Portfolio Protection - Normal Risk State Alerts
Have you ever exited a stock that was showing weakness only to watch it return to
a strong upward trend? Are you hesitant to temporarily exit long term positions
to avoid seasonal or news related risk because you struggle with knowing when to
get back in?
SmartStops Risk Alerts are here to help.
Once an equity has triggered a SmartStops Elevated Risk Alert, indicating that it
is experiencing a period of abnormally high risk, SmartStops begins monitoring the
equity for signs that the risk state has returned to Normal. When a Normal Risk
Alert is triggered, an email is sent enabling timely decisions regarding reentry.
How Normal Risk State Alerts Work
Once a position in your portfolio enters the Elevated Risk State, a Normal Risk
State trigger price will begin appearing in your portfolio table. Just like the
elevated risk triggers, this normal risk trigger will change over time.
If the equity price rises enough to hit its Normal Risk Trigger, it is an indication
that the risk profile of the equity has returned to normal and an email alert will
be sent. This may be a good time buy back in or take off any protective hedge
you had put in place.
When a Normal Risk Trigger is hit, an email alert is sent and the risk state trigger
event will appear in the chart.
Once a Normal Risk State trigger is hit, no further triggers for that position will be published
until once again an Elevated Risk State trigger is hit.
Once a Normal Risk State trigger is hit, no further Normal trigger prices for that equity
will be published until once again it is in the elevated risk state.
SmartStops risk alerts in action.
The Power of Sidestepping Periods of Abnormal Downside Risk
The following chart shows the performance of a $1,000 investment made in General
Electric (GE) over the course of 2009. The red line charts the daily closing value
of your investment following a Buy & Hold approach. The green line charts the daily
closing value when sidestepping periods of abnormal risk by following the SmartStops
aggressive elevated and normal risk signals.
Notice the 3 flat periods experienced when following the SmartStop elevated risk
signals. During these periods of abnormal risk, your position can be safely in cash
or hedged and not exposed to further downside risk.
Frequently Asked Questions About Normal Risk Alerts
Q: Why do we need Normal Risk Alerts?
A: The SmartStops elevated risk alerts are intended to help you get out when the prices are falling
and the SmartStops normal risk alerts are intended to let you know when that temporary period
of abnormal price weakness has ended.
The magnitude of the price weakness to be expected following a SmartStops signal
is unknown. Usually the abnormal price weakness identified by SmartStops is only
temporary and at some point in the future an upward trend may resume. The basic
premise of the SmartStops logic is that when a stock is weak it is safest not to
own it. However when the stock is no longer displaying abnormal price weakness you
may want to buy it back in order to make the profits you intended when you selected
that stock in the first place.
Q: Does a SmartStops Normal Risk Alert mean that the particular stock identified is one I
A: No. SmartStops does not tell you what stocks are good or bad. The selection of
stocks to own is entirely up to you and you should seek professional advice and
do your homework before deciding what stocks to buy. However SmartStops provides
a valuable service in letting you know when a stock that you purchased has entered
a temporary period of abnormal price weakness and is likely to decline further.
The SmartStops normal risk alert service informs you when the previous period of unusual weakness
has ended and the stock's price action has returned to normal.
Q: Does a SmartStops Normal Risk Alert indicate that a stock is going to go up now?
A: Not necessarily. The normal risk alert means that the abnormal price weakness has
ended but there may be some “normal” price weakness from time to time. The stock
is most likely to go sideways or continue upward after a normal risk alert. If the
stock displays any abnormal price weakness a new SmartStops exit alert will be signaled.
Q: I own a stock but I do not see any normal risk alerts for it. Why is there no normal risk alert showing
for this stock?
A: Normal risk alerts are only published on positions whose previous trigger was an
elevated risk alert. Once the risk profile of the
position has returned to normal, no additional normal risk alerts will be published until
an elevated risk alert is triggered again.
Q: How effective are the SmartStops normal risk alerts?
A: They are very effective at making sure that major upward trends are never missed.
However they are not effective at generating a buy signal at the bottom or lowest
price available after an exit signal. The SmartStops normal risk alerts always occur after
a sufficient period of strength has signaled that abnormal price weakness is no
There are many entry-oriented services and many useful technical indicators that
might help you to enter closer to the bottom after a period of weakness. SmartStop
normal risk alerts are not intended to do that.
Q: I am using the conservative SmartStops signals for my exits. If a normal risk state is signaled
as the result of a previous aggressive exit does that effect my long term position?
A: If you took no action based on the previous aggressive exit signal then you don’t
need a reentry and you can ignore that signal. However the normal risk alert can be
viewed as good news because it indicates that some short term weakness that might
have caused your long term position to decline temporarily has now ended.
Many SmartStops users combine both the aggressive and conservative exit signals. They
typically sell part of their position on the first aggressive exit and then wait
for a conservative exit to sell the remainder of the position. In this case a normal risk alert
after an aggressive exit would be an indication that it is now safe to hold the full
long term position again.
Q: Are the normal risk alerts affected by the general trend of the particular stock?
A: Yes. For a stock that has been in a prolonged downtrend, the normal risk alerts will take
longer. The normal risk alerts will occur much quicker for a stock that has not displayed
as much sustained price weakness.
Q: Are the normal risk alerts the same as the 20-day breakout strategy that was used in many
of your research examples?
A: No, but they are similar in that the normal risk states are triggered only after a period
Q: I have a portfolio of ten stocks but
I have not seen any normal risk alerts. Why is that?
A: Remember that a normal risk alert will only occur after an elevated alert and that
the original one-time normal risk signal remains in effect until another SmartStops
elevated risk alert occurs. Perhaps your portfolio of stocks has been strong and there have been
no recent SmartStops elevated risk alerts, so no normal risk alerts are required. It is also possible
that the original normal risk alerts occurred before you initiated your service
so you did not see them.