Featured Video:
This weeks featured video highlights the Canterbury Investment Process. The Canterbury Portfolio Thermostat is an Adaptive Portfolio Strategy capable of navigating all market environments- Bull or Bear.
Video Link: https://www.youtube.com/watch?v=lT7JCF8815Q
Market State 6 (Transitional) The current Transitional market environment has some unique characteristics. Just 14 trading days ago, the S&P 500 was in Market State 1 and our Canterbury Volatility Index was at an extremely low CVI 39 (a volatility reading of CVI 45 or lower is rare and typically ends with a spike in volatility). The following is a quote from the October 8th Canterbury Blog:
We remain in a low risk “bullish” market environment. That said, the market is always subject to a normal pullback, or correction, of -5% to -10%. Corrections are just a part of the price we pay for owning liquid securities.
The current environment is one that has a higher than normal probability of experiencing one or two single-day outliers of 1.5% or more. The current market is also more likely, than normal, to experience a pullback that should remain within the parameters mentioned above.
Through last Friday, the S&P 500 has experienced 5 “outlier days” that exceeded a move greater than 1.5%.
Canterbury Volatility Index (CVI 85): Volatility, as measured by the Canterbury Volatility Index, increased another 15 points for the week and has more than doubled from the lowest volatility reading of CVI 39 on 10/9/18.
The Canterbury Portfolio Efficiency Score:
Canterbury Analytics developed a process that evaluates the status of all the algorithms built into the Portfolio Thermostat system. The primary purpose is to measure the overall efficiency of the portfolio. The Portfolio Efficiency Score (PES) ranges from 0 to 100 and is highlighted using the Canterbury Portfolio Thermostat in the chart below. A Portfolio Efficiency Score (PES) from 100 to 70 means that the portfolio is efficient (green zone). Portfolio corrections should be limited to 8% to 10% with rare 12% outliers. A PES of 69 to 60 (yellow zone) can occur on a short-term basis, during volatile markets, and will require further adjustments in the portfolio’s holdings. A Portfolio Efficiency Score of 59 to 0 (red zone) represents an inefficient portfolio and will have high risk.
Canterbury Portfolio’s current Efficiency Score is at 68 – The Canterbury “portfolio’s” volatility is at CVI 65. CVI 65 is within the efficient range.
Canterbury Portfolio Efficiency Chart
Comment:
Markets are driven by the law supply and demand. Supply and demand is driven by the buying and selling actions of investors. Today’s investors have access to tools and technologies that give them the ability to perform analysis, draw logical conclusions and to make informed decisions. On the other hand, investors are emotional creatures and will sometimes overreact to unexpected events, especially over the short-term.
Extended periods of extremely low volatility almost always end with outlier days and higher volatility similar to how sharp parabolic advance come as a result of over-optimism. Optimism leads to a bubble and then a bust. Why? Investors are fully invested and have high expectations. In other words, no one is left to buy and push prices higher. As prices stop going up and then begin to fall, everyone will head for the door at the same time. It is human nature. Markets do what they need to do to fool the masses.
Through the close Friday, the only two indexes that were still up on the year were the NASDAQ 100, +4.4% and the Small Cap Growth index, up +2.8%. The 20 Treasury Bond (TLT) is down -9% and 7 to 10 Year Treasury is at -8%. Large Cap Intl (EFA) is down -13% and the S&P 500 is even on the year.
The S&P 500 and NASDAQ 100 were two of the best performers though the end of September. The question is: Why do the major stock indexes have periods of outperformance? Both the S&P 500 and NASDAQ 100 were not created to be efficient portfolios. They were created to measure the changes in the market capitalization among groups of companies. In other words, the indexes are weighted in favor of the largest companies. For example, the largest company in the S&P 500 is Apple Computer which accounts for 8.3% of the index. Next is Microsoft making up 6%, Amazon 5.7% and Google is fourth at 5.1%. The total of the four companies are responsible for about 25% of the S&P 500’s performance. The other, 496 companies make up the other 75% of the return. My point is that sometimes the returns of major indexes can get skewed based on the returns of the largest companies.
Returns of the four largest S&P 500 companies through the market peak on 9/20/18:
Company Return YTD 9/20 Cap %
Apple +30.0% 8.3%
Microsoft +32.8% 6.0%
Amazon +66.6% 5.7%
Google A&C +13.3% 5.1%
Total 25.1%
S&P 500 +9.6%
Observation: Almost all of the year to date S&P 500’s returns came from 4 companies.
Bottom Line:
Investing is a lifetime process. Short-term corrections happen, and they happen when most would least expected. Corrections scare investors and those who act on their fears are likely to make bad decisions. Each market event is mutually exclusive, and each feel like it is the beginning of something bigger. Over my career, I have seen more corrections than I can count. Two things about corrections: one, they are soon forgotten as the markets settle, and second, they create opportunities for an adaptive portfolio strategy like the Portfolio Thermostat.
We will see several more twists and turns as the markets come back to equilibrium. Adjustments were made, in the portfolio’s holdings, prior to the decline. The system continues to adapt to the new environment. The day to day fluctuations will continue. More outliers, both up and down are expected. The Portfolio Thermostat owns some ETFs that benefit from declines. We have all the tools necessary manage the portfolio as we experience a series of ups and downs in the markets.
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.
This weeks featured video highlights the Canterbury Investment Process. The Canterbury Portfolio Thermostat is an Adaptive Portfolio Strategy capable of navigating all market environments- Bull or Bear.
Video Link: https://www.youtube.com/watch?v=lT7JCF8815Q
Market State 6 (Transitional) The current Transitional market environment has some unique characteristics. Just 14 trading days ago, the S&P 500 was in Market State 1 and our Canterbury Volatility Index was at an extremely low CVI 39 (a volatility reading of CVI 45 or lower is rare and typically ends with a spike in volatility). The following is a quote from the October 8th Canterbury Blog:
We remain in a low risk “bullish” market environment. That said, the market is always subject to a normal pullback, or correction, of -5% to -10%. Corrections are just a part of the price we pay for owning liquid securities.
The current environment is one that has a higher than normal probability of experiencing one or two single-day outliers of 1.5% or more. The current market is also more likely, than normal, to experience a pullback that should remain within the parameters mentioned above.
Through last Friday, the S&P 500 has experienced 5 “outlier days” that exceeded a move greater than 1.5%.
Canterbury Volatility Index (CVI 85): Volatility, as measured by the Canterbury Volatility Index, increased another 15 points for the week and has more than doubled from the lowest volatility reading of CVI 39 on 10/9/18.
The Canterbury Portfolio Efficiency Score:
Canterbury Analytics developed a process that evaluates the status of all the algorithms built into the Portfolio Thermostat system. The primary purpose is to measure the overall efficiency of the portfolio. The Portfolio Efficiency Score (PES) ranges from 0 to 100 and is highlighted using the Canterbury Portfolio Thermostat in the chart below. A Portfolio Efficiency Score (PES) from 100 to 70 means that the portfolio is efficient (green zone). Portfolio corrections should be limited to 8% to 10% with rare 12% outliers. A PES of 69 to 60 (yellow zone) can occur on a short-term basis, during volatile markets, and will require further adjustments in the portfolio’s holdings. A Portfolio Efficiency Score of 59 to 0 (red zone) represents an inefficient portfolio and will have high risk.
Canterbury Portfolio’s current Efficiency Score is at 68 – The Canterbury “portfolio’s” volatility is at CVI 65. CVI 65 is within the efficient range.
Canterbury Portfolio Efficiency Chart
Comment:
Markets are driven by the law supply and demand. Supply and demand is driven by the buying and selling actions of investors. Today’s investors have access to tools and technologies that give them the ability to perform analysis, draw logical conclusions and to make informed decisions. On the other hand, investors are emotional creatures and will sometimes overreact to unexpected events, especially over the short-term.
Extended periods of extremely low volatility almost always end with outlier days and higher volatility similar to how sharp parabolic advance come as a result of over-optimism. Optimism leads to a bubble and then a bust. Why? Investors are fully invested and have high expectations. In other words, no one is left to buy and push prices higher. As prices stop going up and then begin to fall, everyone will head for the door at the same time. It is human nature. Markets do what they need to do to fool the masses.
Through the close Friday, the only two indexes that were still up on the year were the NASDAQ 100, +4.4% and the Small Cap Growth index, up +2.8%. The 20 Treasury Bond (TLT) is down -9% and 7 to 10 Year Treasury is at -8%. Large Cap Intl (EFA) is down -13% and the S&P 500 is even on the year.
The S&P 500 and NASDAQ 100 were two of the best performers though the end of September. The question is: Why do the major stock indexes have periods of outperformance? Both the S&P 500 and NASDAQ 100 were not created to be efficient portfolios. They were created to measure the changes in the market capitalization among groups of companies. In other words, the indexes are weighted in favor of the largest companies. For example, the largest company in the S&P 500 is Apple Computer which accounts for 8.3% of the index. Next is Microsoft making up 6%, Amazon 5.7% and Google is fourth at 5.1%. The total of the four companies are responsible for about 25% of the S&P 500’s performance. The other, 496 companies make up the other 75% of the return. My point is that sometimes the returns of major indexes can get skewed based on the returns of the largest companies.
Returns of the four largest S&P 500 companies through the market peak on 9/20/18:
Company Return YTD 9/20 Cap %
Apple +30.0% 8.3%
Microsoft +32.8% 6.0%
Amazon +66.6% 5.7%
Google A&C +13.3% 5.1%
Total 25.1%
S&P 500 +9.6%
Observation: Almost all of the year to date S&P 500’s returns came from 4 companies.
Bottom Line:
Investing is a lifetime process. Short-term corrections happen, and they happen when most would least expected. Corrections scare investors and those who act on their fears are likely to make bad decisions. Each market event is mutually exclusive, and each feel like it is the beginning of something bigger. Over my career, I have seen more corrections than I can count. Two things about corrections: one, they are soon forgotten as the markets settle, and second, they create opportunities for an adaptive portfolio strategy like the Portfolio Thermostat.
We will see several more twists and turns as the markets come back to equilibrium. Adjustments were made, in the portfolio’s holdings, prior to the decline. The system continues to adapt to the new environment. The day to day fluctuations will continue. More outliers, both up and down are expected. The Portfolio Thermostat owns some ETFs that benefit from declines. We have all the tools necessary manage the portfolio as we experience a series of ups and downs in the markets.
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.
