Every Dog has Its Day

Every Dog has Its Day

Posted on February 16, 2016

Weekly Update

Market State 12 – Confirmed/Bear: The Portfolio Thermostat has been in one of the “Transitional/Bearish Market States, now confirmed “Bear” Market State, for the last 111 trading days.

The Market State is calculated on the S&P 500 index. The primary purpose of the Thermostat’s Market States is to provide a macro view of the global equities environment. A “Transitional/Bearish Market State” signifies an early stage Bear market. A “Transitional” phase marks a shift from a bullish to bearish market environment, or vice versa. This type of market environment could either switch back and start a new bull market or become a confirmed bear, which is the case today.

Although the current bear market has been confirmed by the Portfolio Thermostat, this does not by any means mean that the market will go straight down. Market rallies are common occurrences during bear markets, usually occurring when least expected and typically led by the most beaten down stocks.

Canterbury Volatility Index (CVI 100 - Bearish): Volatility, as measured by the CVI, remained at the same, high level as last week. Currently, the major equity market indices are experiencing high and increasing volatility, an indication that stocks are experiencing higher correlation (i.e. they are increasingly moving together) and that the benefits of diversification are diminishing. The current high and increasing volatility is a primary Bear market characteristic.

Overbought/Oversold Indicator (52% overbought - Short Term: Neutral): Last week’s decline reduced this indicator by 26 points, improving this indicator from Bearish/Neutral to Neutral.

Market Comment:

Friday recorded a huge reversal in oil prices and the stock market was up big as well. Does this mean that the bear market IS over or is this just another example of a dead cat bounce (short-lived recovery) within a structural bear market?

Markets have a long history of confusing the masses. It is often the case that a couple big up days, or weeks, can give beaten-down investors false hope that everything will be okay. The reality, though, is that these sharp advances rarely occur in bull markets but are common during bear markets and bubbles.

Markets are by nature counterintuitive - thus the sayings, “Bull markets will crawl a wall of worry” while “Bear markets will slide a slippery slope of hope.” In other words, fast slides tend to have big bounces and big bounces give hope.

Below are five typical characteristics of an unsustainable bear market rally:

  • A big short-term advance that would qualify as an outlier from the norm.
  • The rally is preceded by a substantial decline.
  • The bear market rally is typically followed by a decline, with a test of the previous low.
  • The weakest stocks of the previous decline tend to rebound the most during the rally.
  • The stocks with the biggest bounce will typically resume their losing ways.

There are many past examples of the sequence described above. The following are some of the most memorable headlines and commentary from CNN Money.

October 14, 2008:

  • Advance - Stocks rallied Monday afternoon, with the Dow rallying 976 points during the session, as investors bet that the worst of the credit crisis is over. The advance was the largest ever during a session on a point basis. The point gain was equal to 11.1%, the best one-day percentage gain since Sept. 1932 and the fifth-best ever.
  • Previous decline (same article) - Last week was the Dow's worst ever, ending a stunning eight-session selloff that seared 2,400 points off the blue-chip indicator. That represented a 22% decline in the Dow, something not seen since at least the '30s.

11/20/2008 (1 month later…):

  • A New Low - The Dow has lost 872 points, or 10.4%, over the last two sessions. It saw a bigger two-day point drop, in the two sessions, since October 1987, according to Dow Jones.


  • Dog Stock Rally - The Dow's biggest gainer was General Motors, which surged 33% after having been hit hard in the recent selloff.


  • Dog Hits New Low - GM tumbles 11%, the lowest level in more than 72 years.


  • (Headline: Second Best Day Ever - Dow Rises 11%) The second biggest gainer in the Dow was Citi, up 14%.


  • New Low - Citi plunges 26%-lowest in 15 years: Lowest level in more than 72 years.

The S&P 500 was up 2% last Friday. The advance was led by, what has been, two of the worst performing sectors (of nine sectors): Financials and Basic Materials. Both were up 3.99% and 2.66% respectively (both are down -17.19% and -10.66% YTD). The worse dog of all, Oil, was up 12% on Friday but remains down -21.4% YTD. The best performing Sector (Utilities) was actually down on Friday -0.35% but is up on the year. Does this sequence of events sound familiar?

CNN Money (2/12/2016)

  • The huge reversal helped lift the U.S. stock market. The Dow was up more than 300 points in the final hour of trading on Friday.
  • The terrible year for stocks has been underpinned by worries that a slowing global economy could sink the U.S. into recession.
  • ???

CNN Money (2/12/2016)

  • Crude oil prices spiked 12.3% on Friday to $29.44 a barrel. It was the biggest one-day percentage gain since February 2009.
  • The surge comes just a day after oil plummeted to $26.05 a barrel, the lowest level since May 2003.
  • ???

What can we expect from here?

The traditional definition of a bear market is a 20% decline or greater. As it stands today, over 50% of the Russell 3000 stocks have already declined 30% or more from their peaks.

Beginning in 1921, the market has experienced 30 bear markets. The median decline, of the 30 bears, has been a 31% decline from the peak. The S&P 500 peak was registered on May 20, 2015, at 2134.72. A decline to the median would take the market to the 1470 area. The more likely scenario would be a pullback to the old long-term support at around 1550 on the S&P 500.

Bottom Line:

The successful management of a bear market requires a disciplined rules-based process, the key word being “process.” Investing is a long-term proposition but that does not excuse not taking action or allowing our portfolio to suffer major hits.

The following are some key factors to remember in order to actually benefit from bear market environments:

  1. Bear markets will do whatever it takes to fool the masses. Don’t fall for a head fake.
  2. Bear markets take time to work out. Managing an ever-changing market is a process.
  3. The short term is important. The key is in knowing what is important about the short term and what is not.
  4. There is nothing that can be done about the past. Decisions are made on a real time basis and our decisions are what determines success or failure.
  5. We have all the tools and technology we need to benefit from any market environment. What is needed is the application to take advantage of their capabilities.

The Portfolio Thermostat is an evidence-based process designed to harness today’s investment technologies and diverse ETF tools in order to benefit from all market environments, including the current Market State 12 bear.

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.