Markets Don't Operate Based on the Calendar-Revisit // January 5, 2016

Markets Don't Operate Based on the Calendar-Revisit // January 5, 2016

Posted on January 05, 2016

Weekly Update


Market State 8A – (3 trading days) Transitional/Bear Market State: The Portfolio Thermostat has been in one of the “Transitional/Bearish” Market States for the last 91 trading days, beginning on August 20, 2015 when a shift occurred from Bullish - Market State 2 to Transitional - Market State 6.

Canterbury Volatility Index (CVI 83) – Bearish: Volatility, as measured by the CVI, declined 2 points from last week’s reading. The change from Transitional/Bearish Market State 10A to 8A is the result of an improvement in the volatility indicators from a Negative to Cautious rating.

Overbought/Oversold indicator is 87% overbought (Bearish). This indicator has deteriorated from an “oversold” (bullish) reading from the week before. A reading of 95% or higher, either overbought (short-term bearish) or oversold (short-term bullish), is considered to be an extreme level.

2015 Review:

2015 was a great year for the S&P 500’s 10 largest capitalized stocks (the Generals), which averaged a 25.9% gain over the last year.

The following is a list of the biggest winners from Business Insider.

Such blowout returns would lead one to believe that the capitalization-weighted S&P 500 index would have had stellar returns for 2015. Unfortunately, that was not the case. The S&P 500, as well as most other major market indexes and asset classes, were actually down for the year.

The S&P 500’s leadership was very narrow. For example, the newly coined FANG Index (Facebook, Amazon, Netflix and Google) averaged a whopping 77.2% gain for 2015. Can you spell B-U-B-B-L-E? All parabolic advances and bubbles end the same way, with a pop! It is only a matter of time.

The truth is, these big winners of 2015 ultimately mask the bear market that was more commonly experienced by most U.S. stocks during the past year. While the Big 10 steamed on ahead to stellar returns, many major indexes and asset classes felt the sting of a spike in volatility and the consequent sharp declines in value. The following example illustrates why the S&P 500, which is weighted toward the largest companies like the Big 10, can be a poor proxy for the broad market of stocks.

The Russell 3000 is a broad market index. It represents over 98% of the total market capitalization of U.S. stocks. At the close of 2015, 61.8% (or 1851) of the stocks in the Russell 3000 were down 15% or more from their 52-week highs. A “bear market” is defined as a 20% or larger decline from the peak. To date, 51.9% (1555 stocks) in the Russell 3000 have experienced a bear market 20% or greater decline.

Source: Cornerstone Macro - Carter Worth

Meanwhile, the MSCI EAFE Large Cap, Intl. index is down 15% from its May 21st peak. The MSCI Emerging Markets Index is down over 25% from the April 28th high.

You do not need to be a market technician to see the bearish shift in the long-term trend of a variety of indexes and asset classes.  Consider the following charts (the red box highlights the shift from a bullish to bearish trend):

S&P 500 Index (capitalization weighted)

S&P 500 (equal weighted) Symbol - RSP

Russell 2000 (small cap) Index

Emerging Markets (EEM)

Global High Yield Corp. Bonds (HYLD)

Vanguard Real Estate Investment Trust Index (VNQ)

U. S. Treasury Bonds (TLT)

CRB Commodity Index (DBC)

Source for all Charts AIQ.

How can the Canterbury Portfolio Thermostat maintain stability and profit from a difficult period?

The Canterbury Portfolio Thermostat adjusts its ETF holdings to match the current bearish Market State environment. The portfolio currently holds “inverse” ETFs that represent four of the bearish asset classes listed above.

An inverse ETF will move in the opposite direction of the underlying index. In other words, when the Emerging Markets ETF (symbol EEM) goes down in price, the inverse- Emerging Markets ETF (symbol EUM) goes the opposite direction - UP in price.

A primary objective of the Portfolio Thermostat is to maintain declines within the confines of a bull market correction (8% to 12% from the peak value). To accomplish this objective, the Portfolio Thermostat systematically and objectively adjusts the portfolio’s securities in order to maintain a Bullish Portfolio State” (Portfolio States 1, 2, 3, 4 or 5), even though most general asset classes are experiencing bearish market environments.

Bottom Line:

We have made the adjustments in our ETF holdings to reflect the current market environment. As the current “Transitional” Market State matures, please keep in mind the following points:

  • Our portfolio maintains its own Market/Portfolio State based on the current holdings. The Portfolio Thermostat’s portfolio is currently in Bullish-“Portfolio State 2,” even though most primary markets are in Transitional or Bearish- Market States.
  • Our portfolio has not exceeded a normal correction/decline expected during a bullish - Market State environment.
  • A properly structured portfolio should remain stable and have low volatility regardless of the overall market environment - bullish or bearish. Our portfolio is stable and has not had a one-day change in value of more than 1% since late August.

Understand that the only portfolio decline that matters is one that exceeds a normal bull market correction of 8% to 12%. A correction or decline in value is measured by the difference between the portfolio’s highest value and the following lowest market value. In other words, the smaller the portfolio’s downside fluctuations, the more likely the portfolio is to register a new high in value in a shorter time period. A 15%, 20%, or even greater decline may take years to recoup losses. Likewise, a single digit percentage difference between one portfolio and another, or a fixed benchmark, is nothing more than random market 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.


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.