Canterbury Portfolio Thermostat Revisited

Canterbury Portfolio Thermostat Revisited

Posted on February 10, 2015


Canterbury Portfolio Thermostat Weekly Update 2/09/2015

Market State 5 (2 days) Long Term (Bullish) Short Term (Neutral): Market States 1 and 5 have the same characteristics with one exception. The difference is in the level of volatility. Market State 5 exceeds the defined parameters to qualify for the lowest risk environment. In other words, Market State 5 has a higher probability of experiencing a correction that could match the outside limits of a typical long term Bull market (-8% to -12%).


Canterbury Volatility Index (CVI): The current reading is CVI 76. The high was CVI 77 for the week. Volatility, as measured by the CVI, has increased 90% from the most recent cycle low of CVI 40 on 9/19/14. The Portfolio Thermostat’s volatility indicators will normally shift to caution when the CVI increases by 20% or more.


Market State 5 (MS 5) is rare and tends not to stay in place for very long. According to a Canterbury study covering 20,516 trading days, beginning on 7/19/1929, found only 2.33% of the days as being in MS 5. To put this into better perspective, MS 1 comprised 35.89% of the trading days and MS 2 comprised 17.65% of the days.


Understanding Market States:

The purpose of the Portfolio Thermostat’s Market States is to provide a big picture “macro view” of the current environment for global equities. In other words, are equities currently displaying bullish characteristics (paddling with the prevailing current) or is the representative of “the market” (S&P 500 Index) in one of the “bearish” Market States and telling us to exit our global equity ETFs and replace them with alternatives to global equities?


The Portfolio Thermostat is composed of 12 different Market States. Each Market State (or in the case of an individual traded security, a “Security State”) will have its own unique traits and tendencies.  Of the 12 Market States, 5 are Bullish, 4 are Bearish and 3 are Transitional. The macro Market State is determined and established by defined and quantifiable metrics placed on the S&P 500. The S&P 500 is considered to be the bellwether representative of the global equity markets.


The Canterbury Portfolio Thermostat -

Primary Goals and Objectives:

  1. The “portfolio” should always be in a Bullish - Market State MS 1 through 5 regardless of the macro market environment.
  2. The portfolio’s volatility, as measured by the CVI, should not exceed CVI 75 when the S&P 500 is in a Bull Market State. The portfolio’s volatility should not exceed CVI 90 when the S&P 500 is in a Bearish Market State (MS 9-12).
  3. The portfolio’s peak to trough declines (maximum short term “drawdowns”) should not exceed -8% when the S&P 500 is in a Bull Market State and not exceed -12% when S&P 500 is in a bearish Market State
  4. The portfolio should benefit from long-term compounded returns by limiting declines to normal fluctuations or actually profiting from bear market environments.
  5. Investors should no longer to be concerned or worry about flaws in their portfolio management process.

How can The Canterbury Portfolio Thermostat Accomplish its Goals and Objectives?

  • Only hold ETFs with a Buy or Hold “Security State” rating
  • Immediately liquidate any ETF holding with a Sell Security State rating
  • Purchase the highest rated ETF with a Buy Security State rating with cash proceeds from ETF that was sold
  • Confirm that the Thermostat’s portfolio ETF holdings match the allocations designed to fit each Market State


February 6, 2015
Canterbury Portfolio Thermostat
Market State 1 (last 67 trading days): Long Term (Bullish) Short Term (Bullish)
Canterbury Volatility Index: CVI 56 (bottom part of chart): Risk level is low


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Canterbury Portfolio Thermostat

The Canterbury Portfolio Thermostat model is an all-inclusive comprehensive portfolio strategy. The model utilizes a proprietary rules-based process designed to stabilize and maintain low and consistent portfolio volatility. All aspects of a portfolio’s asset allocation, diversification and security selection are tactically managed as one coordinated systematized process. The model employs six separate, but connected, algorithms for the primary purposes of maintaining acceptable portfolio fluctuations and avoiding "substantial declines.” Substantial declines destroy the likelihood of generating compounded returns, which is the main objective of all “conservative” long term investors.


Bottom Line

The macro Market State is at the top of every Weekly Update:

  • The macro Market State tells the story about what kind of market behavior can be expected in the current environment.
  • The macro Market State establishes the percentage allocations between the two Major Groups; Global Equities and Alternatives to Global Equities.
  • The macro Market State sets the diversification requirements, for the Canterbury portfolio to match the existing environment.

The actual Canterbury portfolio will have its own Market State and its own CVI. A primary objective of the Portfolio Thermostat is to maintain a bullish market State and a low or declining CVI at all times. The Portfolio Thermostat’s algorithms make adjustments in the portfolio’s ETF holdings allowing it to move in concert with the ever-changing markets.

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.