Large Caps Lead while Global Indices Struggle

Large Caps Lead while Global Indices Struggle

Posted on October 15, 2019

Market State 2- Bullish: The stock market, as measured by the S&P 500, remains in Market State 2.  Market State 2 is one of the five bullish Market States and has been in place for 18 trading days, since September 18th.  So far, the length of this current period in Market State 2 falls slightly above average.  Since 1950, there have been 226 periods in Market State 2, each lasting an average of about 10-20 trading days.

Canterbury Volatility Index (CVI)- CVI 75: The Canterbury Volatility Index, which is also a primary component of computing Market States, is currently at CVI 75.  Over the last few months, volatility has been higher than what would be expected during a healthy bull market.  At the market’s peak in July, the Canterbury Volatility Index had a volatility reading of CVI 53.  Following 2 pullbacks, the market’s volatility now sits at CVI 75, with its high at CVI 87. 

As a general rule of thumb, volatility below CVI 75 is considered a less risky environment.  This is, however, dependent on where volatility is coming from.  In the market’s current case, volatility has gone from a low point to CVI 75, rather than starting out high and dropping.  Since a volatility spike to begin the month of August, a little over a third of the trading days (18/51) have exceed +/-1.00%.  Out of those 18 days, 3 of them have exceed -2.00%.  In other words, the market has been a little more erratic over the last 2.5 months.

Large cap US stocks continue to be the strongest area of style-specific investing.  So, while the S&P 500 is currently in Market State 2 and within reaching distance of recent highs, many other areas of style investing are struggling to maintain their footing.  There has been, and continues to be, quite the dispersion between large caps and the rest of the investment styles and global indices.

The table below shows the investment styles, along with 2 international indexes (EAFE and Emerging Markets), and their risk adjusted ranking.  Canterbury uses Volatility-Weighted-Relative-Strength (VWRS) to rank different asset classes and securities.  The VWRS ranking takes into account a security’s relative strength, or momentum, and also that securities volatility.  So, in other words, it is a relative strength per unit of volatility (risk-adjusted strength).
Investment Style VWRS Ranking
Large Cap Value (Market State 2) 1
Large Cap Growth (Market State 2) 2
EAFE (Market State 8) 3
Small Cap Value (Market State 10) 4
Mid Cap Value (Market State 10) 5
Mid Cap Growth (Market State 4) 6
Emerging Markets (Market State 7) 7
Small Cap Growth (Market State 10) 8
Source: Canterbury Portfolio Analytics Group

The table above shows that large cap value and large cap growth are currently leading the markets on a risk-adjusted basis.  In fact, of the other six style investments, all but one are in Market State 7 or worse.
Globally, stocks have not been performing well for some time.  The two charts below are of the EAFE (Europe, Australia, and Far East) and Emerging Markets.

Source: AIQ
And here are charts of US Small Cap Value and US Small Cap Growth:

Source: AIQ
Portfolio Thermostat
The Canterbury Portfolio Thermostat does not aim to compete against any individual index or blended benchmark.  We know that portfolio efficiency is a moving target, and all asset classes will go in and out of favor.  The Portfolio Thermostat is an Adaptive Portfolio Strategy designed to navigate various markets and create an efficient portfolio for today’s environment- Bull or Bear.
Canterbury benchmarks its portfolio against key “internal” metrics, in order to measure portfolio efficiency.  These metrics are Portfolio State, Portfolio Volatility, and Portfolio Benefit of Diversification.  Together, these internal benchmarks create the Portfolio Efficiency Score.

The Portfolio Thermostat is currently efficient for today’s market environment.  If you have been keeping up with the last few weekly updates, you will notice that portfolio’s volatility has been lowered, and the portfolio’s Benefit of Diversification has been raised. The reason for this is that the market is in a sort of sideways trading range right now.  Although it is in Market State 2, which is technically bullish, the market has moved sideways with a lot of volatility.  There have been quite a few outlier days.
In addition, there are many global indices and styles that have not seen the same type of market environment that the S&P 500 has.  The Portfolio Thermostat currently holds inverse positions in some of these investment styles and global indices.  This is to help stabilize the portfolio in the case that volatility continues to rise.

Bottom Line
Although the S&P 500 is showing some low risk characteristics, volatility is still high, and the market is trending sideways.  In addition, there are many different styles, like small caps and global indexes, that are much more bearish and far off of their highs. There has been a disparity between the health of small cap stocks and large cap stocks. 

Making money means nothing if you cannot keep it.  The goal of the Canterbury Portfolio Thermostat is to limit drawdowns, and keep the portfolio in a bullish state.  Currently, the Portfolio Thermostat holds some of the strongest sectors/industries, but also has inverse positions in some asset classes that have been performing poorly.  By creating a stable, bullish portfolio, we can effectively manage risk within the portfolio, regardless of the risk in the markets.
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.

Canterbury Investment Management: Tom Hardin

More About Brandon Bischof

Brandon is directly responsible for managing the Canterbury Analytics Group (CAG). To date, Canterbury Analytics Group has played an important role in advancing portfolio management from a loose art form based on subjectivity and obsolete assumptions to an adaptive process with scientific rules and methods capable of providing evidence based results and statistically relevant value add results.

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.