Stock Portfolio Exposure Models

Risk management rules are an essential part of every effective investment strategy. Managing the risks involved in every single stock trade or position component is of equal importance to aspects such as stock selection or trade management rules. Yet this part of the trading plan is often neglected or given secondary importance in the plans of traders.

At the center of our risk management work are our TopStock Exposure Models (see below). The models detail the current conditions for the Trend and Momentum of the Market and help guide us to the proper exposure to market risk.

  • Current Environment:The crosscurrents in the stock market remain as traders attempt to weigh solid earnings and an improving economy against rising oil prices, sovereign debt problems in Europe, and now concerns about the status of the credit rating of the United States. Currently, the market appears to be trapped in a trading range as investors await further inputs.

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Risk Management Models Summary

Our disciplined approach to managing risk is designed to keep our Portfolios “in-line” with the major trends of the market. We strive to keep portfolios mostly invested during Positive Environments and to Reduce Exposure to Market Risk during Bear Markets and severe corrections.

At TSP, we focus on our two proprietary Risk Management System Models. Both systems are robust market models incorporating the entire spectrum of market indicators. In short, our disciplined systems act as our primary guide to exposure to market risk. (For more details on each risk management system, see model summary below)

Current Readings – TSP Risk Management Systems

  • Graduated Risk Management System
    Recommended Exposure to Market Risk (Short-Term): 47.50%
  • Long-Term “Big Picture” Trend Management System
    Current Signal: Buy

Graduated Exposure System (Intermediate Term Time Frame)

The Graduated Exposure Risk Management System is our guide to determining the appropriate exposure to market risk.

The system is a “Model of Models” comprised of of 11 independent Models. Each model includes has proved successful in its own right and gives separate buy and sell signals, which effects a percentage of our exposure to the market. Our Trend models (Short-Term Trend, Intermediate Term Trend, and Trend & Breadth Confirm and Investor Sentiment models) control a total 40% of our exposure. The 3 Momentum Models control 10% each and our 4 Environment Models each controls 7.5% of the portfolio’s exposure to market risk. The model’s “Recommended Exposure to Market Risk” reading (at the bottom of the Model) acts as our longer-term guide to exposure to market risk.

TSP Risk Management Models
(Our Guide to Intermediate-Term Market Exposure)

Trend Signals (40%)


S.T. Trend Outlook Model Hold 5.00% Neutral
Int. Trend System Hold 5.00% Neutral
Trend and Breadth System Sell 0.00% Negative
Investor Sentiment Hold 5.00% Neutral
Momentum Signals (30%)
Market Diffusion Index Buy 10.00% Positive
Short-Term Momentum Hold 5.00% Neutral
Long Term Momentum Buy 10.00% Moderately Positive
Mkt Environment (30%)
Monetary Conditions Sell 0.00% Negative
Economic Model Sell 0.00% Negative
Inflation Model Sell 0.00% Negative
Valuation Model Buy 7.50% Moderately Positive
Recommended Exposure to Market Risk: 47.50%

Long-Term “Big Picture” Trend System

Designed for Long Term Investors who do not wish to make a lot of adjustments to their holdings (i.e. 1 to 2 adjustments per year), our “Big Picture” Trend System focuses on the overall Environment of the market. The goal is to identify the “Major Trend” of the market and keep portfolios on the “right side” of the market’s current cycle. The Model includes hundreds of indicators (both long term and short term) in the areas of “the tape,” monetary conditions, investor sentiment, economics, valuation, overbought/oversold conditions, and industry leadership.

When the Environment is rated as “positive” (about 32% of the time) our studies have shown that the S&P has advanced at a rate of +38.4% annually. However, when a negative environment exists (about 20% of the time) the S&P loses almost -21% per year. The Model recently switched to a Buy signal on November 12, 2008 in response to the model registering an extreme oversold condition.

“Big Picture” Trend System

Signal Analysis
Current Signal Buy
Date of Last Signal 11-12-2008
Buy Price (S&P 500 Index) 852.3
Gain/Loss +53.00%

Model Analysis
Model Score (out of 10) 8.3
Rating Neutral
Projected Annual Return +19.00%

Model History (From June 1982)
% of Trades Profitable 87%
Model Gain Per Year +16.7%
S&P 500 Per Year +10.0%

Recommended Exposure to Market

(For Long Term Accounts Seeking Minimal Trading)