Is Portfolio Managment an Art or a Science?

Is Portfolio Managment an Art or a Science?

Posted on August 19, 2013

Canterbury Portfolio Thermostat Weekly Update – 8/19/2013

Market State 2 (last 2 trading days) - Market State 2 almost always follows Market State 1 and typically represents a normal consolidation of previous short-term market gains. Market States 1 and 2 reflect a long-term Bull market and are characterized by low or declining volatility and a price chart that shows a pattern of consecutive higher highs and higher lows (known as a stair step pattern).

Canterbury Volatility Index (CVI) = 55 (Rational/Low Risk Environment) The CVI is up only 2 points from the August 14th cycle low of 53. Our U.S. stock market overbought/oversold indicator closed the previous week at 68% overbought (neutral). The indicator closed last week at 96% oversold. (96% indicates that the US stock market is extremely OVERSOLD - Bullish).

Canterbury has performed many historical studies on the U.S. stock market. We have a record of each day’s Market State and CVI (volatility) extending back to 1929. What we have discovered is that, over the last 84 years, 36% of the total trading days were in Market State 1 and 18% of the days were in Market State 2. The total percentage of days spent in Market States 1 or Market State 2 is 54% of the total trading days. The remaining 46% of the days were spent in one of the other 10 Market State environments. Since August 15, 2012 the Portfolio Thermostat has been in either Market States 1 or 2 for all but 11 trading days. It is no wonder that 2013 has been a good year for US stocks.

The DJIA is subject to a 200 to 275 point drop at anytime. Such a drop is just part of the market’s noise. The Portfolio Thermostat has been on a "one-day market tornado watch” for the last couple weeks. That meant that the existing market environment was conducive for an "isolated” day over 200 points. As you will recall, the last two Weekly Updates pointed out that the market environment was set for one of those scary -200 plus point down days. "Remember that the DJIA can be subject to a 200 to 275 point isolated one-day decline, particularly when complacency is high and volatility is low. Such a move, if it occurs, would not affect the current Bullish market environment.” Last Thursday the DJIA dropped 225 points. This drop did not affect the current Bullish market environment.

How did the Portfolio Thermostat know to issue a special warning that such an event was even more likely than normal? Because the Portfolio Thermostat is a complex scientific set of algorithms that are based on studies of about 21,000 days of market data. As a result, the Thermostat model can identify various market environments and what is most likely to occur in each environment.

Effective portfolio management is an objective science, not a subjective art. Subjectivity has no place in portfolio management simply because there is simply no way to test the degree of predictive value added if any.

Market Comment:
The Dow Jones Industrial Average experienced its worst week of the year and was down 2.23%, while the S&P 500 was down 2.10% for the week and has a total drawdown of 3.18% from its August 2nd peak. The European market continues to look better. Specifically, the large cap international Exchange Traded Fund (symbol EFA) was only down pennies on the week. None of our existing holdings gave sells last week. The U.S. Market is now oversold and the risk is low. All the market needs now is to regain some momentum to shift back to Market State 1.

Canterbury Investment Management: Tom Hardin

More About Tom Hardin

As Chief Investment Officer, Tom Hardin, Chartered Market Technician (CMT), makes all the final decisions on all investment and portfolio management decisions for Canterbury Investment Management. Tom has more than 30 years experience in the investment management industry and has broad breadth of knowledge. He is known as an innovator, educator and been revolutionary in the advancements in 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.