Evidence Based Results and Adaptive Portfolio Strategy

Evidence Based Results and Adaptive Portfolio Strategy

Posted on June 26, 2018

Market State 2- Bullish (30 days):  The Portfolio Thermostat operating system identifies the characteristics of 12 different market environments called “Market States.” Market States 1 and 2 have the lowest risk, of the 12 environments. Market States 1 and 2 have registered most of the new market highs.
• 5 Bullish (rational) Market States
• 4 Bearish (irrational) Market States
• 3 Transitional Market States (indicating caution, which tend to precede a change from Bullish to Bearish.)

CVI 64: CVI remains low following yesterday’s market movement. The current volatility on the S&P 500 is within the optimal range between about CVI 75 and CVI 45.  CVI 64 indicates a low risk, rational environment.  Canterbury monitors CVI on a daily basis.

As of last week, we saw the market was short-term overbought and that a small correction would actually be healthy.  Following yesterday’s movement, the market is now short-term oversold and we may expect a rally.

Canterbury Portfolio Analytics Group has performed extensive studies on the Canterbury Volatility Index (CVI) and its relation to outlier days.  From these studies, it was discovered that outlier days can happen when CVI gets to extreme low levels.  We can illustrate this using the 10-day CVI.  For reference, as of Friday, 10-day CVI was at 31 and jumped to 55 on Monday.

In a study by Canterbury Portfolio Analytics Group, using S&P 500 daily data from 1970 to now (over 12,000 days), it was found that there were 235 total periods where 10-day CVI dropped below 45 and went back above 10-day CVI 55. When these periods occurred, it was found that 91% of these periods ended on a day greater than 1% (up or down), with 70% of them being greater than 1.25% (up or down).  This shows that when 10-day CVI gets to a low level, like it has over the past few weeks, an outlier day is likely to occur… similar to the effect of squeezing down a spring. 

Additionally, it was found that the direction of the movement, whether the move was up or down 1%, was unpredictable as it was roughly a 50/50 split between upward spikes and downward spikes. 

Advance Decline Line
As an additional confirmation, Canterbury likes to analyze the S&P 500 stocks Advance/Decline Line (A/D Line).  This indicator measures market breadth, showing the number of advancing stocks versus declining stocks.  From today’s A/D Line, we can see a Positive Divergence.  This means that while the market has not put in a new price high, the A/D Line continues putting in higher highs, showing a general positive movement among S&P stocks. This can be seen in the chart below.

Source: AIQ

Bottom Line
The market remains in a Bullish Market State Environment.  It is important to not get caught up in minor market fluctuations.  An outlier day is to be expected when volatility (in this case, the 10-day CVI) gets to extreme low levels.  The Market shows many bullish signs, as illustrated in the Advance/Decline Line and Growth’s leadership over Value, plus the market is now oversold. 

Canterbury continues to monitor, on daily basis, for any significant changes to the market environment.  We know markets can go through variable environments, and thus require an adaptive strategy.  At Canterbury, we only focus on evidence-based results.  It is important to not get caught up in the news and world events that are often falsely related to markets.  Statistically relevant studies are important tools in an adaptive portfolio strategy, like the Canterbury Portfolio Thermostat.
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.