Market Breadth and Nasdaq Relative Strength Remain Strong

Market Breadth and Nasdaq Relative Strength Remain Strong

Posted on April 29, 2019
Market State 1 (Bullish) – The S&P remains in Market State 1, a bullish market environment.  As of Friday, the Market has put in a new all-time high.  Most new highs, like the most recent one, occur in Market State 1 (85%).  Market State 1 has long-term positive, low/decreasing volatility (CVI), and short-term positive indicators.
Canterbury Volatility Index (67 Day) - CVI 60 – Volatility continues to steadily decline.  The Canterbury Volatility Index (CVI) is currently at CVI 60.  Our shortest-term volatility readings (CVI 10-day), are at extreme low levels.  When this occurs, markets may be prone to “spikes” in volatility.  A CVI “spike” is a single-day outlier of +/-1.50% that often relieves built up pressure in volatility.  They are similar to the squeezing down of a spring.  As volatility compresses, it may need to release some pressure.
With the S&P 500 putting in a new high, the S&P 500’s advance/decline line also put in a new high.  The A/D Line measures market breadth.  If the market were to be putting in new highs while the A/D Line was not, that would signal that breadth is weak, meaning the larger stocks (“generals”) are leading the rally while the troops fall off.  Today’s environment is showing broad participation in rally, meaning the troops are leading the generals.  In fact, the A/D line has been putting in new highs since early February, which was an early bullish sign (positive divergence) and has been discussed in past updates. 

We have discussed the concept of relative strength before. Relative strength indicates how well a stock/index is performing in comparison to another stock/index. In this case, we are comparing the NASDAQ’s relative strength versus the S&P 500. Relative strength indicators currently show that the NASDAQ is has been outperforming S&P 500 since February, as shown in the chart below:

Source: AIQ
From the chart above, we can see that the Nasdaq’s relative strength is increasing, meaning the Nasdaq is showing strength over the S&P 500.  This is usually a positive indication for markets as it shows investors are willing to take on more “risk.”  Conversely, during the downturn that started with the previous peak in October 2018, we saw the Nasdaq’s relative strength falling, meaning it was underperforming on a relative basis. 

Canterbury uses a similar relative strength indicator called volatility-weighted-relative-strength.  This indicator utilizes volatility (CVI) in its calculation to put each asset class on an even playing field.  It makes a relative strength indicator risk-adjusted. According to the VWRS, the Nasdaq has been outperforming the S&P 500 on a risk-adjusted basis since March 11th. 

Bottom Line
The US Stock market, as measured by the S&P 500 is at a new high while in a bullish Market State.  Small and mid cap stocks have yet to put in a new high but are mostly increasing with Large caps.  Market breadth remains strong showing the troops are leading the generals upward.  In addition, the Nasdaq is outperforming the S&P 500 on a both an absolute and risk-adjusted basis, which is a good sign.

Although the market is at a new high, the vast majority of the days will not be new highs over an investment lifetime.  In fact, as we saw in December, markets can experience very fast drawdowns, some of which will be much more substantial and have a much, much longer recovery time.  That is why we must have an adaptive investment portfolio process.  In order to have your portfolio put in new highs more consistently, we must limit our drawdowns to normal corrections.  We must adapt or portfolio to every market environment-Bull or Bear.
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.