Managing Transitional Market Environments

Managing Transitional Market Environments

Posted on September 28, 2015

Weekly Update

September 28, 2015

Market State 12-A (24 Days) Transitional/Bearish: Transitional States are marked by several large, often back to back, one day market moves. These “big moves” often appear to be random and are counter intuitive. For example, on the Thursday before last, Fed Chair Yellen announces that rates would remain unchanged. Common knowledge would say the market would go up, but instead the Dow closed down 65.21 points the day of the announcement and was down another 290.16 the following day.

Canterbury Volatility Index (CVI 102) Bearish: A volatility reading above CVI 90 is reflective of high investor emotion leading to imbalances between the forces of supply and demand. The peak volatility reading was CVI 119 on 9/9/15.

Overbought/Oversold indicator (71% Oversold) Neutral: The previous week’s reading was 94% overbought (Short Term Bearish). As a result, the S&P 500 declined 27 points while the NASDAQ took a bigger hit by losing 140 points (down 2.93%) for the week.

Market Comment:

Last Thursday successfully tested the low end of the S&P 500’s short term trading range at 1910. The short term trading range is highlighted in the purple box below.

Source: AIQ

The current “Transitional” market environment is locked in a trading range between 1900, on the downside, and 2000 at the peak (please see trading range box outlined in purple). If the market breaks above the 2000 resistance, then the next obstacle will begin in the 2040 area where massive overhead supply exists (overhead supply circled in orange). The orange circled area identifies the breakeven points for many existing holders. On the downside, the low registered on 8/25/15 at 1868 is critical support and will most likely be tested in the days ahead. If the 1868 area fails to hold, then the Portfolio Thermostat will shift to a “confirmed” Bear Market State 12.

The market climate made a dramatic shift in behavior after 8/20/15 when the Market State shifted from MS 2 (Bullish and Stable) to Transitional Market State 6 and then Bearish/Transitional Market State 12A on the following day. Please see change in the market’s trading characteristics, in the chart above, before and after 8/20 (black arrow).

Managing Transitional Market States:

By definition, “transitional” market environments will eventually transition to something else. In the meantime, investors will endure an emotional roller coaster as they overreact to daily news events causing increased volatility. This over-reaction in pricing, both up and down, will appear to be random or counter intuitive to the majority.

The Portfolio Thermostat adjusts its holdings to limit daily fluctuations during Transitional and Bearish Market States. The goal is to limit the portfolio’s volatility to the normal daily fluctuations expected during Bullish Market States 1 through 5 regardless of how volatile the daily swings are in the S&P 500. In other words, the market will eventually experience all 12 Market States ranging from stable and Bullish to volatile and Bearish. The goal of the Portfolio Thermostat is to maintain our portfolio in one of the stable and Bullish Market States 1 through 5 regardless of the overall market climate.

Bottom Line:

We have made the adjustments in our ETF holdings to reflect the current market environment. As the current “Transitional” Market State matures, please keep in mind the following points:

  • Our “portfolio maintains its own Market State based on the current holdings. The Portfolio Thermostat’s portfolio is in Market State 2
  • Our portfolio’s daily fluctuations should not exceed the normal volatility experienced during a bullish market environment.
  • The current gyrations typical of a Transitional Market State, should have little impact on our portfolio.
  • We remain focused on risk management. Successful compounding of long term returns requires limiting risk and taking advantage of the opportunities as they arise.
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.