Posted on September 16, 2015

Weekly Update

September 14, 2015

Market State 12-A (14 Days) Transitional/Bearish: Canterbury’s studies show that a transition from a bull to a confirmed bear market is a process that can sometimes take months. A “bearish” transitional phase is a period following an emotional sell-off large enough to trigger the Portfolio Thermostat’s bearish indicators. The market will then typically enter a period of high volatility as daily fluctuations swing both ways (up and down) in the 300 plus Dow point ranges. Buy and hold investors are subjected to an emotional roller coaster as they endure the daily ups and downs.

Canterbury Volatility Index (CVI 112) Bearish: Volatility above CVI 90 is reflective of uncertainty between the forces of supply and demand. The resulting price instability (volatility) is a primary characteristic of a bear market.

Overbought/Oversold indicator (79% Oversold) Bullish/Neutral: As a point of reference, a higher percentage Oversold is better for the market. This indicator declined 13 points last week from 92% Oversold.

Chart of the S&P 500

Source: AIQ


Transitional and Bear Market States are volatile and tend have many erratic daily swings that exceed 2% or more, up and down. The maximum declines, from the peak value, will often exceed -10% to -12% normal correction.

Transitional market environments tend to overreact to the daily news and will often move in an opposite or counter intuitive direction than what one would expect.

A traditional “buy and hold” approach, by definition, has no active risk management. Therefore, portfolios with fixed percentage asset allocation and static diversification are subject to large declines during Transitional and Bearish Market States. Riding out these declines erodes portfolio returns by impacting the ability to compound gains from Bullish Market States.

Bottom Line:

Five points to keep in mind during Transitional and Bear Market States:

  1. All established financial markets and traded securities will experience both, bull and bear market environments.
  2. Most meaningful profits are made during bullish Market States and occur over relatively short periods of time.
  3. The Portfolio Thermostat manages risk by systematically adjusting its ETF holdings in order to maintain a bullish “portfolio” Market State during variable market environments. In other words, the goal is to keep the “Canterbury portfolio” in one of the 5 bullish Market States, at all times.
  4. The Canterbury portfolio, should be able to maintain daily fluctuations to less than 1% to 1.5% ranges and total maximum drawdown declines, from the peak, value to the 8% to 10% ranges. Any outliers from these ranges should be rare and small.
  5. The Canterbury portfolio will have extended periods of “trading range” behavior (up or down within the 10% “normal market noise ranges). The more substantial portfolio gains tend to occur during periods when most would least expect. The portfolio’s total returns should average out to meet expectations when the cycle is complete.
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.