Bonds Aren't So Safe Anymore

Bonds Aren't So Safe Anymore

Posted on July 29, 2013

Canterbury Portfolio Thermostat Weekly Update – 7/29/2013

Market State 1 (last 15 trading days) = Bullish/Rational - 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.

Canterbury Volatility Index (CVI) = 59: The CVI was down 4 points for the week, and down 14 points from the previous peak (73) on June 26th. The S&P 500’s volatility has been low and continues to decline, characteristic of a Bull market. Remember that the DJIA can be subject to a 200 to 275 point isolated one day decline, particularly when complacency is high and volatility is low. Such a move, if it occurs, would not affect the current Bullish market environment.

Our overbought/oversold indicator hit an extreme 100% overbought Friday a week ago. The current slow motion advance is allowing the overbought position to work itself off. Last Friday's reading declined to 82% over bought. As a point of reference, over 95% indicates that the U. S. stock market is short-term over-extended.

Market Update:
The S&P 500 continues its slow ascent. It has been up 7 of the last 10 days. The advances over the last two weeks have been so small that the market was actually down midday last Thursday. We are not complaining because July was a stellar month for US stocks. The same cannot be said about bonds. For July, the S&P 500 (SPY) was up about 5.3% for the month, and 20 year Treasury bonds (TLT) down -2.08%. It appears that US stocks is the primary game in town.

Muni bonds are not as secure as they were in the past. Investors assumed that the bonds were backed by the full taxing authority of the issuer. Not so any more. Detroit refused to raise taxes to pay interest due on some of its bonds. The court will decide if Detroit can get away without paying its obligations to debt holders. If they can others may do the same. The current Portfolio Thermostat rating on the iShares Municipal bond ETF (MUN) is Security State 12 which is the most Bearish of our 12 market environments.

Bottom Line:
The US stock market is still overbought but is working it off by going sideways. We are in a strong Bull market for domestic stocks. Any pullback would be a buying opportunity unless volatility spikes higher.

The Canterbury Portfolio Thermostat Model:
The Portfolio Thermostat model is a dynamic rules-based process designed to stabilize portfolio volatility by adjusting to the changing nature of markets. It actively manages asset allocation and diversification to most benefit from each market environment’s unique characteristics. The Portfolio Thermostat helps maintain acceptable portfolio fluctuations and avoid "substantial declines.” Substantial declines destroy the likelihood of generating compounded returns, which is the primary objective of all rational investors. The inspiration for the Portfolio Thermostat arose from the need to manage portfolio volatility and generate compounded returns throughout all market environments. The Portfolio Thermostat is designed to identify, and then categorize, the various market environments into 12 individual Market States. Market States 1 through 6 represent different market environments during a long term Bull market. Market States 7 through 12 are different stages of a long term Bear market. The Portfolio Thermostat assigns a custom asset allocation created to benefit from the unique characteristics of each Market State environment.

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.