Markets Are Not Driven by Events

Markets Are Not Driven by Events

Posted on May 31, 2017
Market State 1: Bullish/Rational (3 trading days): The Market State 1 environment is when most new highs occur. The S&P 500 established new all-time highs on each of last week’s last 3 trading days. Market State 1 is also likely to experience normal -3% to -5% corrections from the highest peak in price. These corrections are random and unpredictable. 

Canterbury Volatility Index (CVI 39) The S&P 500’s volatility increased by 8 points based on the one day -1.8% decline on May 17th. The Portfolio Thermostat’s algorithms strongly predicted the likelihood of a “one day outlier” based on the historical extreme low volatility.

The S&P 500’s volatility shot up from CVI 32, the lowest level since January 7, 1995, to CVI 40 on Wednesday, May 17th. Such low volatility creates a squeezing down affect, similar to squeezing down a spring. When the spring is let go, the pressure is then released, resulting in a one day outlier. Trading will typically resume as if nothing, out of the ordinary, had happened.
Comment: is important to note that events do not drive the markets. Events can create random market noise like the May 17th decline of 373 points. Prior to that, the Dow Jones Industrial Average advanced 449 points over a two-day period in late April. The reason for the advance… potential tax cuts. As for the reason for the May 17th one day -1.8% decline… a rumored memo from former FBI Director James Comey allegedly said that Trump asked him to stop the investigation of former national security adviser Michael Flynn. Sounds like noise to me.
Do you remember political strategist James Carville’s famous phrase during the 1992 Presidential election between Bush and Clinton? It’s “the economy, stupid.” Carville’s phrase put the focus on the real issue…the economy and not the noise.
If James Carville were a market analyst, instead of a political analyst, what would he have said about the one day -373-point decline? “It’s the environment… stupid.”
Bottom Line:
Events do not drive markets. Supply and demand drives markets and the state of the market environment is what is important. Not the daily noise.
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.

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