Market State 1 (Bullish): The Market State, as measured by the S&P 500 is in Market State 1, which is one of the 5 bullish Market State Environments. Bullish Market States are characterized by having low or decreasing volatility, and therefore, low risk. Most new market highs are put in while in Market State 1.
Canterbury Volatility Index (CVI)- CVI 50: The Volatility of the S&P 500 continues to decline as the market continues its recent rally. Canterbury studies show that declining volatility is a bull market characteristic. Volatility is a primary measurement of risk.
Contrary to conventional investment wisdom, higher risk does not mean higher returns. Risk is defined as volatility and drawdowns. High volatility and high drawdowns are exactly what we do not want. Since 1951, the S&P 500 has put in 1,237 new market highs. ALL of those highs have occurred in Market States 1-6 (MS 1-5 are bullish; MS 6 is often the result temporary volatility spike). In fact, 85% of those new market highs occurred while in Market State 1. As has been mentioned in previous blogs, most Transitional markets and all bear markets are characterized by high/increasing volatility (high/increasing risk), which often results in high drawdown. High drawdowns can wipe out years of savings and earnings and take an extended period just to get back to breakeven.
Market Comment
Rotation is a law of the markets. All liquid-traded securities will go through periods of leadership, as well as periods where they are lagging. For most of 2019, the US stock market had been led by more defensive sectors like Utilities and Real Estate. Today, we are seeing a much different picture.
The table below shows Canterbury’s Volatility-Weighted-Relative-Strength Rankings, which is a risk-adjusted strength measurement, for the S&P 500 sectors across various dates this year. You can tell in the chart below, that for a majority of the calendar year, Utilities and Real Estate have held some of top spots in leading the market. On the other hand, Financials has often struggled. Today, however, we can see that Real Estate and Utilities are at the bottom of the risk-adjusted rankings, while Financials is at the top.
Source: CIM
Portfolio Efficiency
The Canterbury Portfolio Thermostat does not aim to compete against any individual index or blended benchmark. We know that portfolio efficiency is a moving target, and all asset classes will go in and out of favor. The Portfolio Thermostat is an Adaptive Portfolio Strategy designed to navigate various markets and create an efficient portfolio for today’s environment- Bull or Bear.
Canterbury benchmarks its portfolio against key “internal” metrics, in order to measure portfolio efficiency. These metrics are Portfolio State, Portfolio Volatility, and Portfolio Benefit of Diversification. Together, these internal benchmarks create the Portfolio Efficiency Score.
The Canterbury Portfolio Thermostat is currently efficient for the given bullish market environment. The Portfolio Thermostat currently holds a wide array of sectors and industries, as well as a style index, international index, and a few alternatives to equities like commodities and bonds.
Bottom Line
Right now, market risk is low because volatility in the market is low. Low or decreasing volatility is a bull market characteristic. Canterbury monitors volatility on a daily basis for any spikes or changes in the current market environment. Volatility only measures the market risk of today and does not measure what the risk in the market will be in the future.
Markets are like weather and will go through many different environments. We know what the environment is today but cannot predict what the weather will be like at this time next year. We use a home thermostat to monitor for changes in outdoor temperature and adjust to maintain a comfortable indoor temperature. Canterbury uses a similar process to adjust to market volatility. Whether volatility in the markets is high or low, the portfolio should maintain a consistent, stable low-volatility environment.
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.
Canterbury Volatility Index (CVI)- CVI 50: The Volatility of the S&P 500 continues to decline as the market continues its recent rally. Canterbury studies show that declining volatility is a bull market characteristic. Volatility is a primary measurement of risk.
Contrary to conventional investment wisdom, higher risk does not mean higher returns. Risk is defined as volatility and drawdowns. High volatility and high drawdowns are exactly what we do not want. Since 1951, the S&P 500 has put in 1,237 new market highs. ALL of those highs have occurred in Market States 1-6 (MS 1-5 are bullish; MS 6 is often the result temporary volatility spike). In fact, 85% of those new market highs occurred while in Market State 1. As has been mentioned in previous blogs, most Transitional markets and all bear markets are characterized by high/increasing volatility (high/increasing risk), which often results in high drawdown. High drawdowns can wipe out years of savings and earnings and take an extended period just to get back to breakeven.
Market Comment
Rotation is a law of the markets. All liquid-traded securities will go through periods of leadership, as well as periods where they are lagging. For most of 2019, the US stock market had been led by more defensive sectors like Utilities and Real Estate. Today, we are seeing a much different picture.
The table below shows Canterbury’s Volatility-Weighted-Relative-Strength Rankings, which is a risk-adjusted strength measurement, for the S&P 500 sectors across various dates this year. You can tell in the chart below, that for a majority of the calendar year, Utilities and Real Estate have held some of top spots in leading the market. On the other hand, Financials has often struggled. Today, however, we can see that Real Estate and Utilities are at the bottom of the risk-adjusted rankings, while Financials is at the top.
| VWRS Rank | 1/2/2019 | 3/29/2019 | 6/28/2019 | 9/30/2019 | 12/16/2019 |
| 1 | Utilities | Real Estate | Technology | Utilities | Technology |
| 2 | Healthcare | Utilities | Discretionary | Staples | Financials |
| 3 | Real Estate | Staples | Industrials | Real Estate | Healthcare |
| 4 | Technology | Technology | Real Estate | Financials | Staples |
| 5 | Discretionary | Discretionary | Staples | Technology | Industrials |
| 6 | Staples | Materials | Materials | Industrials | Materials |
| 7 | Industrials | Healthcare | Utilities | Discretionary | Discretionary |
| 8 | Materials | Industrials | Healthcare | Materials | Utilities |
| 9 | Financials | Energy | Financials | Healthcare | Energy |
| 10 | Energy | Financials | Energy | Energy | Real Estate |
Source: CIM
Portfolio Efficiency
The Canterbury Portfolio Thermostat does not aim to compete against any individual index or blended benchmark. We know that portfolio efficiency is a moving target, and all asset classes will go in and out of favor. The Portfolio Thermostat is an Adaptive Portfolio Strategy designed to navigate various markets and create an efficient portfolio for today’s environment- Bull or Bear.
Canterbury benchmarks its portfolio against key “internal” metrics, in order to measure portfolio efficiency. These metrics are Portfolio State, Portfolio Volatility, and Portfolio Benefit of Diversification. Together, these internal benchmarks create the Portfolio Efficiency Score.
The Canterbury Portfolio Thermostat is currently efficient for the given bullish market environment. The Portfolio Thermostat currently holds a wide array of sectors and industries, as well as a style index, international index, and a few alternatives to equities like commodities and bonds. Bottom Line
Right now, market risk is low because volatility in the market is low. Low or decreasing volatility is a bull market characteristic. Canterbury monitors volatility on a daily basis for any spikes or changes in the current market environment. Volatility only measures the market risk of today and does not measure what the risk in the market will be in the future.
Markets are like weather and will go through many different environments. We know what the environment is today but cannot predict what the weather will be like at this time next year. We use a home thermostat to monitor for changes in outdoor temperature and adjust to maintain a comfortable indoor temperature. Canterbury uses a similar process to adjust to market volatility. Whether volatility in the markets is high or low, the portfolio should maintain a consistent, stable low-volatility environment.
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.
More About Brandon Bischof
Brandon is directly responsible for managing the Canterbury Analytics Group (CAG). To date, Canterbury Analytics Group has played an important role in advancing portfolio management from a loose art form based on subjectivity and obsolete assumptions to an adaptive process with scientific rules and methods capable of providing evidence based results and statistically relevant value add results.
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.
