Knowing What is Important about the Short Term // May 2, 2016

Knowing What is Important about the Short Term // May 2, 2016

Posted on May 02, 2016
Weekly Update

Market State 8: Transitional/Bearish – Long-term Bearish. As discussed in the past, the Portfolio Thermostat is composed of 12 primary Market States. Readers should think of the market environments as either: “bullish” (where the normal “random” undiversifiable risk is a correction of about 10% from the highest peak value) or “Transitional” or “Bearish” (MS 6 through 12, which have no meaningful limits on the risk exposure taken). The last four double-digit percentage swings in the S&P 500’s value are characteristic of Transitional and Bearish Market States. 

Canterbury Volatility Index (CVI 67): The combination of volatility indicators used in the Portfolio Thermostat’s algorithms are reflecting a low-risk market environment.

Short-Term Overbought/Oversold Indicator: The market has registered an 87% oversold reading (Bullish/Neutral). A reading of 95 or higher, either overbought or oversold, is considered to be an “extreme” level.  

Market Comment:
Most of the global equity markets were slightly down last week. The S&P 500 and Dow were both down -1.3% for the week, while the NASDAQ declined by -2.6%. Large–cap stocks underperformed small-cap stocks.
Source: Bloomberg
The markets continue to give mixed signals, some positive and some not, which can be confusing.
However, confusion can be reduced and confidence maintained when we keep in mind that markets and financial securities are always fluctuating and that they will cycle through both bullish and bearish market environments. We may be getting mixed signals but with a systematic investment process and a well-grasped objective, it can become clear how to respond to them when you know which signals are important and which are not.
Much of what is important for long-term investing occurs in the short term, including managing portfolio fluctuations. A successful portfolio management process should not allow portfolio fluctuations to exceed 1% to 1.25%, either up or down, on a daily basis. Additionally, the portfolio’s total decline (from its highest peak value) should not exceed an 8% to 12% range. Either of these occurrences should be a signal that an adjustment needs to be made. Random market movements (systematic risk), on the other hand, should not prompt an overreaction of fear or frustration as these are unpredictable and are quite simply short-term market noise.
Furthermore, what’s not an important signal, though a common source of concern is a single-digit percentage difference between different portfolio managers, strategists, or benchmark indices. Random market noise is a large contributor of these differences and is merely the price of having liquidity in the markets. One index that was up 5% more than a particular strategy could be down 8% more than that same strategy the next month. Single-digit percentage differences are simply not a reliable or meaningful indicator of success. As long as your portfolio can maintain the guidelines outlined in the paragraph above, it is positioned for long-term success.
Bottom Line:
By knowing what is important and what is not, you can be better prepared to respond to market behavior and changes and more realistically understand their implications, giving you confidence and peace of mind. You can better evaluate value-added results and eliminate unnecessary confusion. 


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.