Bull Markets and Low Volatility

Bull Markets and Low Volatility

Posted on July 31, 2017
Market Update 7/31/2017
 
Macro - Market State (Based on the S&P 500)
Market State 1: Bullish/Rational (13 trading days): The S&P 500 is moving at a turtle’s pace. Last week, the S&P 500 set three all-time new highs over the five day period. The interesting part is that the market finished flat for the week. The largest advance, for the week was only six points on the S&P 500 (about 0.2%). Now that is a sideways market.

Canterbury Volatility Index (CVI 34): Same old story. Volatility declined another two points last week. Volatility is so low that the S&P 500 barely has a pulse. The previous low was CVI 31 registered on May 16, 2017. Prior to the recent low volatility, one would need to go back to January 6, 1994 to see volatility as low as it is today (CVI 32).
 
Chart 1: The S&P 500 has had a number of new all-time highs since March but the total gain is limited.

Source: AIQ

What can We Expect During an Extremely Low Volatile Market?
Low volatility is a primary characteristic of a bullish market environment. When a portfolio, or market index, is experiencing low volatility then we know that the securities within the portfolio are working together to provide a higher risk adjusted return. Risk tends to be limited during bullish Market States. A normal, “bull market” correction should be about -10% from the highest peak in value. On the other hand, the upside potential is pretty much unlimited. Limiting portfolio declines is the primary requirement to compounding returns over time.
 
There is no such thing as a bearish market environment with low volatility. Bearish market environments are marked by erratic price swings. Most price swings are downward, sharp, and deep. Bearish environments tend to have a low percentage benefit of diversification, meaning that the existing diversification among the portfolio’s securities is not effectively reducing risk. On the other hand, most bear markets will experience large single day advances that can last from several days to a few weeks or months.
 
Comment:
Not much has changed since last week. The NASDAQ 100 continues to be slightly stronger then the S&P 500. Globally speaking, international developed and emerging markets have continued their strength versus the United States. Part of the international strength is due to the weak US Dollar. Per the Portfolio Thermostat’s volatility weighted strength ranking, health care and technology are the strongest, risk adjusted, sectors while the energy sector and consumer staples sectors remain the weakest.
 
Bottom Line:
The low volatility will most likely relieve itself by experiencing one or two outlier trading days up or down, in the 1.5% plus range. Such days have little impact on the overall market environment.

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.


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.