Here we go again.. Back to the old high

Here we go again.. Back to the old high

Posted on July 12, 2016
Weekly Update
Market State: Transitional Bull - All “Transitional” Market States have high risk regardless of being labeled as Transitional Bull or Bear.
A “Transitional” Market State occurs when a Bullish Market State begins to show Bearish characteristics or vice versa. In a Transitional Bear Market State, price action begins to shift away from a stable bullish environment and more toward a period of increasing volatility with lower highs and lower lows.

Example: Here are three, of many, indications of Bull Market State shifting to Transitional Bear:  
  • Consecutive trading days with the market up or down 1.5% or greater. Market inefficiency.
  • Price breaks below the 50 and 200 day moving averages.
  • Sharp increase in volatility. Volatility indicators turn negative

A “Transitional Bullish” Market State will begin to show “Bullish” characteristics following a period in a confirmed Bear market environment. Below are three of many indicators of Bear Market State shifting to Transitional Bull Market State:
  • Sustained period with daily fluctuations less than 1.25% up or down. One or two outliers are acceptable
  • Price breaks above the 200 and 50 day moving averages.
  • Volatility has experienced a sustained and consistent decrease.

Source: AIQ

Current Market Status:
The old high, for the S&P 500, was set at 2130.82 on May 21st 2015. Almost a year and two months later the market is back to the same level. The interesting point is that the current challenge, to get above the old 5/21/2016 high, is not the first. The S&P 500 has traded over 2100 five times and failed to break out every time.
S&P 500 HIGH

5/20/2015: 2130.82
  •  6/23/2015:   2124.19
  •  7/20/2015:   2128.28
  • 11/03/2015:  2109.79
  •   6/23/2016:  2113.32
  •   7/08/2016:  2129.90

What would it take for the market to reestablish its former bullish Market States? The following are some things to watch for:
  • Break above the old 2130.82 high by 3% or more (S&P 500 @ 2195)
  • Break out should be on higher than average volume.
  • The market should consolidate the gain and successfully retest the former resistance, now support, is the 2030 to 2040 area.
  • Volatility, as measured by the Canterbury Volatility Index, should decline to CVI 75 or lower and remain stable.
  • Price movement should slow up. Single day fluctuations should not exceed 1.25% to 1.5%. There can be a single day outlier (1.5% or greater) following very slow periods.

The Portfolio Thermostat model is set up to maintain an efficient portfolio through all market environments. Some environments have more risk than others. That is why the Thermostat adjusts its ETF holdings to move in concert with and maintain stability through unstable market environments. One unmistakable sign of an unstable market environment is having short periods when investors can’t sell fast enough followed by the feeling that they are being left behind and can’t get back in fast enough. Look at the following chart of the S&P 500 and make your own determination of the current market’s efficiency.  

Source: AIQ

Also, keep in mind the other major markets have not established new highs:
NASDAQ:                             5.3% down from the high
Russell 2000:                       9.2% down from the high
Dow Transportation Ave:     17.5% down from the high
Bottom Line:
Bull markets look like this:

Source: AIQ

I know bull markets. Bull markets are friends of mine. We are not in a bull market yet.
Today’s new high in the S&P 500 was not enough to qualify as a change in trend.
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.