Maintaining Stability in All Market Environments

Maintaining Stability in All Market Environments

Posted on October 05, 2015

Weekly Update


Market State 12-A (29 Days) Transitional/Bearish: Each Market State has its own unique characteristics. Transitional States tend to have frequent large daily swings in value. These “big moves” often appear to be random and are counter intuitive.

Canterbury Volatility Index (CVI 105) Bearish/Unstable: Canterbury’s evidence based studies show a pattern connecting a volatility reading above CVI 90 with negative current and future market environments.

Overbought/Oversold indicator (46% Oversold) Neutral: The Overbought/Oversold indicator is used to make small tactical adjustments during Transitional - Market States. A reading of 95% Oversold or higher will trigger a slight increase in our long equity holdings and a 95% or higher Overbought will call for a slight decrease in the percentage of global equity ETF holdings.

Market Comment:

Last week the S&P 500 was up 20 points, or 1.0%, ending at 1,951. The Dow also finished the week up 1.0%. Sounds a bit boring. Actually, it was anything but boring. For example, Friday had an intraday trading range of 3%, closing on its high for the day. If Friday would have closed on its low, instead of its high, the week would have been down -2% instead of up 1%. The S&P 500 began the week with a sharp decline of 3% and revisited the August 25th cycle low at 1872.

The S&P 500 is currently in a 7% plus trading range between 2000 and 1865. The daily swings are substantially higher than normal. The chart below highlights the recent trading range. It is important to note that the price fluctuations, within the designated range, are of little irrelevance. They are reflective of the typical market noise associated with Transitional Market environments.

Source: AIQ

The overall market is worse than the S&P 500 would suggest. In fact, the equal weighted S&P 500, Russell 2000 index, and several others broke below their August 24th lows. The advance decline line (number of stocks going up verses down) on the S&P 500 and NASDAQ have continued to deteriorate.

We remain in a bearish market environment. Keep in mind that bear markets are known for having substantial rallies followed by additional declines that test, and many times break, the old lows.

The Portfolio Thermostat’s primary objective is to limit portfolio declines to the 8% to 12% range from the portfolio’s highest peak to trough. Our goal is to maintain daily portfolio fluctuations below 1% with occasional outliers between 1.0 and 1.2% (up or down) during Transitional Market States

Bottom Line:

Volatile markets are counter intuitive. Transitional/Bearish - Market States begin and end quickly, when most investors would least expect. Risk management is paramount to maintaining portfolio stability.

The Portfolio Thermostat focuses on long term compounded returns. This is accomplished through systematic and timely adjustments of ETF holdings to match (and benefit from) the prevailing market environment. Some of the largest gains occur during the sharp advances that often follow Transitional and Bear Market States.

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.