A New Way to Tell When to Fold 'Em
TOO BAD THIS SERVICE WASN’T AVAILABLE a few weeks ago. A new company called SmartStops (http://www.smartstops.net) will go live Monday (July 7) with an advisory that will tell you when to bail out of a particular stock.
There’s no shortage of brokerage analysts, newsletter writers, bloggers and in-laws who are happy to tell you what stocks to buy. But there’s less help when it comes to advice on closing a position. Taking a shot at filling this void is the newly launched SmartStops. The Electronic Investor was invited into the beta test group in mid-June, and we think it’s a site worth joining—or at least bookmarking if you only want to access its free services.
The founders of SmartStops believe current solutions are either too simplistic—setting a stop loss or trailing stop based on a percentage or absolute dollar drop in a stock price—or too complex—requiring investors to set and adjust a lot of complex technical variables.
“Investors assume a lot of risk without having the skills to put together a good strategy,” says SmartStops CEO Brent Collins. “Most people take the path of least resistance, which is to be a bit oblivious to time-sensitive decisions. They’re not prepared to react, and are thus exposed to risk, unable to lock in profits, and greater potential losses.”
HIS COMPANY’S WEBSITE CURRENTLY OFFERS exit strategies for stocks only; it doesn’t cover options or futures, but is looking at those possibilities. Its algorithms categorize the overall market into up, down, or sideways movements, then calculate exit points for individual stocks based on an overall market trend.
When the market is going up, the calculation is designed to give the investor more room to generate added profits. When the market heads down, the exits are moved closer to the current stock price so as to preserve capital. The proprietary calculations are intended to avoid reacting to “market noise” or random events. That way, said Collins, the system avoids whipsaw changes or premature exit triggers of trailing stops. The company is reluctant to go into too much detail about the system beyond the fact that many of its indicators are based on technical analysis.
During the beta, we had a list of 10 stocks, including Google (ticker: GOOG), Intel (INTC) and IBM (IBM), we were following on SmartStops. Eight of them hit short-term exit points during the week of June 23, mostly late in the week when the market fell sharply. We got a sell signal at $21.75 on Intel, for instance, which subsequently dropped to $21.57. SmartStops members receive an e-mail alert when an exit point is reached, and can also check the Website during the trading day to see new recommendations.
Each covered stock has both short-term and long-term SmartStops. You should use the short-term stops for stocks you’re considering holding for less than six months. The long-term stops, which provide more breathing room, are intended to be used for stocks you plan to hold longer than six months. Stops are published for U.S. stocks with volumes that average over 40,000 shares per day, and are priced above $5 per share.
SmartStops executives showed us a comparison of three investing strategies for the S&P Depository Receipts (SPY) over a 10-year period. The short-term SmartStops strategy ended up with the highest profit, and unlike buy-and-hold, had the investor in the market just 57% of the time. The long-term exit strategy also out-performed a buy-and-hold approach, and was in the market 84% of the 10-year period. Collins says, “We’re showing that we can improve people’s returns with less risk and less exposure to the market.”
There are two ways to use the site. For no charge, you can check out SmartStops on individual stocks, though you’ll have to type in the ticker symbol each time. For $9.95 per month, you can track a portfolio of up to 10 stocks, which will allow you to save all the ticker symbols and receive e-mail triggers when a stop is reached. Subscribers also receive an end-of-day report; there are plans to create a mobile applet over the summer. You can add sets of 10 more symbols for an another $9.95 per set.
Down the road, SmartStops plans to partner with online brokers and financial data providers, and also will develop a dashboard application to provide still more help with subscribers’ sell decisions.
SmartStops’ “exit guru” Chuck LeBeau says, “People will try the free service for a bit; look at a stock and history, and ask themselves, ‘Would this have helped me?’ One good trade quickly covers the cost of the service, and then some.”
TOOL UPDATE: Nasdaq has updated its Market Replay feature, which we reviewed March 24, 2008 ("A Timely Boon for Small Investors") to add the ability to offer intra-day replays and the inclusion of trade data, in addition to quote data, in the results. Market Replay 2.0 lets you see price changes in a Nasdaq, NYSE or Amex-listed stock in all its gory detail over a certain time. It, along with other Nasdaq trading tools, is available at the Nasdaq Data Store (data.nasdaq.com).
The tool is intended to answer a trader’s questions after an execution. Like “What the heck happened?” Market Replay lets brokers and traders reconstruct events around a trade to help validate the price received. The exchange is hoping that online brokers will use Market Replay to send their clients a Nasdaq-validated screen shot, taken when a trade was executed, to confirm the quality of the execution. This could also reduce client inquiries.
You’ll need the most recent version of Adobe Flash Player to use the tool. It displays a tick-by-tick graph over a particular time period, showing each execution of an individual stock. Market Replay 2.0 also shows order size.
One enhancement allows same-day replays of the market. The initial release of the tool provided historical data that was accessible to users beginning with the previous trading day and extending backward in time. Data are delayed at least 15 minutes for intra-day replays.
“With an enhanced Nasdaq Market Replay, all investors can now instantly discover in even greater detail exactly how a trade was executed,” says Nasdaq OMX Executive Vice President Adena Friedman.
The system is available to professionals for $50 a month via their data vendor. Individuals can access it for a lot less or for free via Internet portals.