A Trend is Continuing and it's Not One Most Would Think

A Trend is Continuing and it's Not One Most Would Think

Posted on September 23, 2013

Canterbury Portfolio Thermostat Weekly Update – 9/23/2013

Market State 1 – (last 9 trading days) - Long term Bullish; short term Bullish - Market State 1 is the most predictable of the Portfolio Thermostat’s 12 Market States (environments). The risk, while in MS 1, is typically around -2% to -4% from the most recent market peak. The S&P 500 was up +1.30% last week. The total advance from the previous trough (bottom) on 8/27/13 is up +4.65%.

  • Canterbury Volatility Index (CVI) = 53. The "market’s” CVI is based on the S&P 500’s volatility. The CVI increased 2 points last week. ·
  • Canterbury Portfolio Thermostat Model Portfolio’s CVI = 47.The Portfolio Thermostat Model Portfolio closed at the same CVI 47 reading as last week (no change).

A CVI below 75 reflects a low risk environment (Bullish). Low and flat or decreasing volatility are characteristics of a Bull market.

Our overbought/oversold indicator reading is currently 97% overbought. This means that a lot of buying power has been used up during the latest advance. The market needs to consolidate some of its gains to get the reading back to the neutral area.

It probably isn’t fair to continue picking on Wall Street, but it is so easy. Over the last two or three weeks, Wall Street and the financial press have focused on three major news events that, in their opinion, would have big impacts on the markets. Their predicted outcome for each event was overwhelming similar. The same was true regarding their predictions on how each event could affect he markets. The three events included: The crisis in Libya, the August jobs report and how much would the Fed taper?

Crisis in Syria:·

  • The crisis in Syria has been a tragic human story but contrary to expert predictions the crisis has had little effect on the US stock market.

August jobs report:·

  • Here is a quote from the Canterbury Portfolio Thermostat - Weekly Update 9/09/13: Wall Street got it wrong again, the employment numbers were once again dismal as more people gave up and left the workforce. As a reminder, the vast majority of analysts thought the employment numbers would be up and as a result the market would be up. In spite of the "surprising” bad news, the S&P 500 finished pretty much even for the day, rallying back after an early decline following the news. Ironically the market actually went up the following 3 days in a row.

How much will the Fed taper?·

  • Again, almost all "experts” thought Fed Chairman Ben Bernanke would reduce (taper) its $85 billion per month purchase of bonds. Last Wednesday, Kenney Polcari /CNBC Contributor did a good job summing up the "experts” prediction. "Although so many of the Street's analysts, economists and strategists prepped us, ad nauseam, for months over the size and rate of tapering, THEY ALL GOT IT WRONG!” The Fed did not taper and S&P 500 went up 1.22% on the good news. Ironically the market proceeded to go down Thursday and Friday giving back most of Wednesday’s gain.

As the famous Yogi Berra once said: "Prediction is very difficult, especially about the future.” I am not questioning the intelligence or knowledge of Wall Street experts. That said I do question the overconfidence in their own ability to predict future events and the resulting future impact on markets and securities. The idea that Wall Street continues to base investment management strategy primarily on subjective predictions of what their experts "think” is going to happen is ludicrous.

Fact: The markets are driven by one thing and one thing only, the Law of Supply and Demand. Any viable portfolio management process must be based on quantifiable rules. These rules should measure various aspects of how supply and demand is currently affecting markets, securities and the portfolio as a whole.

A portfolio management "model” should be composed of programmed algorithms. These algorithms can be stress tested through variable market environments to determine predictive value. Only securities that meet the rules for having Bull market characteristics should be owned. For example, a portfolio should hold securities with low or decreasing volatility that are experiencing accumulation (demand) for their shares.

An effective portfolio management model must have the ability to make adjustments based on the changing market environments. Maintaining "true diversification” requires a dynamic process designed to only hold securities with low correlation in order to maintain consistency and manage risk through all market environments – Bull or Bear. In other words, portfolio management is a science not an art.

The Portfolio Thermostat’s volatility indicators reflect a normal and rational US stock market environment since August 10, 2012, to be exact. The Portfolio Thermostat has remained in Bullish Market States (Bullish market environments) for all but 11 trading days over the last year. During that time the world’s financial news has given investors cause for continuous worry.

Market Comment:
Expect more of the same market environment we have had all year. The short term overbought condition has not improved and will most likely cause a sideways and choppy market. A small short term pullback is likely. Any change in the current market environment should be preceded by a spike in volatility. An increase in volatility would cause a shift to one of the Portfolio Thermostat’s transitional or Bearish Market States. Such an event is not likely.

The Portfolio Thermostat model has dictated a higher than normal exposure in US Stocks. It has not allowed any exposure to the bond ETF’s, other than inverse bonds (inverse bond ETFs goes up when the underlying bond index goes down), There has been only a small exposure to ETFs that are alternative to the global stock market.

Canterbury Portfolio Thermostat:
The Portfolio Thermostat is made up of a series of rules based software algorithms that are based on probabilities of what is most likely to occur during each of 12 market environments called Market States. The goal of the Portfolio Thermostat model is manage portfolio holdings to match and benefit throughout all market environments – Bull or Bear.

The portfolio’s assets are allocated to each of the 3 Groups and then used to purchase the strongest ETFs within each Group. Every ETF in the Portfolio Thermostat universe is assigned a "Security State” ranking that represents a Buy, Sell, or Hold rating. New purchases are determined by choosing the ETF with the highest Security State ranking. An ETF is sold when its Security State ranking changes to a Sell or when a shift in the Market State requires an adjustment in the percentage allocation of the 3 Groups. The number of holdings and the size of each holding are determined by the existing Market State and the subsequent Group percentage allocation.

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.