Market is Looking a Little Tired

Market is Looking a Little Tired

Posted on May 26, 2015

Canterbury Portfolio Thermostat™

Weekly Update


Market State 1: (MS 1 for the last 3 trading days): Long-term: Bullish; Short-term: Bullish.

The S&P 500 registered a new all-time high last Thursday. One would expect a new high to be accompanied by the Portfolio Thermostat’s most Bullish Market State (MS 1), and it did.

The S&P 500 set a new high at 2130.82 on Thursday versus a previous high at 2117.69 on 4/24/15. The market’s peak before that occurred last year at 2090.57 on 12/29/14. In other words, the market is up just 40 points from last year’s high or 35 points following Friday’s 5 point decline. The total gain is about 1 1/2% since 12/28.

Canterbury Volatility Index (CVI): CVI 54 - The CVI (volatility) decreased by 4 points from the previous week. The market’s volatility and price range continues to get narrower. Please see the S&P 500 chart below.

As a point of reference, a CVI of 75, or lower, is considered to be a “safe zone.” Canterbury has performed numerous studies on the impact of volatility on markets and securities. Our studies have provided evidence showing that low and decreasing volatility is a primary characteristic of a Bullish market environment.

The Overbought/Oversold indicator finished the week at 76% Overbought. (Short-term: Neutral/Bearish). This indicator decreased by 2 points for the week for no meaningful change. A reading of 95% Overbought or higher would be considered to be an extreme level (short term Bearish). The stocks only advance/decline line registered a new high last Monday.

Market Comment

It feels like the summer doldrums are setting in. The U.S. markets had an opportunity to begin a new leg up following the slight breakout above the S&P 500’s pesky resistance at 2018. What the market needed was a mini buying panic following the slight breakout. Instead of the usual mini buying panic, when there is a break above significant resistance, the move was followed by a lack of interest from new buyer’s which was reflected by low volume and flat trading range.

There is a chance that the extreme low volatility and tight trading range could lead to one of those 2%, one day, outliers (200 to 300 point one day move) we have discussed many times in the past. The most likely scenario from here is more sideways movement or a retest of the support at 2118 or 2100. The market is just looking a little tired. The good news, is that we remain in a low risk Bull market environment.

Please see the chart below.

Understanding Markets

Bull markets rarely just go straight up. In fact, Bull markets can have several months of sideways movements and periods of emotionally painful “corrections.” The traditional definition of a Bull market "pullback” is a 5% decline from the peak value. A correction is defined as a 10% decline from the peak. Most of a Bull market’s gains tend to come during spikes over short periods. Traditionally a Bear market is defined as a 20% correction from the peak. Bear markets have very clear and quantifiable features. For example, Bear markets begin with an increase in volatility. All Bear markets are volatile but not all volatile markets are necessarily Bears.

All market indexes and securities will eventually experience Bear markets even if under asset (example, a publically traded company) reports earned profits every quarter. In other words, companies and stocks are not the same thing. The private ownership of a company is not liquid, therefore the profits could be passed through to the owners while losses may require more capital contributions from the owners. On the other hand, a publically traded stock is liquid. Liquid traded securities will see their prices fluctuate in the open market based on the shifts between supply and demand for the shares.

Portfolio Thermostat

The Portfolio Thermostat avoids Bear markets by only owning ETFs that are defined being in a Bullish-Security State. Any holding that is downgraded to a Transitional or Bearish Security State is sold the next day and is replaced with the highest rated ETF that also meets the model’s diversification requirements. The requirements are determined by each of the 12 Market States.

Bottom Line

Here are the keys to producing long term compounded returns:

  1. Avoid portfolio declines (drawdowns) that would exceed a normal Bull market correction. Price volatility and substantial declines kills the ability to compound returns.
  2. A portfolio should only hold ETFs that are in Bullish Security States. The most efficient portfolio (the portfolio with the least risk and highest returns) is a moving target. This is why the portfolio needs to adjust holdings to move in concert with the ever-changing market environments.
  3. Understand that markets have periods of sideways trading ranges and most of a portfolios gains occur over relative short periods of time. 
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.