A Series of Outlier Days

A Series of Outlier Days

Posted on September 23, 2020
Markets continue to be weaker, as the Nasdaq index is weaker.  As it stands today, the S&P 500 has a heavy tilt towards technology.  Naturally, if technology (Nasdaq stocks) retreat, so will the broad markets because of the heavy favoring towards tech.

An increase in volatility, which we have seen so far in the month of September, is accompanied by an increase in the amount of “outlier days” (+/-1.5%).  So far, half of the trading days in September have been outlier days.  Most of them of seen wide swings in fluctuation.   

Why are we seeing a pullback in technology?  Well, technology had gone too far, too fast.  An example of this is Apple, which is the largest component of both the Nasdaq and S&P 500 and was previously the largest component in the Dow Jones prior to its stock split.  Chart:

Source: AIQ Trading Expert Pro

Apple was up 40% in the span of 1 month.  That was a parabolic, unsustainable rise.  Now, since the start of the month, Apple is off its peak by -21%.

Excerpt from last week’s update:
Many stocks, especially tech-related, saw parabolic advances.  Investors see huge run-ups in certain stocks and want to participate.  Eventually, expectations become over-inflated and there are no more buyers left, and only an abundance of potential sellers, who have high expectations.  Oftentimes, this leads to sharp pullbacks or more.

Equal Weight S&P 500
Rather than looking at the S&P 500, which has a heavier weighting towards technology, we can examine the S&P 500 Equal Weight Index.  Unlike the S&P 500, which is market-cap weighted, the equal weight index places an equal amount of weight into each stock.  So, rather than tech-related stocks making up close to 40% of the market, tech-related stocks would only make up 15%.

Source: AIQ Trading Expert Pro

As you can see in the chart above, the Equal Weight S&P 500 has not broken above its price from June 8th.  This is because it had a lower allocation towards technology stocks, which had carried the markets up until the last few weeks.

Sector Rankings:
According to Canterbury’s Volatility-adjusted ranking system, here are the current rankings of each S&P 500 sector:
Sector Risk Adjusted Ranking
Discretionary 1
Basic Materials 2
Industrials 3
Communications 4
Technology 5
Staples 6
Healthcare 7
Financials 8
Real Estate 9
Energy 10
Utilities 11
Source: Canterbury Investment Management

Due to the recent pullback, which has been driven by technology, both the technology and communication sectors have fallen in the risk-adjusted rankings.

Bottom Line
The market is volatile and experiencing a string of outlier days (beyond +/-1.50%).  So far, this pullback has been driven by technology-related stocks since those stocks became parabolic and over-extended.

Back in March/April, the markets experienced an extreme, unprecedented degree of volatility.  Since then, the S&P 500 seemingly went straight up, with very little correction.  Now, volatility, which was is still high, is starting to pick back up again. 

The last 10 years in the market have seen nothing but a few pullbacks with “V” shaped rebounds in price.  From 2000-2010 the markets experienced two 50% declines and took until 2013 to get back to the 2000 high.  The last 10 years were not like the previous 10 years (from 2000-2010).  The next 10 years will not be like the last 10 years.  In fact, they will more than likely be the opposite.   
Canterbury Investment Management: Tom Hardin

More About Tom Hardin

As Chief Investment Officer, Tom has more than 30 years of experience in the investment management industry and has a broad breadth of knowledge. He is known as an innovator, educator and has been revolutionary in the advancements of portfolio and risk management.

Canterbury Investment Management: Tom Hardin

More About Brandon Bischof

Brandon is directly responsible for managing the Canterbury Analytics Group (CAG). To date, Canterbury Analytics Group has played an important role in advancing portfolio management from a loose art form based on subjectivity and obsolete assumptions to an adaptive process with scientific rules and methods capable of providing evidence based results and statistically relevant value add results.

Every effort was used to provide accurate data and mathematical calculations to provide, what we believe to be, accurate results. Canterbury Investment Management, LLC, and its principal owners, make no guarantee of completeness or accuracy of data or calculations as well as conclusions of any statistical data or information contained in the simulation illustrated on this page. Past results or performance is in no way a guarantee of future results.