Tag Archive | Stocks

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…

Valuations in Free-Fall: S&P 500 Cheapest Since 1957!

 originally published at Kapitall, who go on to identify potential stocks to play.

The Standard and Poor’s 500 index valuation has hit 25% below the average from the last nine recessions, even as price estimates continue to fall, according to Bloomberg‘s data. These estimates provide a statistically significant outlook on analyst expectations for future growth and the degree to which stocks might be considered undervalued.

Historically, market contractions have not reached these lows since 1957 when the gauge for American equities traded at 13.7 times forecast earnings. Today’s equities trade at 10.2 times 2012 forecast earnings and earnings estimates continue to fall to their lowest level since April.

“What you’re seeing is a growth scare,” Wayne Lin, a money manager at Baltimore-based Legg Mason Inc. “The question is, how much of that is priced in. I’d say that if we don’t have a double-dip recession, if earnings just stay flat, these valuations are reasonable. The market already expects those downgrades.” (via Bloomberg)

Unlike previous market crashes or recessions, this one has been relatively slow-going. In the previous nine quarters, companies prepared for further economic volatility and managed to exceed income forecasts after cutting costs and lowering debt. With lowered analyst estimates for 2012 companies will have an easier time hitting their mark.

Whether or not lowered earnings estimates makes today’s stock prices a bargain is an ongoing debate between bears and bulls. According to Rob Arnorr, founder of Research Affiliates LLC, “the measures by which stocks are cheap today rely on continued recovery and a continued surge in already peak earnings. It relies on a very shaky foundation.”

for stock picks, go  to Kapitall.

If you can’t beat them join them, Best Buy. BBY

by  Chris Georgopoulos, SmartStops contributor

Reading financial articles can be, let’s say boring at times. This article we are going to try to spice it up, let’s play a game of role playing.  Famed speculator, Jesse Livermore once was quoted…

“If I were walking down a railroad track and saw an express train coming at me at 60 miles an hours.  I would be a damned fool not to get off the track and let the train go by. After it had passed, I could always get back on the track, if I desired.” –Reminiscences of a Stock Operator, Edwin Lefevre.  

For this game let’s rename the train, Best Buy stock (BBY: NYSE), the ““I” in walking down the track” we can call the shareholders of Best Buy and the speed of the train, the issues.  The game is scored by the costs of each decision. Whoever has the best return wins!

It is the end of summer 2005, Best Buy is approaching $80/share and the future couldn’t be brighter. The tech bubble burst is ancient history, the housing market is hot, interest rates are low and every house in America is an ATM for consumer spending.  You are on the railroad track…there isn’t a train in sight! 

It is now the beginning of fall 2008; Best Buy has fallen to the mid $40s in defiance of the market making new highs and there are rumors of problems in Mortgage backed securities.  (Note:  Sidestepping risk is now made possible with the release of SmartStops.net  which if had been available would have had you out in the $70 range in 2005).  Your friend has made a fortune flipping speculative properties in south Florida and Las Vegas, but you see he is worried. He still has five houses on the market with almost no personal income… (You know how this story ends)  You can hear a train coming and it sounds like it’s really moving!

Only a few months later, Best Buy is trading under $18/share!   The rumors are true; the housing market has crushed the stock market. It seems nobody thought housing prices would ever go down and the economy is on the verge of total failure. You can now see the train, its moving fast and finally you start to consider if you should actually get off the tracks.

(SmartStops.net   issued two Long-Term exit signals in 2008 the first January 4, 2008 at $46.80 and on September 16, 2008 at $40.68. That’s a  $22 per share savings by sidestepping risk.)

It is two years later; Best Buy is trading back in the mid $40s. 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.”

By Joan Warner
February 1, 2010

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).

Never mind that the groundbreaking concept has governed investment discipline for more than 40 years and that Markowitz won a Nobel Prize for it in 1990. Its central tenet-that diversification mitigates portfolio risk-seemed to collapse in 2008 when the bear market left no asset class unmauled. Only Treasuries provided a haven, and according to MPT, Treasuries don’t even count. They’re just the risk-free baseline at the bottom of the return axis. If you had furious clients asking what the hell happened to your age-appropriate asset allocation strategy, you weren’t alone.

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?

Read More…

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…

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…

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.”

Read More…

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…

Bill Gross: Prepare for ‘disharmony’

By Bill Gross – Originally published at Investment News:  The following is the commentary of Bill Gross, managing director and co-CIO at Pimco, for the month of September. For a complete archive of his commentaries, click here.

“Just an old-fashioned love song, comin’ down in three-part harmony.” –Three Dog Night

In many ways the global economic crisis is like a marriage gone bad. As the Three Dog Night sang years ago, global economies have functioned harmoniously for many years, but suddenly the love songs have become strident and cacophonous, the policy coordination morphing into a war of the roses as opposed to a giving of them. Instead of three-part harmony we are now experiencing, at a minimum, tri-party disharmony, teetering on the brink of “divorce,” which in economic parlance means a possible “developed economy” recession – a downturn from which reconciliation may be difficult due to a lack of policy options and cooperation. But I get ahead of myself. Let’s first ring the wedding bells, then take you through an explanation of three separate global marriages and how each of the partners have grown apart.

Europe Unites!

Oh those feisty Europeans! Always fighting like a dating couple and then finally resolving their differences by saying “I do” sometime in the 1950s with the creation of the Common Market and the European Economic Community (EEC). In doing so, France and Germany said “never again,” and even though they didn’t like each other (read “hate”) they decided to make economic lurv in the hopes that they wouldn’t destroy the continent again. It later turned into a formal union, a European Community (EC), where they invited lots of witnesses to the ceremony and created instant family members, if that’s metaphorically possible. Twenty-seven of them, including Italy, Spain and the U.K. were now relatives despite some liking pasta and others preferring horrid cuisines featuring Shepherd’s Pie or fish and chips. The marriage progressed to the point of a smaller monetary union sometime in 1999, but critically, without a common budget. Husband and Wife – Germany and Greece – decided to have a joint bank account, but with separate allowances and no oversight. Greece could issue bonds at nearly the same yield as could its Northern hard-working neighbors, but were free to spend it any way they chose. This was an economic version of an open marriage where one party gets to have all the fun and the other worked nine-to-five and came home too exhausted for whoopee. Well sometime last year, global lenders said enough is enough and soon the whole cheating European Union (EU) was at each other’s throats, hiring lawyers and threatening to break up. Calmer heads prevailed when the ECB decided to make nice and use its checkbook. Last week Angela Merkel and France’s Sarkozy sort of got engaged for at least the second time, nixing expanded funding for their Southern neighbors and placing the burden even more on the ECB. Who knows where it goes now, but let’s put it this way – Germany and France are sleeping in a king-size bed while the rest of its EU family are sleeping in separate bedrooms. As a result Euroland faces economic contraction.

California Dreamin’

This impending divorce in America is not about sex or sleeping around, but more about romancing the now stone-cold notion that anyone could be a millionaire in the good old U.S. of A. if only they worked hard enough. Our Statue of Liberty proclaimed “give us your tired, your poor…” and sent many of them West to build a little house on the prairie or strike it rich in the goldfields of Sacramento, California or Skagway, Alaska. Many of them did and a century later, the option-laden fields of Silicon Valley provided modern-day examples of rags to riches fairytales come true. But this odd couple marriage of rich (and poor hoping to be rich), now seems on rather shaky ground. Instead of boundless opportunity, the nursery rhyme describing Jack Sprat – who could eat no fat – and his wife – who could eat no lean – appears to be the starker of the two realities. There are the poor and there are the very rich, with the shrinking middle class resembling Mr. Sprat rather than his wife.

During this country’s recent economic “recovery,” real corporate profits increased by four times the amount of working wages in dollar terms, and, as the chart below shows, are 50% higher than at the turn of the century while wages remain relatively unchanged, something that has not occurred since this country’s nuptials were concluded over three centuries ago. Is it any wonder that preliminary battlefield skirmishes in Wisconsin and Ohio between labor and capital promise to spread across every state of this land? (Not Texas!) Is it any wonder that Republican orthodoxies favoring tax cuts for the rich and Democratic orthodoxies promoting entitlements for the poor threaten to hamstring any constructive efforts to reduce unemployment over the foreseeable future? We are witnessing romantic love turning into a spiteful, bitter clash between partners in name only.

Alimony Anyone?

The Asian Miracle

Confucius say, “Can there be a love which does not make demands on its object?” While not a marriage, there has definitely been a love affair between Western consumers and their Chinese producer “objects” for several decades now. Read More…

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