Market Highs, Breadth, and Style Leadership

Market Highs, Breadth, and Style Leadership

Posted on June 24, 2019

Market State 1 (Bullish)- The current Market State, as measured by the S&P 500 remains bullish and at the upper end of its trading range.  The market has reached this relative level twice before, and it would not be unexpected to see a pullback from this point.  The chart below shows the S&P 500.  The two previous times the markets have reached this level, there has been a pullback or correction.  The most recent time was in the month of May, where the market experienced a 6% pullback, before kicking back to today’s level.

Source: AIQ Trading Expert Pro

Canterbury Volatility Index (CVI)- CVI 63- Volatility, as measured by the Canterbury Volatility Index (CVI), remains relatively stable at CVI 63.  Volatility reached a recent high at CVI 70 on June 4th, near the bottom of the recent pullback.  Short-term CVI, which measures volatility over the past 10 days, has fallen from CVI 92 to CVI 50 over the same time frame (June 4-today).  Falling CVI is a bullish characteristic, and it is typically a positive sign when short-term CVI falls below longer-term CVI after a volatility spike (which was experienced in May).

Keep in mind, when we measure market volatility, as we are doing here, we are using the S&P 500.  Volatility can be measured on all liquid traded securities and indexes and will vary from security to security.  The S&P 500’s volatility is CVI 63, while the Nasdaq shows CVI 90; the Dow is CVI 65; Emerging Markets is CVI 86; and EAFE is CVI 67.  There will be times when most indexes show similar CVIs, but also times when they can differ in volatility substantially.

The stock market, measured using the S&P 500, recently hit a new high.  Coupled with this was a new high in the Advance/Decline Line (A/D line).  The A/D line measures the number of stocks advancing versus declining.  Having a new high in the stock market, but not one in the A/D Line would signal that larger weighted stocks are carrying the market, while smaller weighted ones are falling off.  In other words, the generals would be carrying the troops, and this would be a bearish signal. As we can see in the chart below, the recent high is coupled by a new high in the advance/decline line.

Source: AIQ Trading Expert Pro

An example of the A/D Line not putting in a new high while the S&P 500 is putting in a new high can be found by looking at the technology crash in 2000.  As the market continuously puts in new highs, the Advance/Decline line actually falls lower and lower (extreme negative divergence).  This is an example of a select few stocks leading the market, rather than having broad participation.  Here is a chart:

Source: AIQ Trading Expert Pro

Although the divergence is not nearly as extreme, a divergence in the market and A/D line can also be found by looking at the S&P 500 right before the financial crisis.  Here, we can see the market and A/D line put in new highs together in June 2007, but when the market puts in a new high in October, the A/D line puts in a lower high (negative divergence).

Source: AIQ Trading Expert Pro

Style Indexes
The market has been carried by Large Cap stocks for most of this year.  This explains why the S&P 500 has been ranked so highly as of late.  Canterbury uses Volatility-Weighted-Relative-Strength to rank various securities and asset classes. According to the VWRS ranking, Large Cap Growth is rated first in the style indexes. This is followed by Mid-Cap Growth and Large Cap Value.  Small Cap Growth and Value have consistently been ranked last for most of the year.  The table below shows the Style Index VWRS Rankings as well as each style’s security state (1-5 bullish; 6-8 transitional; 9-12 bearish).
Style VWRS Rank Security State
Large Cap Growth 1 1
Mid Cap Growth 2 1
Large Cap Value 3 1
Mid Cap Value 4 3
Small Cap Growth 5 9
Small Cap Value 6 9
The two charts below show Large Cap Growth (ranked 1st) versus Small Cap Value (ranked last).  As you can see, while Large Cap Growth has broken out to new highs, Small Cap Value is putting in lower highs.
Source: AIQ Trading Expert Pro

Portfolio Metrics
Since the Canterbury Portfolio Thermostat is an adaptive portfolio strategy, it does not benchmark itself against any individual equity index or equity/bond blends.  One simple reason for this is the portfolio can adapt to any market environment- bull or bear, and therefore adjust its allocations.  A fixed index or fixed portfolio allocation will always remain the same, and therefore, during bear markets, will be exposed to high levels of volatility and high asset correlations. 

To accommodate for this, Canterbury developed its own internal benchmarks.  These benchmarks are Portfolio State, Volatility (CVI), and Benefit of Diversification.  Those metrics are combined into one composite “Portfolio Efficiency Score.”  If the Efficiency Score is between 70-100, the portfolio is considered efficient.  The Canterbury Portfolio Thermostat aims to maintain an efficiency score above 70 throughout all market environments- bull or bear. 

Current Portfolio Metrics:

Portfolio State: Bullish
Volatility: CVI 40
Benefit of Diversification: 41%
Portfolio Efficiency Score: 100

Bottom Line
The Market remains at/near its high for the moment.  The Market State is bullish, but as we remember from last weeks market commentary, 85% of all new market highs occur in Market State 1.  This means that Market State 1 can be prone to pullbacks.  The S&P 500 has reached this range twice before and failed to break to break above it. 

The Advance Decline line is putting in new highs at the same time as the market.  This is a bullish indication, as it shows broad market participation in getting to a new high.

Large Cap stocks have led the US Markets, which explains the strong performance of the S&P 500.  Small cap stocks- both growth and value- are currently exhibiting more bearish characteristics. 

The Canterbury Portfolio Thermostat is an Adaptive Portfolio Strategy- designed to maintain an efficient portfolio in both bull and bear markets.  Since efficiency is a moving a target, being able to adapt the portfolio’s holdings and allocations is crucial to maintaining an efficient portfolio.  The current key internal benchmarks indicate that today the Portfolio Thermostat is set up in an efficient manner.  Should the overall market environment change, the Portfolio Thermostat will adapt its holdings to maintain efficiency.
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.