Ask Mike:
Why did you lower the stop on GOOG?

Question:

Hello Mike,

I understand the strategy for lowering a Stop Loss in a long position under certain conditions, such as a week when the stock will trade ex-dividend.

But I notice that sometimes a Stop Loss will be lowered in Stock Ratings from the previous week, even though the stock remains Long. For example, GOOG's stop was lowered from $427 last week to $416.53 this week, even though it pays no dividends and is still rated as a Strong Buy.

GOOG closed at $471.80 on Friday. What's the rationale for lowering the previous week's stop in this scenario?

Patrick M

Mike's Response:

Hi Pat,

We really should explain this better on the website. I'll make sure we add your question and this answer to our FAQ's.

We only lower a stop loss for 1 of 3 reasons:

1. The stock will go ex-div in the upcoming week and we want to make sure we don't get stopped out, just because of a dividend declaration.
2. We had previously moved a stock's stop to an Aggressive Stop Loss setting to protect profits, due to uncertain market conditions. Then, at a later date when the concern abates, or we have sold the stock, we move the stop back down to a normal stop loss setting.
3. Periodically, we will do a complete database recalculation (more on this, below).

Periodically, we re-set the database by having the software back up 3 years and do a complete recalculation of every position. This means the stop loss settings are completely re-set. These recalculation events often cause the stop loss to vary slightly from a week-to-week calculation.

When the software does a complete recalculation, all the stops are computer generated, completely ignoring any actual trades or manually adjusted stops along the way.

The pure computer generated calculations will, therefore, often be slightly different from our week-to-week stops, since the week-to-week calculations are predicated on any manual changes to stops and don't have the 3-year scope of volatility.

In the case of GOOG, this introduced a 2% variation in the stop loss setting.

This re-set process is valuable since we have the software take a much larger time-line view of each stock, which often helps determine more accurate trends and changes in trends and the process ignores human intervention.

These re-calculation events impact each Sector and Industry, as well. As the Sector and Industry trends get re-calculated, they have an impact on the stop loss calculation for each stock.

So, at the end, as far as the computer is concerned, it never violated the rule of not lowering a stop loss. It also ignored any arbitrary and artificial upward setting of a stop loss when we manually manipulated the stops for profit protection reasons.

In the week-to-week calculation of stops, manual adjustments come into play in a re-calculation, only computer generated adjustments come into play.

Of course, when this recalculation occurs, it can also raise a stock's stop loss from where it 'normally' would have been with the week-to-week only calculation.

We do a total recalculation about once per quarter.

Best regards,

Mike