July Has Been the Strongest Month for US Stocks in Years

July Has Been the Strongest Month for US Stocks in Years

Posted on July 22, 2013

Canterbury Portfolio Thermostat Weekly Update – 7/22/2013

Market State 1 (last 10 trading days) = Bullish/Rational - Market State 1 is the most predictable of the Portfolio Thermostat’s 12 Market States (environments). The risk, while in MS 1, is typically around -2% to -4% from the previous market peak. The latest S&P 500 peak was last Friday at 1680.

Canterbury Volatility Index (CVI) = 63:
The CVI was down 5 points for the week and down 10 points from the previous peak (73) on June 26th. The S&P 500’s volatility has been low and continues to decline, characteristic of a Bull market. Our overbought/oversold indicator is at an extreme 100% overbought. Note that a reading over 95% indicates that the U. S. stock market is short-term over-extended.

Market Update:
The S&P 500 is up about 5.3% for the month and 7.6% from the previous cycle low, which was registered on 6/24. Treasury bonds and emerging markets remain in a long-term Bear Market. The 20 year Treasury bond (TLT) ETF is down -12% from its peak, as well as the emerging markets (EEM) – down -15.6% in just 23 trading days. Recently, TLT and EEM have had a normal "reflex rally” following their sharp declines. Our studies show that "substantial” declines (reduction) in volatility over, a short term period (CVI 73 to 63 or a 14% decline in volatility), is indicative of too much investor confidence. Taking into account the current overbought condition, combined with investors’ concern over missing the current rally, we have a recipe for a normal short term correction. That being said, markets can remain overbought for a considerable period during a strong Bull market, but the probabilities favor a normal and healthy short-term correction in the US stock market.

The Muni Bond ETF (MUB) only lost 0.56% on the (expected) Detroit bankruptcy news but is currently in the worst of the Portfolio Thermostat’s 12 Security State environments (Bearish - Security State 12). The Detroit bankruptcy, if approved, can hurt confidence in Municipal bonds, in which case it may be more difficult for other states to borrow money. The playing field is changing. The concern here is that some judge might rule that the securities need not be backed by the city or state. Additionally, other cities may well consider using bond money for other purposes before paying its debt holders. The Portfolio Thermostat’s Bearish Security State rating indicates that the Muni bond yields could be too low to justify future potential risk.

Bottom Line:
The US stock market is extremely short-term overbought but market breadth shows no warnings of a developing major market top. Both the S&P 500 and our stocks-only Advance Decline Line are at new highs. A short-term correction to digest some of the substantial short-term gains is likely. It is also likely that any short-term correction in the US stock markets will result in a continuation of the Bear market in emerging markets. The Portfolio Thermostat owns the INVERSE Emerging Markets ETF (EUM) and INVERSE 20 year Treasury bond ETF (TBF).

The Canterbury Portfolio Thermostat Model:
The Portfolio Thermostat model is a dynamic rules-based process designed to stabilize portfolio volatility by adjusting to the changing nature of markets. It actively manages asset allocation and diversification to most benefit from each market environment’s unique characteristics. The Portfolio Thermostat helps maintain acceptable portfolio fluctuations and avoid "substantial declines.” Substantial declines destroy the likelihood of generating compounded returns, which is the primary objective of all rational investors. The inspiration for the Portfolio Thermostat arose from the need to manage portfolio volatility and generate compounded returns throughout all market environments. The Portfolio Thermostat is designed to identify, and then categorize, the various market environments into 12 individual Market States. Market States 1 through 6 represent different market environments during a long term Bull market. Market States 7 through 12 are different stages of a long term Bear market. The Portfolio Thermostat assigns a custom asset allocation created to benefit from the unique characteristics of each Market State environment.

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.