Market State Shifts from Transitional to Bullish

Market State Shifts from Transitional to Bullish

Posted on August 01, 2016

Weekly Update
Market State 1: Bullish. The Market States are calculated on the S&P 500. The Portfolio Thermostat’s Market States have been in various Transitional or Bearish Market States for nearly a year now but has shifted into a confirmed Bullish MS over the past week.

It is important to understand that Bull markets are more predictive of the expected risk than the amount of expected return. In other words, Canterbury studies have produced statistically relevant evidence showing that the Portfolio Thermostat’s five Bullish Market States are typically limited to normal “bull market corrections” in the -10% range, from the highest market peak value. The timing and amount of the market’s advances, however, are less predictable. That being said, most meaningful gains occur when securities are showing the same supply and demand characteristics that are required for the S&P 500 to be in a Bullish Market State.

The Canterbury Volatility Index (CVI) is at CVI 65, well into the stable safe zone. Volatility at or below CVI 75 is typically associated with a low-risk environment.

Canterbury Portfolio Thermostat: Bullish Portfolio State 1: Our portfolio will begin making some adjustments in its ETF holdings to reflect the upgrade in Market State.  The portfolio’s volatility is currently at CVI 21, which is at the lower end of optimal volatility. The adjustments will increase our portfolio’s volatility in order to reflect a more stable environment.
Market Comment:
The most recent S&P 500 advance that led to a break above the old May 2016 high, at 2130, created an overbought condition. The market needed to maintain low or decreasing volatility and an orderly consolidation of the previous gains in order to be upgraded from a Transitional Bull to a confirmed Bullish Market State.
It is now only 37% overbought, short-term neutral/bullish (95% to 100% overbought would be outright bearish), having been able to hold on to its gains and work off its “overbought” condition.

As you can see in the chart below, the overbought percentage has been on a declining trend – a bullish sign. On the Friday before last, the market was 86% overbought and on the Friday before that (7/16/16) it was 93% overbought (bearish). However, the current bullish Market State environment is not one in which a rising tide lifts all ships.

There are a number of major market indexes that remain in either Bearish or Transitional States. For example, the large cap. International market index (EAFE) remains bearish, as well as several economic sectors, like Energy, Basic Materials, most Financials and many others.

Source: AIQ
Bottom Line:
The current market environment will require effective security selection. There are areas of the markets to be in and some to definitely avoid. The Portfolio Thermostat’s security selection process will identify the highest rated ETFs and will then “rank” them on a risk-adjusted basis to determine the most optimal combination.

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.