13:00
Where State Room, 60 State St., 33rd Floor
Boston, MA, United States
Entry Fee USD 695.00

“I have to believe that perhaps the notion of a black swan has not been fully explained? Or if it was, then the concept itself not wholly grasped?”

The event description:

“Preparing for the Next Black Swans”: The year 2011 will most certainly be remembered for its Black Swan events, including the spreading unrest in the Middle East and the earthquake in Japan. Money Managers need to be prepared for unexpected events as they position their investments across asset classes. The Bloomberg Money Managers conference will bring together mutual fund, hedge fund and private equity investors to consider events that could rock the markets, portfolio strategies for managing the unforseen and the future of actively-managed investing.”

“Can you see the shift that has occurred? If you have not participated in or observed the financial services and money management industry throughout the 1990s and before, perhaps not. Prior to 2000, the very concept of a black swan — an unexpected event that has an outsized impact and which endures post-impact rationalization as wholly expected (a la dot-com crash, subprime collapse, debt crisis, etc.) — was anathema. The models accounted for all possibilities. Math and science, financial engineering had permanently eliminated tail risk. This is not overstating things. Fast-forward a full decade, black swans are everywhere, their ubiquity serving as a sort of psychic balm. Today, every unpredicted event is black swan-worthy.”

Black Swan , Taleb – reminding everyone – have a risk strategy from the start!

Remember – you can’t “predict”, which is why its important to maintain constant protection.  SmartStops is producing intelligent self-adjusting baseline numbers that are derived from careful analysis of the individual equity’s behavior.  And they further optimized based on macro conditions.  Thus providing you the capability to take a pro-active or re-active approach to managing your risk. 

 from an interview with the infamous  Nassim Taleb of Black Swan -http://knowledge.wharton.upenn.edu/article.cfm?articleid=2755

Taleb: That’s true. But I’ve been trying to emphasize the true message of the black swan, which is that there are some environments in which rare events are simply not predictable.

Most people think that they can predict the black swan, that with quantitative sophistication they can get answers. They don’t get the idea that because we can’t predict black swans, then we need to restructure institutions and rethink strategies to be more robust in the face of uncertainty.

MPT in a Black Swan Universe

from Financial Advisor Magazine:       Advisors need to consider how catastrophic events could help portfolios outperform.

More than one year after the collapse of Lehman Brothers and the subsequent meltdown in the financial markets, many long-held investment tenets are now being questioned. The validity and utility of modern portfolio theory as the prescription for prudent portfolio management is being re-examined. Dealing with this issue and developing solutions to cope with the revelation of newly uncovered risk is imperative if we are to successfully guide our clients through this tumult. It is equally imperative for our own survival to meet this challenge directly and develop strategies to navigate the financial minefield.

With two major declines over the past eight years, the stock market is on pace to underperform every decade over the past century, including the 1930s. During this time, modern portfolio theory represented the investment methodology most widely employed by advisors. It mandated a strategy of allocating funds to a wide array of asset classes in an effort to lower risk. The Holy Grail was to identify lowly correlated or even negatively correlated assets that would allow a portfolio to withstand the most severe declines.                    More -> http://www.famag.com/component/content/article/4615.html?issue=115&magazineID=1&Itemid=73

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