Large Caps lead while Small Caps Struggle

Large Caps lead while Small Caps Struggle

Posted on May 28, 2019
Market State 6 (Transitional/Bullish) – The Stock market, as measured by the S&P 500, remains in Market State 6.  Market State 6 is one of the 3 Transitional Market States, and most often converts back to a Bullish Market State.  Since 1950, there have been 80 Market State 6 periods.  Of those 80 periods, 59 periods (74%) went back to a Bullish Market State, while 21 periods (26%) did not. Of those 80 periods, the longest time ever experienced in Market State 6 was 45 trading days.  The median amount of time of being in Market State 6 was 11 trading days.
Interestingly enough, if we take the Dow Jones daily data, which dates back to 1896, there are 178 Market State 6 periods, with 145 of them (81%) converting back to a Bullish Market State.
Canterbury Volatility Index– CVI 65- Volatility, as measured by the Canterbury Volatility Index (CVI) remained flat last week.  Shorter term volatility (as measured by a 10-day CVI, as opposed to a 67-day CVI) also remained flat and is currently at 10-dayCVI 65—the same level as the regular CVI.   
April 22nd’s blog, was the last time we wrote about Style Index rankings.  Canterbury ranks indexes, securities, and asset classes based on a volatility-weighted-relative-strength (VWRS), which is a risk-adjusted ranking system.  On April 22nd, we discussed how large caps (growth and value) were leading the markets, while small cap and mid cap stocks had some catching up to do.  In addition, the EAFE and emerging markets were both ahead of US stocks at that time. 
If we take a look at the Style Indexes today, based on VWRS rank, in conjunction with the EAFE and emerging markets, there have been some major changes in leadership.  Emerging Markets, which previously ranked first of the style indexes, is now in last.  Large cap growth is the highest ranked and large cap value is ranked 4th.  The chart below shows both the VWRS ranking today, as well as a month ago.  Notice the difference in CVI levels today.  After Large cap growth, volatilities become much higher.  Small caps have really struggled, both growth and value, to keep pace with the rest of the market, during both the rally to a new market high, as well as in the recent pullback.
May 24, 2019 April 22, 2019
Style VWRS Rank Style VWRS Rank
Large Cap Value 1  (CVI 68) Emerging Markets 1
EAFE 2  (CVI 63) EAFE 2
Mid Cap Growth 3  (CVI 79) Large Cap Value 3
Large Cap Growth 4  (CVI 65) Large Cap Growth 4
Mid Cap Value 5  (CVI 86) Mid Cap Growth 5
Small Cap Growth 6  (CVI 91) Mid Cap Value 6
Small Cap Value 7  (CVI 94) Small Cap Growth 7
Emerging Markets 8  (CVI 89) Small Cap Value 8
Portfolio Efficiency
As noted the last week, Canterbury strives to meet/maintain primary internal benchmarks: Portfolio State, Volatility, Benefit of Diversification.  Recently, the Portfolio Thermostat made some slight adjustments to both decrease volatility and increase the Benefit of Diversification.  As of today, the Portfolio Thermostat’s volatility (CVI) is CVI 41 (previously 50) and its Benefit of Diversification is 42% (previously 32%).  Descriptions of these metrics can be found in last week’s blog.

Bottom Line
There are some signs of weakening market strength.  It was noted last week that the Nasdaq has been relatively underperforming the S&P 500.  In fact, so far this year, the S&P has been one of the stronger performers. Small cap stocks, mid cap stocks, and emerging markets have struggled to keep pace with Large caps. As we continue to go through this Transitional Market State, Canterbury will keep an eye on Sector/Style ratings as well as their rankings and make the necessary adjustments to keep your portfolio in a Bull State.
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.