It Is All About The Extreme Low Volatility

It Is All About The Extreme Low Volatility

Posted on February 23, 2017
Weekly Update

Market State 1 represents a low risk bullish market environment. The S&P 500 had been consolidating its gains for over a month and finally broke out, to the upside on February 9th. The market has picked up about 3% over the last 8 trading days. The short term risk should be limited to random fluctuations of 4% or less.
We would expect the market to follow the typical bullish pattern of establishing a new high, followed by a pullback to consolidate gains, followed by a rebound and an advance to new highs. In other words, the market should follow a stair-step pattern of higher highs and higher lows.
Below is a chart that shows the different Market States that Canterbury has identified.

Canterbury Volatility Index (CVI 37): Volatility declined another point last week and remains at a historic low reading. As discussed in last week’s update, volatility as measured by the CVI has only been this low two other times since 1995 (over 20 years). The volatility hit a low of CVI 34 on 2/26/2007 and prior to that, the last lower volatility was at CVI 32 on 1/7/1994. We would need to go back 40 years (CVI 38 on 10/10/1977) to see volatility at the same level as today.

 Source: AIQ
Observations on extreme low volatility:
  • CVI 38 on 10/10/1977 was followed by a -9% correction over the next 5 months.
  • CVI 32 on 1/7/1994 was followed by a -7% correction over the next 3 months. The correction was followed by a trading range, for about a year. The S&P 500 then broke out of its range and was followed by about a 150% advance over the next 3 years. 
  • CVI 35 on 2/26/2007 was followed by a -6% decline in about 10 trading days. The correction was followed by+13% advance in a little less than 5 months.
Bottom Line:
Markets are driven by supply and demand. Supply and demand are driven by investors’ beliefs and predictions regarding future market volatility and pricing.
No two markets are just alike. That said the emotional state of investors tends to be similar to past emotional states, following periods of similar market environments. Therefore, based on similar market environments from the past, the probabilities would favor a relative sharp, bull market correction in the -4% to -7% range followed by a rebound and accent to new highs.

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.