Market Risk Barometer

Monitor the health (and risks) of the market environment

The SmartStops Market and Sector Risk Barometer is a systematic market risk model that measures the health of the US stock market. It constantly analyzes risk in the major averages and sectors to provide reliable and objective readings at all times.

It provides warnings!
Use it as your guide for maintaining proper portfolio risk exposures which are ever-changing to market conditions to keep you on the right side of the market at all times. This tool is the perfect resource to have in your back pocket to make sure you are  protecting yourself or taking advantage of current market conditions.

 

Market & Sector Risk Barometer

Legend:
SmartStops Risk Ratio (SRR)
The percent of equities in the group that are in the Elevated Risk State according to the SmartStop Aggressive Risk Signals on a given day.
SmartStops Risk Barometer Index (SRBI):
The current risk ratio in relation to its average over the preceding 100 market days. An SRBI above 1 means the current risk ratio is higher than its 100 day average. An SRBI below 1 means the current risk ratio is lower than its 100 day average

How it Helps with Risk

SmartStops Market & Sector Risk Barometer can help you gauge the magnitude and direction of market or sector risk.  This is a key tool for those deploying sector rotation strategies or looking to leverage the ever-growing number of ETFs in their investment strategies and portfolio.

Improve Sector Rotation Strategies

What is Sector Rotation?

A “Sector Rotation Strategy” is what some investors and advisors deploy to seek profit from changes in the business cycle.  It entails “rotating” in and out of sectors over a course of time  as the economy moves through the different phases of the business cycle. Allocations are increased in sectors expected to perform well while allocations are reduced for sectors or industries that are expected to underperform. The goal of this strategy is to construct a portfolio that will produce investment returns superior to that of the overall market.

Why use Sector Rotation as an investment strategy?

An underlying premise of sector rotation strategies is that the investment returns of stocks from companies within the same industry tend to move in similar patterns. That’s because the prices of stocks within the same industry are often affected by similar fundamental and economic factors. This is a product of the sector classification framework itself: Companies are grouped together based on their business models and operations, which ensures companies within a sector have similar economic exposure and sensitivities.  In 1999, Moskowitz and Grinblatt showed in their academic paper  that stocks within an industry are more likely to associate with each other (momentum-wise).Indeed, the technology sector then in 2000 really demonstrated that point.

VIX

Our SRR™ (i) and SRBI™ (i) allows investors, advisors and traders  to easily monitor the risk level of popular markets and sectors so that the right risk management strategies can be developed and deployed; ensuring you are not at risk of being in a sector or market that is now elevated. The Risk Barometer can also be used in conjunction with the traditional approach of VIX (i).

VIX or the Volatility Index is defined by the CBOE as “a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index options prices.” One problem with the VIX is it does not differentiate between volatility caused by upward price movement versus downward price movement. Plus daily changes in the VIX tell us what’s happening now and what has happened, not what will happen leaving very limited predictive value. A lot of press gets made about VIX but it can be a mistake to rely solely upon those fluctuations as a reliable predictor of fear that will drive market volatility. However used in conjunction with our Market Risk Barometer,  it can provide a more comprehensive picture of the risk profile of the market sectors.

(i) The VIX provides a 30-day, forward-looking measurement of expected stock market volatility by using weighted average prices of out-of-the-money calls and puts of the S&P 500 index.

How does the Risk Barometer work?

Based on the SmartStops individual equity risk states, the Market Risk Barometer provides two numbers to indicate the current risk of the market or sector:

  • SmartStops Risk Ratio (SRR): This number reflects the percent of the equities of the market or sector selected, that are currently in the elevated risk state (utilizing the aggressive smartstops) for any given day.
  • SmartStops Risk Barometer Index (SRBI): This value represents the risk ratio divided by its 100-day average to provide some insight into the direction of change in risk. An SRBI greater than one indicates that the risk ratio is above its 100-day average, and an SRBI below one indicates a risk ratio below its 100-day average.

What markets does the SRBI cover?
Available markets include the S&P 500, Dow Jones Industrial Average, CAC 40 and DAX.

When looking at overall markets, one should also keep an eye on these indices weighting of sectors. As they will change over time.  For example, during the 2000 bubble , the S&P500 had Technology reached a high of 30%; that is tech-based companies comprised 30% of the total index. Currently in 2018, Technology has reached almost 26%. The chart to the right shows the actual Sector weightings for 2018.

What sectors does the SRBI cover?

Basic materials
Consumer goods
Consumer services
Energy
Financials
Healthcare
Industrials
Technology
Telecommunications
Utilities

ETFs and a New Sector Class System for the Modern Economy

ETF’s now allow you to also gain exposure to a variety of segments of the market without having to invest large amounts.  With ETF’s you can more easily execute a sector rotation strategy and adjust your portfolio so as to maximize gains.

SmartStops support ETF symbols in the same manner as stocks. Thus risk exposure to a sector ETF is easily analyzed and maintained.

Even within the ETF industry, modernization is occurring.  Jeff Shen, co-head of investments at BlackRock recently stated:  “Outdated and backward looking sector classifications are one area where we see incredible opportunity to re-imagine what is possible for investors. BlackRock thus launched their new “Evolved Sector ETFs” which relies upon a new methodology that uses forward-looking inputs and allows companies to be classified in more than one sector as indeed companies business strategies can cross sector exposure

As new ETFs are created, SmartStops can include these symbols for risk profiling and ongoing coverage so long as they meet our qualifying criteria:

  • Trading at $1 or more
  • An average daily volume of 40,000 shares over past 20 days
  • Trading history of at least 150 days

Start Monitoring Risk by Sectors and Markets

Share This