Market Volatility Continues to Decline

Market Volatility Continues to Decline

Posted on April 15, 2019
Market State 1 (Bullish) – The S&P 500 remains in Market State 1, which is a Bullish Market State.  Overall, Canterbury has defined 12 different Market States, separated into 3 distinct market environments: bullish, bearish, and transitional (either bullish to bearish or bearish to bullish).  Market States 1-5 are bullish; 6-8 are transitional; and 9-12 are bearish.  Bullish Market States, like the one currently being experienced typically have the least amount of risk, with corrections limited to about 10%.
Canterbury Volatility Index (67 Day) - CVI 67 – Volatility continues to decrease, which is good sign for the markets.  CVI 67 marks the lowest volatility level for the S&P 500 since October 16th, which was the first leg of the recent drawdown in the markets.  Canterbury short-term volatility, a 10-day CVI is now at CVI 41, which is extreme low conditions.  Typically, when volatility enters extreme low conditions, the market is prone to experience a “spike” in volatility.  However, volatility can remain extremely low for long periods of time without an outlier day occurring.
As of Friday’s close, the S&P 500 is now within a percent of its October all-time high.  The current run has occurred on declining volatility, with CVI levels falling form a high of CVI 129 on January 4th, to today’s volatility low of CVI 67.  Since the Christmas Eve low, the S&P 500 has rallied close to +24%, with the largest drawdown experienced over that time being -2.5%.
Canterbury Portfolio Analytics performed a study on the S&P 500, dating back to 1/2/1950, that examined the largest run-ups in the market without experiencing a 3% pullback, as well as the amount of time that the run-up occurred over.  The results of the study were interesting.  Check out the table below.  The Run-ups are sorted in descending order, from largest to smallest.  The “Market State” column displays what Market State the run started in, and the date column displays the start date of the run.  The “# of days” column shows the length of trading days the run-up occurred over.  
Largest Run-ups without a 3% Correction
Rank Run-Up Market State Date Started # of Days
1 39.56% 2 11/22/1994 285
2 37.78% 6 11/2/2016 314
3 31.57% 8 10/25/1960 119
4 31.10% 7 2/12/1958 199
5 30.19% 6 4/14/1997 84
6 28.53% 8 9/14/1953 183
7 27.09% 12 12/9/1974 53
8 26.55% 1 10/13/1970 149
9 26.27% 12 4/21/1980 91
10 25.35% 8 1/7/1991 78
11 24.56% 1 12/24/1986 65
12 24.36% 12 10/23/1962 87
13 24.27% 12 10/8/1998 39
14 23.66% 12 12/21/2018 77
15 22.20% 8 11/12/1971 117
There are a few observations to be made from the table above.  The first of which, is out of the maximum run-ups without a 3% pullback, the current run ranks 14th since 1950.  Second, of the 15 top run-ups without a 3% pullback, 12 of them originated in a Transitional or Bear Market State, with 5 of those being from Market State 12. One last point to highlight, is that it appears that when one of these runs begins in a bearish market state, like Market State 12, the run typically occurs over a very short period of time compared to the other runs.

Bottom Line
The run being experienced currently is one that is coming out of a Bearish/Transitional Market State and one that has occurred over a very short period of time without any sort of pullback.  This event is very rare.
This goes to show that the Market’s rapid drop back in December was a trading anomaly.  The Market has since taken a tube shot upward, rallying far off of its lows.  CVI has also been declining over the course of this period.

Short-term volatility remains extremely low, the Market is nearing its old high, and has not experienced more than a 3% pullback during this run.  These are all things to keep an eye on.  It becomes especially important to have an Adaptive Portfolio Strategy to help navigate the everchanging market environments as they start to develop- whether 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.