Canterbury Volatility Index Matches Lowest Level Since 4/9/13

Canterbury Volatility Index Matches Lowest Level Since 4/9/13

Posted on September 09, 2013

Canterbury Portfolio Thermostat Weekly Update – 9/09/2013

Market State 2 – (last 16 trading days) - Long term Bullish; short term neutral - Market State 2 typically represents a normal correction in a long term Bull market. The normal risk in MS 2 is -4% to -8% ranges from the previous S&P 500 peak. The S&P 500 was up +1.36% last week. The total correction, from the August 8th peak, is -3.19%.

Canterbury Volatility Index (CVI) = 53 - A CVI below 75 reflects a low risk environment (Bullish). The CVI declined only 2 point last weeks (decline in volatility). Low and flat or decreasing volatility are both characteristics of a Bull market.

Let’s begin with a breakdown of last week’s events. President Obama and Russian Prime Minister Putin reconfirmed their fundamental differences regarding the ticking time bomb that could literally explode at any time, in Syria. Based on their awkward body language, it doesn’t look like the two are going to become best buddies anytime soon. Wall Street had high expectations for the jobs report released on Friday. Unfortunately, Wall Street got it wrong again, the employment numbers were once again dismal as more people gave up and left the workforce. I think it is safe to say that most of the important news was not particularly good.

Surprise! Most global stock markets were up last week and our Portfolio Thermostat’s volatility index (CVI) actually decreased and matched the lowest level seen since April 9, 2013. Rule Number 1: Portfolio management is a "SCIENCE” and not an art. Don’t make investment decisions based on news events or your gut feeling. It is human nature to be pessimistic at market bottoms and optimistic at market peaks.

Bottom Line:
The Portfolio Thermostat’s current Market State is Bullish. The Canterbury Volatility Index is at CVI - 53 and declining (Bullish). Please be aware that the extremely low CVI number can set the stage for an isolated, one day, -200 to -275 point one day decline. The probabilities of such an event are higher than normal. If we do see such a day which is not followed by a substantial increase in the CVI, then there should be no meaningful impact on the current Bullish market environment.

Portfolio Thermostat-Market States Description

Market States are categorized by analyzing three primary inputs:

  • Long-term indicators are used to identify the primary trend of the market or security.
  • The proprietary Canterbury Volatility Index (CVI) and related volatility indicators evaluate the degree of rationality in the current market environment.
  • Short-term supply and demand indicators determine which portfolio adjustments are to be made and indicate the strength of the current Market State.

The Portfolio Thermostat process identifies 12 individual Market States, which include

  • 5 Bullish (rational) Market States
  • 4 Bearish (irrational) Market States
  • 3 Transitional Market States (which tend to precede a change from Bullish to Bearish, indicating caution)

Each of the 12 Market States is assigned a percentage allocation of the 3 Groups

  • Group 1 – Countries, Sectors, and Industries
  • Group 2 – Alternatives
  • Group 3 – Styles and Indexes (Long and Inverse)

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 Portfolio Thermostat

Market States-Changing Market Environments

Canterbury Market State Long Term Risk/Volatility Market Environment
Market State 1 Bull Low Rational
Market State 2 Bull Low Rational
Market State 3 Bull Low Rational
Market State 4 Bull Low Rational
Market State 5 Bull Moderate Emotional
Market State 6 Bull High Emotional
Market State 7 Bear Moderate Emotional
Market State 8 Bear Moderate Emotional/Irrational
Market State 9 Bear Moderate Emotional
Market State 10 Bear High Irrational
Market State 11 Bear High Irrational
Market State 12 Bear High Irrational
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.