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.
Nowhere to Run: The Correlation Bubble
SmartStops Comment:: Indeed, Beta and correlation approaches are not enough to manage risk in today’s markets. However we have somewhere for you to run – to intelligent self-adjusting risk methodologies that the SmartStops optimization engine offers.
Originally published at Seeking Alpha: http://seekingalpha.com/article/815851-nowhere-to-run-the-correlation-bubble
Fundamental analysis of “buy and hold” companies is a quaint, Warren Buffetish notion that probably works in the long term. But as Keynes said, in the long term we’re all dead. The big risk in today’s über-correlated markets is systemic shock. One can practice due diligence on a company and buy at a reasonable valuation, but if global markets collapse the next day and don’t recover for years, one has paid a lot in opportunity cost. In other words, tail risk is not reflected in fundamental analysis.
Fundamental analysis is valuable so long as the basic fabric of capital markets remains intact. In an insane world (where U.S. Treasuries and German Bunds are considered “risk-free”, of infinite rehypothecation, where MF Global’s John Corzine walks off with $200M segregated assets, of the London Whale, LIBOR, Goldman’s muppets, regulatory capture of SEC and Fed, U.S. / China animosity and the dollar’s loss of world reserve status) it’s unlikely that business-as-usual will continue without a disruptive bout of creative destruction.
Precisely when and how it will occur is anyone’s guess, but, unfortunately, old school techniques like cross-asset class and regional diversification have lost their glimmer. Just as socioeconomic disparity is partitioning the globe into lords and serfs, so too has the market been divided into polarized castes of highly correlated risk-on assets and (scarce few) risk-off havens.
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…
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…
Rethinking Modern Portfolio Theory
Are we all doing it wrong — or is the theory in need of updating and repair?
I think MPT died 30 years ago,” says Jeffrey Saut, chief investment strategist at Raymond James. “If the theory were correct, Warren Buffett, Peter Lynch and Paul Tudor Jones wouldn’t have their track records.” He says that although 60% of Lynch’s trades resulted in losses, he could manage downside risk precisely because he wasn’t tied to a strategic asset allocation. “Asset allocation-and just about any other model-works in a bull market,” Saut scoffs. “But the driver of returns in a bear or range-bound market is stock selection and risk management.”
So far, no other single method has knocked the Modern Portfolio Theory off its perch as a coherent way of structuring portfolios and pricing assets. But more and more practitioners believe the theory doesn’t deal adequately with today’s world.
Poor Harry Markowitz. Every time investors get whipped in the financial markets, they take it out on his Modern Portfolio Theory (MPT).
Investors don’t kick Markowitz only when they’re down. MPT also came under gleeful attack during the technology boom of the late 1990s, when “risk” was a dirty word. What sense does it make to diversify out of an asset class that’s returning 30%? Plenty, of course-but try telling clients to keep a little money in cash during a raging bull market.
Why does MPT look so good on paper, yet fail so spectacularly every few years?
Know when to Hold ‘em, Know when to Fold ‘em
SmartStops comment: Its why this service was brought to fruition. Follow SmartStops and you can be protected before you lose it all.
Unprecedented Monthly Volume Sell-Off Suggests Now’s the Time to Take Shelter - published at Minyanville by Kevin A. Tuttle
Do not concern yourself if the market goes up today, tomorrow, or a month from now. The risk of entering is not worth the reward.
Over the weekend I had the pleasure of speaking with a very prominent European money manager – overseeing hundreds of billions – about the “across-the-pond” financial crisis unwind and looming hazard of a potential domino-effect coming to fruition. Without rehashing the entire conversation, the consensus is not “if,” it’s “when” will the developing pressure finally blow. He actually went so far as to say it could truly begin unraveling within the next few weeks considering the catalysts currently in play.
The intent of providing the conversation synopsis is not for sake of fear, but understanding the potential ramifications. About three years ago, in one of my firm’s quarterly reports, we opined on a unique situation in regard to the GDP measurements of Global Nations. It stated the unprecedented growth statistics from the 56 nations tracked. “History is currently being made in the sense that all the globally tracked economic growth nations (56), every one… 100%…, are showing expansion.” This lead to my next comment… “If the economic cycle pendulum swings in both directions what would happen if the inverse occurred?” Are 2011/2012 the years we are about to find out? Maybe that’s somewhat extreme, but yet… is it possible?
We at my firm do not pretend to be intelligent enough to figure out all the nuances, catalysts, causes and reasons why the markets could fall apart; we’ll leave it to the team of economists and officials to attempt to sort that out. What we do instead is try to determine when the storm is coming and how to take shelter, which brings me to my point: Now is the time. Take shelter! Do not concern yourself if the market goes up today, tomorrow or a month from now. Clarity is key! Would you sail your boat into rocky waters with a potential hurricane looming because of your love of sailing? Is the risk worth the reward? For some, maybe; but for most, probably not.
S&P 500 Index
Since the “2011 Channel of Indecision” broke on August 4, the seas have picked up dramatically and have begun swallowing ships. The markets have never seen this type of monthly volume sell-off – 47% above average (unprecedented), as seen in the monthly chart above. As Kenny Rogers put it so eloquently… “Know when to hold em’ and know when to fold em’, know when to walk away, know when to run!”
Autozone is definitely “in the Zone” but are there risks?
originally posted at Minyanville.
by Chris Georgopoulous, SmartStops contributor
Autozone (AZO: NYSE), a retailer of automotive replacement parts and accessories has seen an unprecedented appreciation in value over the past few years while most equities have been punished from an economic recession. While the success of Autozone’s stock, management and business model are unquestionable there is still one question that needs to be answered; “Will it continue? “
Most businesses experienced negative effects from this past economic recession, Autozone triumphed. The marketplace for new cars dried up quickly when personal income and spending dropped. With less money in the pockets of consumers, the more they had to rely on their aging autos. Aging autos need to be constantly fixed, and where did consumers go to replace those batteries, headlights and fuses? That’s right, “Get in the zone….Autozone”!
This macroeconomic factor is the foundation of the growing demand, but it wouldn’t have propelled the stock alone. A competent management focused on using this ever growing cash flow to aggressively repurchase shares, open new stores and concentrated on maximizing same store sales figures. The stars aligned for Autozone and they took advantage of it.
Autozone (AZO) SmartStops Long-Term chart
Simple Moving Averages to highlight; 20=$292.10, 50=$271.55, 200=$178.82
The same success can be seen in the technical and fundamental analysis of their stock. From its lows in early December 2008 the stock has increased from the mid $80s to over $300. The Stock has not once broken its 50 day SMA, which was tested for the first time in 2 years during the most recent market correction. Once tested the stock quickly rebounded in defiance of the overall market and broke to new highs.
Fundamentally the market may even be discounting the stock’s value. Yahoo Finance lists the next five years growth rates at around 15%, Read More…
Do leveraged ETFs move the market? SEC investigating..
SmartStops comment: Interesting to see that the SEC is now investigating whether leveraged ETFs are a cause of increased market volatility. When will the public realize that the basic underlying structures fueling our stock markets around the world have changed in our 21st century. There are so many more instruments and derivatives that create the need for a more dynamic intelligent risk management approach. Asset allocation and diversification, the tenets of modern portfolio theory are not enough in this day and age. This is exactly why the SmartStops service was created.
originally published at ETF Trends.
Leveraged exchange traded funds are being blamed for the wild volatility in stocks last month, but data and empirical evidence show the concerns are way overblown.
“With equity volatility doubling recently, some of the same topics that came up two years ago during the credit crisis have resurfaced as people look for possible culprits,” Credit Suisse said in a recent report. “ETFs have received some blame for the increasing volatility, although we believe it’s a case of confusing correlation with causation.”
The Wall Street Journal reports the Securities and Exchange Commission is looking into whether leveraged ETFs magnified the market’s wide swings in August. [SEC Reportedly Probing Whether ETFs Added to Market Volatility]
Many leveraged ETFs are geared to provide 200% or 300% of the daily moves in stocks. “Inverse” leveraged ETFs rise when stocks fall. These high-octane funds need to rebalance every day to provide the desired performance.
“Our findings show that the leveraged ETF rebalancing trades are unlikely to be the most influential factor in driving intraday swings into the close,” Credit Suisse said in its report. “Less liquid spaces like small caps and specific sectors may be more likely to be affected on rare days with extreme moves, but liquidity needs are often quickly met in the same way as for typical index rebalances that occur throughout the year.”
The Costs of Greed – Dendreon
originally published at Minyanville.
Note: SmartStops saved investors $26.57 a share from the first July 18th risk alert
by Christopher Georgopoulos
Provenge is a proven success, but management has to prove to the market that not only are they brilliant scientists, but brilliant businesspeople.
Partnerships between drug development companies and large pharmaceutical makers are common. These deals provide the usually cash-strapped development firm with capital to see their drugs through the long and expensive phases of testing required by the U.S. Food and Drug Administration (FDA). Along with the capital, these firms receive the expertise of proven and tested marketing channels and the expertise in the infrastructure of clinical and the regulatory processes. But don’t celebrate to early — firms like Merck (MRK), Johnson & Johnson (JNJ) and Pfizer (PFE) do not offer this out of the goodness of their hearts. They charge for it — usually in the form of revenue-sharing of an approved drug.
Partnerships are not the only option these development firms have. They can choose to do it all themselves. They can raise their own capital, usually in the form of dilutive stock offerings or, similar to Mannkind (MNKD), their founder may fund the majority of capital needs personally. Either way, once they have raised the necessary capital to fund the final phases of approval, the rest must be spent on manufacturing and distribution. Or simply, they need to pay to make and sell the drug.
The management of Dendreon (DNDN) had to make this decision and they chose to go it on their own. They believed, and were correct, that the FDA would approve their drug Provenge, the first therapeutic cancer vaccine. They celebrated this victory and saw the potential “streets of gold” and “rivers of honey” and they decided they didn’t want to share any of it.
The market didn’t seem to mind this decision. They raised the necessary capital through dilutive offerings. They were widely covered by Wall Street with some exceptional high price targets. Their manufacturing plants were being built and approved. The stock rose along with the list of billion shareholders. The stock, still very volatile, had its bumps in the road. For example, in the summer of 2010 the stock fell from its highs over $55 to under $30 due to a scare that Medicare wouldn’t cover the expensive treatment. This news kept the stock in a range until the summer of 2011 when Medicare announced that Provenge’s benefits were enough for coverage. This was another solid victory for the solo Dendreon, which then saw its shares rise once again.
This string of victories and brief rise in price came to a crashing halt on its second-quarter 2011 earnings release. The company announced that Provenge sales were weaker than expected, and management even removed revenue guidance for the rest of the year. This revenue guidance was truly important, for the majority of their yearly guidance was estimated to be back-end loaded in the fourth quarter of 2011. Management claimed that the uncertainty of guidance was due to the prescribing doctor’s uncertainty of insurer or Medicare reimbursements. In their terms, “…increased sensitivity to the impact of cost density on doctors’ practice economics…” It also claimed that there was difficulty identifying suitable patients.
The repercussions of such uncertainty from management did not go unnoticed. Wall Street punished the shares, cutting the price by two-thirds the next day. If that wasn’t enough, a string of downgrades followed the price down to pre-approval levels. Analysts and investors alike are both now questioning the once highly anticipated growth rates and possible need for additional capital.
So let’s get this straight:
Management believes that the main reason for the slower adoption is that the doctors that prescribe Dendreon’s drug have difficulty identifying patients, and that they are not fully educated on how to get reimbursed.
Really?
Dendreon has created a new, revolutionary therapy for the plague of the 21st century that is good enough to have the approval of the FDA and Medicare and they can’t sell it? Not only can they not sell it, they can’t even adequately explain the process of reimbursement. Do you believe an experienced sales team from a large pharmaceutical firm would have made the same mistake?
Dendreon wanted it all and didn’t want to partner (pay) for any help. Their inefficient sales team is one of the direct consequences of the greed they showed from the beginning. The repercussions of this greed can get worse. For example, there are still unfortunately many patients out there that need treatment and as long as the doctors remain uneducated there are a plethora of other options. They could prescribe Johnson & Johnson’s drug Zytiga and soon maybe even Stimuvax, Oncothyreon’s (ONTY) innovative cancer vaccine which is in late-stage trials.
Looking at the stock technically, it’s a mess. Read More…
Has Priceline’s trend broken? –A look at the stock through ancient eyes.
There are strategies that have passed the test of time, which we can refer to as “Tried & True”. “Cash is King” during economic downturns or the infamous, “catching a falling knife”, are a few examples. I have found that the lessons of the great speculator, Jesse Livermore fall into this same category. During times of market confusion or abnormal stock behavior, I use his “Tried & True” lessons to guide my own trading decisions.
How does Priceline (PCLN: NASDAQ) look through his eyes?
Priceline.com, the online travel discounter has undoubtedly been a market leader, a darling to momentum and growth seeking investors. PCLN has appreciated from the $50 area to over $550 since Oct of 2008. This “market-bragging” move has been attributed to stellar growth, perfect technical indicators and huge market interest.
