Is This the Calm Before the Storm? // April 18, 2016

Is This the Calm Before the Storm? // April 18, 2016

Posted on April 18, 2016
Weekly Update

Market State 8: Transitional/Bearish – Trends for the current environment are as follows:
Long-Term - Transitional/Bearish; Volatility - Bullish; Short Term - Neutral/Bearish
Canterbury Volatility Index (CVI = 74) - A reading below CVI 75 is considered to indicate a low-risk environment. 

Canterbury’s studies show that the likelihood of a decline exceeding a normal market correction of 8% to 12% in this environment would be very rare. However, because the S&P 500 is still relatively close to its most recent high (only 2 points below it), the full magnitude of the systematic undiversifiable risk of the market could still be in that 8% to 12% correction range, even with volatility below CVI 75.  

Comment on One-Day Outliers (A recap of the previous week’s Update)
“The Portfolio Thermostat’s definition of a ‘one-day outlier’ refers to a daily move greater than 1.5%, either up or down. Periods of high or increasing volatility are more likely to have more ‘one-day outliers’ than periods of low or decreasing volatility. We see this illustrated again in what we’ve seen so far this year.
Volatility, as measured by the CVI, registered 2016’s highest level at CVI 102 on 2/27/16. Of the first 31 trading days of the year, 16 days were “outliers.” During that time, the S&P 500 had a maximum peak-to-trough decline of -10.05% (12/31/16 through 2/11/16). Over the next 36 trading days (up through last Friday), volatility declined and is now signaling a more stable market environment. Of those 36 trading days, only 2 days were outliers and the S&P 500 advanced +12.36%.

Short-Term Overbought/Oversold Indicator: The S&P 500’s current reading is 74% oversold (Neutral). A reading of 95 or higher, either overbought or oversold, is considered to be an “extreme” level. 

Market Comment:
The equity markets have been on their best behavior for the last couple months. The big questions, though, are: Is the worst truly over? Is this the calm before the storm?
Last week’s update discussed the many conflicting indicators, some bullish and some bearish, that were being registered about the environment. Nothing much has changed from last week, except that the volatility has slipped into the CVI 75 “safe zone.” The consistent decline in volatility is a very positive turn for the market’s stability. That said, it would be much better if the markets were not right on their cycle highs because, as mentioned earlier, this means the systematic risk of the market is still in the 8% to 12% range, rather than a lower level (as might have been the case had it already experienced some drawback).   
A sharp double-digit percentage rally that was preceded by an equally sharp double-digit decline is not typical of a healthy bull market. A longer period of “backing and filling” is more typical of a transition from a bearish to a transitional bullish Market State environment.
Bottom Line:
The Portfolio Thermostat’s Market States have not yet shifted to a bullish environment. Therefore, the model continues to call for a balance between the Global Equities and Alternatives to Global Equities Group of Exchange Traded Funds.


Canterbury Investment Management: Tom Hardin

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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.

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