Q&A from SmartStops.net Webinar

Controlling Risk in Volatile Markets

Presented By Chuck LeBeau

September 24, 2009

 

Q: With your study, I understand the exits, but what strategy did you use on when to

to get back in?
A: The study reflected an entry method that is commonly referred to as the "Turtle Trading"

method.  It is defined as:  you enter as soon as the stock makes a new 20-day high.

 

SmartStops will soon be publishing our own re-entry strategies with even better

results than the" turtle" approach.  The SmartStops reentry method  will assure that you will

not miss "the next big move" which is what holds many from feeling they must just hold on to a stock

through periods of weakness.  The problem in holding on however is that a stock

may not recover for weeks, months, years or never (as in the case most recently in some

2008 financial stocks like Lehmann (LEH).   In fact, statistics show that market leaders will

drop an average of 72% from their peak.

 

 

During the webinar, Chuck mentioned the Black Swan study that showed "avoiding the worst

100 days out of the 29,190 trading days increased the profits by 43,396.8% to $11,198,734,

and more than doubled the mean annual compound return to 11.5%.   Below is another study

completed from 1984-1998 emphasizing the same point

 


Q: What about mutual funds?  What about commodities?
A: Both are being considered as an expansion of our services.
 
Q: Do you do this for bond ETFs also?
A: All ETFs are covered so long as they have a trading history of 150 days, and are above $1 in price and volume is >40,000 shares. 
 
Q: Is the same underlying analytic approach used for ETFs? 
A: Yes

Q: Do you recommend adjusting your stops on existing positions based on current smartstops?
A: Yes, we do recommend you adjust them daily.  We hope to work with all brokers to make this as seamless as process as possible.  We currently do offer our BrokerLink service for TD Ameritrade customers. 
 
However, if you do not want to adjust them daily, we do provide a color-coded "warning" in our daily end-of-day portfolio reports.  Thus if you have not yet set your stop, you will be warned that the current stock price is very close to the SmartStop and may want to set it then.
 
Q:  Do you offer SmartStops exits for the short trades?
A: We currently do not supply SmartStops for "short" positions though we do support ETFs that may be a "short" fund.
 
Q: Are SmartStops mainly for using on longer time frames, based on daily closes and not really designed to be used in "intraday? trading?
A: Correct.  We do not support a shorter time horizon for intraday / day traders. 
 
Q: What if we want to make money on the way down? Does SmartStops work in the opposite way?
A: We only provide exits that are below the prices so they do not serve as exits for short trades. However our sell signals may be a good entry for a short trade.  Or another idea would be to buy an ETF that goes short as we do provide SmartStops for ETFs.

Q: What kind of statistical tests have you done to determine if the SPY data is valid or just "luck"?
A: It was a 10-year backtest of an ETF we thought might be representative of results in general.  Since we do not suggest which stocks to buy it is difficult to generate performance data that is not biased by our choice of stocks to test. We posted a very comprehensive test that included all 500 stocks in the S&P 500 Index. You can view the results at http://smartstops.net/LearnMorePages/ExitStrategyComparisons.aspx     
 
Q: These studies are retrospective. Did you have any portfolio where you invested according to these criteria & do you have any results of that?
A: We have done numerous studies.  One is showing the most 10 widely held stocks, as if you owned them in beginning of 2008 and at end of 2008 using SmartStops exits that were actually published.  We have yet to upload that to our website but the results are shown below.   
 
Also Chuck points out that the results of the SPY test from the original ending date (May, 2008) that were updated from May, 2008  to the end of August, 2009 are entirely "out of sample" results that might be more meaningful than the backtesting.  You should note that we did better in the out of sample period than we did in the back test. That should be very encouraging.

You can also just look at our charts on our website.  We currently have a 2 year history. You can then analyze any portfolio you may have set up. 



Q:  What is the basis of the indicator?  I guess I wonder if it relies on more than individual stock price/volume data as well as index price/volume data.
A: SmartStops unique methodology utilizes both macro trends and individual stock behavior to determine the optimized calculations.  There are many factors including volume that go into our proprietary calculation.

Q: How does SmartStops compare to 'Chandelier Stops'?
A:  SmartStops incorporates several indicators in its sophisticated behind-the-scenes methodology.
As Chuck, the inventor of the Chandelier exit remarks,  the Chandelier exits are intended to work best in rising markets where typical exit strategies lag  too far behind prices. However in a downtrend there will be only that one exit hopefully near the top. After the top is made there is no logical place to hang the Chandelier from. 
 
 SmartStops methodology is unique. It alters the underlying analytics based on macro trends as well as individual stock behavior to produce optimization and is much more sophisticated than Chuck's Chandelier.

Q: Have you done any studies to determine the % of false exit signals that we should expect? I.e., % of instances where shortly after the exit, the trend resumed?
A:These risk alerts are sometimes false alarms, but negative consequences of false signals can be overcome by shifting investments to better performing alternatives, or by re-entering the equity when an uptrend resumes, e.g., upon a new 20 day high (yes, our re-entry alerts are in beta). The number of false signals experienced will vary based on several factors. The first SmartStops trigger following an uptrend is very reliable.  Since they are reset every day, triggered SmartStops map out abnormal weakness along the downtrend so there will always be a last alert before an upward trend resumes.

Stock prices may also bounce back after moving sharply lower and triggering a SmartStop, but this might also be an early indication of trouble.

Re-entry alerts will arrive soon!  Email support@smartstops.net if you wish to be a beta tester.





Q: How can I keep risk at a certain percentage like 1% if sometimes the SmartStop is moved lower than the original stop?
A:Chuck suggests that you might limit downward adjustments because the exits change daily and risk will be fluctuating constantly.  Although short-term fluctuations are usually very minor and would not result in a substantial increase in risk, you should occasionally check the risk of each position and rebalance the portfolio (buy or sell shares) if it looks like the risk might be getting out of line.
 
Q: For Canadian stocks not in your database, can I simulate your short-term values with a formula such as 3.5 ATRs?
A: That would be better than most exit strategies that are currently available but it would not be as accurate as SmartStops. ATR is only one variable and indeed the multiples are continually switching.   Also please note we will be rolling out support for Canadian stocks hopefully before end of 2009.

Q: Using short-term SmartStops,  I have already experienced two whipsaws so far this year. In one case I exited and rebought at a 20 day breakout just three days later.
A:  Unfortunately an occasional whipsaw will occur as nothing can guarantee you a stock will not recover quickly.  However we have fewer whipsaws than alternative stops.  If you have to buy a stock back slightly higher just consider the whipsaw as the cost of insurance that will protect your portfolio and drastically improve performance. 
 
Q: Can Smartstops handle a rapidly rising stock market? 
A: Yes.  Unlike most trailing stops, SmartStops adjusts upward very rapidly as new highs are made.

Q: How do SmartStops work with 2X and 3X leveraged ETFs?
A: The leveraged ETFs are extremely volatile so our exits will be far away so you will need to use a very small position size as Chuck explained in the webinar.
 
 
For more information, please contact us at support@smarstops.net