A Strong February Should Bring a Much Needed Respite

A Strong February Should Bring a Much Needed Respite

Posted on March 03, 2014

Canterbury Portfolio Thermostat – Weekly Update 03/03/2014

Market State 2 (33 trading days) - Long-term: Bullish; Short-term: Neutral-Bearish:

Canterbury Volatility Index is at CVI = 58. The market’s volatility declined another 3 points last week. The previous peak in volatility was at CVI 66 on 2/11. A volatility reading below CVI 75 is considered to be a low risk environment.

Overbought/Oversold indicator:
Our overbought/oversold indicator closed Friday at 95% overbought (short term Bearish). A reading over 95% is considered to be an "extreme level.”

The stocks-only Advance Decline Line hit a new high prior to the S&P 500’s high; Long-term: Bullish. This is a strong long term indicator that shows that the breadth of the market remains wide (rising tide is lifting a lot of ships).

Market Comment:
Most major markets hit new highs last week. The current advance has been led by an interesting mix of index styles which is reflective of the broad breadth mentioned earlier.

The top Index Styles, in order of our Volatility-Weighted Strength ranking, are as follows:

1) QQQ NASDAQ 100 Index 65
2) IWF Russell 1000 Growth Index 61
3) IWR Russell Midcap Index 64
4) EFA EAFE Small cap International 67
5) DVY Dow Dividend Trust 55
6) IWB Russell 1000 Index 58
7) IJS S&P Small Cap 600 Value Index 66
8) SPY S&P 500 Index 58

The Portfolio Thermostat software algorithms are composed of several thousand combinations of indicators designed to evaluate the dynamic and ever-changing supply and demand in traded securities. The Portfolio Thermostat model has identified 12 different Market States. An individual Market State, for example each occurrence of Market State 2, will have similar characteristics but no two are the same. Each will have its own unique signature.

The current Market State 2 has been in place for 33 trading days, a relatively long time considering that the S&P 500 has had a trough to peak advance of 6.45% between 2/3/14 and last Friday. The primary reason we did not see the shift back to our most Bullish Market State 1, is that the volume related indicators remained Bearish short term. The current Market State 2 has been marked by two separate one day declines over -2% on 1/25 and 2/3. Those two days occurred on very high volume. The "negative volume” (volume on down days) has been much higher than "positive volume” (volume on up days). As a result, the Portfolio Thermostat’s volatility indicators have not turned positive and thus have not allowed a shift back to Market State 1 (the most Bullish environment).

I have discussed the market’s current overbought condition, now at an extreme 95% overbought (short term Bearish, market has gone up too fast), over the last two Weekly Updates. The markets have continued to move slightly higher. The rubber band is stretching and volatility is dropping. This sets up a short term environment that can see one or two days with declines in the 1.5% to 2% ranges.

Bottom Line:
We remain in a long term Bull market. A short term correction is needed to work off the overbought condition. The equity markets are very healthy medium and long term. A short term correction is likely to bring the usual noise from the financial news. There are no signs of a meaningful change anytime soon. Our portfolios had a strong February.

Canterbury Investment Management: Tom Hardin

More About Tom Hardin

As Chief Investment Officer, Tom Hardin, Chartered Market Technician (CMT), makes all the final decisions on all investment and portfolio management decisions for Canterbury Investment Management. Tom has more than 30 years experience in the investment management industry and has broad breadth of knowledge. He is known as an innovator, educator and been revolutionary in the advancements in portfolio and risk management.

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.