Could the S&P 500 Put in a New High? // April 4, 2016

Could the S&P 500 Put in a New High? // April 4, 2016

Posted on April 04, 2016
Weekly Update

Market State 9 Confirmed Long-Term Bearish Market Environment/Short-Term Bullish: The Portfolio Thermostat identifies 12 different market environments, called Market States. Five Market States represent stable and efficient (bullish) environments; three represent transitional (or cautious) environments; and four Market States are inefficient/bearish environments. The bearish Market States are likely to have large swings in value, both up and down, over short periods.

Each Market State has three primary algorithms that determine the existing environment. One uses moving averages and other proprietary indicators to identify the “Long-Term Status.” The second algorithm is based on a combination of indicators for the purpose of analyzing changes in our Canterbury Volatility Index (CVI). Our studies show that changes in volatility can give an early indication of a future change in the Market State. The third algorithm is based on a combination of short-term supply and demand indicators.

Currently, the Long Term algorithm is Bearish; the volatility indicators are in a cautionary status; and the Short Term indicators are Bullish (though they do have higher risk than when the Portfolio Thermostat is in one of the long-term bullish Market States).
The Portfolio Thermostat has been in a Transitional or Bearish Market State for the last 154 trading days.

Canterbury Volatility Index (CVI 79 - Neutral): The market’s volatility has been declining during the most recent advance. It is normal for volatility to decline during rallies, even when these rallies occur during a bearish Market State.

Overbought/Oversold Indicator (67% Short Term Oversold) Neutral: A reading of 95 or higher, either overbought or oversold, is considered to be an “extreme” level. The current status indicates that the market is having fewer one-day outliers (referring to a one-day move of 1.5% or more). 

The S&P 500 was up 1.8% for the week. The market is now up 13.3%, from its lowest level, just 34 trading days ago. What a run! Could the S&P 500 put in a new high? Sure it could! The S&P 500 only needs to go up another 58 points to pass last year’s old high at 2073. That’s less than 3% away from its current level. In fact, the S&P 500 “could” do almost anything during one of the four bearish Market States
Bear Market States are marked by counter-intutive swings in price that most would believe “could not happen.” For example, what is the likelihood of a 13% six-week market advance that is almost a perfect reverse miror image of the previous six-week decline? See the following chart of the S&P 500’s first quarter.

Below are a few more charts showing sector performance from the end of December through 2/11/16 and another one from the bottom on 2/11/16 through 3/7/16.  

Observation: if investing in financial markets requires taking a ride like the one above, then you can count me out.  The Risk/Reward relationship here simply isn’t worth it.
Bottom Line:
All financial markets and securities will fluctuate and, as a result, they will experience both bullish and bearish market periods. This has always been true and always will be. Why? Because traded financial securities are liquid and prices are driven by supply and demand.
Successful investing is about having a process that can identify the difference between bullish and bearish environments. It is about using the liquidity to our advantage, by managing the portfolio’s holdings in a way that maintains stability through variable market environments.

Successful investing is about having a process that will maintain the portfolio in a Bullish Market State even when the markets are not in one.


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.