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.
AMZN Reentry

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.
Reentry Alert Email

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. See 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.

GE Invesment over time

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 should buy?

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 longer present.

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 of strength.

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.