One of my responsibilities at AAII is co-managing the Stock Superstars Report (SSR) portfolio. This newsletter combines four different investing strategies to diversify not only by industry and company size, but also by investing style. The combination has proven to be effective, with MarketWatch ranking SSR among the top newsletters for long-term performance.
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The New York Stock Exchange (NYSE) will no longer accept or honor stop and good-till-canceled (GTC) orders starting on February 26, 2016. Any existing stop or GTC orders on the NYSE’s book will be canceled. CNBC published a statement from the exchange that said the changes were primarily being implemented to protect individual investors.
A stop order is simply an instruction given to a broker to sell a stock if it reaches a certain price point. For example, an investor who owns a stock currently trading at $50 can place a stop loss order to sell the stock should the price drop to $40. Once the share price hits $40, the order goes live and can be executed. A GTC order is instructions to transact if the stock reaches a specified price in the future. GTC orders stay open until they are executed or canceled by the investor or the brokerage firm. Many brokerage firms establish time limits on GTC orders, such as 90 or 120 days; after this time period, the orders are automatically cancelled.
I do not anticipate the NYSE’s policy change to have much impact on most individual investors. The market is highly fragmented, with trading occurring on many different exchange venues. It’s not unusual for brokers to send trades to internalizers—which are essentially clearinghouses—for execution.
A spokesperson with Vanguard told me that the firm does not send stop orders directly or even indirectly to NYSE. She added, “Stops are sent as limit orders or market orders to exchanges once activated. Prior to that they 'rest' on a rack either at the wholesaler or on their own books. Market data is monitored and once a trade occurs at the stop price then orders are sent to market as market or limit orders. In other words, [the NYSE’s change] will not impact our individual investors.”
Though I have not heard back from the other large online brokers I reached out to (the fact that this is a holiday-shortened week may be among the reasons why), my suspicion is that the status quo will hold at most other firms as well. Most major online brokerage firms currently allow stop, stop limit orders and good-till-canceled orders, and there is little reason to believe this will change. Check with the brokerage firm(s) you use to be sure.
I do view these type of orders as problematic, however, and believe they should be generally be avoided. When something in the market structure goes haywire, standing stop loss orders can be executed even when the steep price drop turns out to be a momentary move. This happened a few months ago when worries about China caused some ETFs and stocks to briefly incur significant price drops soon after the start of trading. Those with stop loss orders saw their orders executed at prices that only existed for a matter of minutes.
A far better tool is a price alert. Various websites and smartphone apps offer the ability to notify you when a stock’s price has crossed a certain threshold. I prefer price alerts to stop and GTC orders because they give you the opportunity to review the situation and determine what, if any, action you may want to take. Since high-frequency traders, hedge funds and other institutional investors will always win on speed, your advantage—as an individual investor—is the ability to be patient. Waiting a few hours, days or even weeks can often result in a better price. More importantly, price alerts protect you from having trades executed that you otherwise would not want to occur, such as in the case of flash crashes and other bouts of temporary volatility.
- The Many Ways to Place a Buy or Sell Order – Stop orders are just one of several options available to you.
- A Behind-the-Scenes Look at How Trades Are Executed – In this month’s AAII Journal, John Ramsay of IEX explained how the current structure of the stock market influences how and where trades are executed.
- Rising Middle Class Provides Hope for Long-Term Peace – John Bajkowski explains why the growth of the middle class is the key for a calmer world in his latest From the President AAII Blog post.
- Do You Use Stop Orders? – Tell us why or why not on the AAII Discussion Boards.
Six members of the S&P 500 will report earnings next week. Avago Technologies (AVGO), Brown-Forman Corp. (BF.B) and PVH Corp. (PVH) will report on Wednesday. On Thursday, Dollar General Corp. (DG), Kroger Co. (KR) and Medtronic (MDT) will report.
The first economic reports of note will be the November Chicago PMI and the October pending home sales index, which will be released on Monday. Tuesday will feature the November ISM manufacturing index, the November PMI manufacturing index and October construction spending. The November ADP Employment Report, revised third-quarter productivity and the periodic Beige Book will be released on Wednesday. Thursday will feature September factory orders and the November ISM non-manufacturing index. November jobs data—including the unemployment rate and the change in nonfarm payrolls—will be released on Friday, as will November international trade data.
Fed Chair Janet Yellen will speak publicly on Wednesday and Thursday. Also making public appearances will be Chicago president Charles Evans on Tuesday; Vice Chair Stanley Fischer and Cleveland Federal president Loretta Mester on Thursday; and Philadelphia president Patrick Harker, St. Louis president James Bullard and Minneapolis president Narayana Kocherlakota on Friday.
- 16 Financial Ratios for Analyzing a Company’s Strengths and Weaknesses
- Calculating Intrinsic Value With the Dividend Growth Model
- A Strategy Millennial Investors Can Use to Beat the Market
Due to the timing of today’s holiday, this week’s Sentiment Survey results were not available when I finalized this week’s commentary. (The survey results are calculated at 12:00 a.m. each Thursday morning.) You can see the current results and access a spreadsheet with historical data on the AAII Sentiment Survey page.
Bullish: 30.8%, down 3.5 points
Neutral: 38.7%, down 4.0 points
Bearish: 30.5%, up 7.5 points
Bullish: 39.0%
Neutral: 31.0%
Bearish: 30.0%
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