More of the Same

More of the Same

Posted on May 12, 2014

Canterbury Portfolio Thermostat - Weekly Update – 05/12/14

Market State 2 (41 trading days) - Long-term: Bullish; Short-term: Neutral/Bearish

Canterbury Volatility Index is at CVI = 54: The CVI was down 2 points for the week. The CVI has now declined by 10 points or a -16% decrease in volatility from the most recent high (in volatility) on April 16th at CVI 64.

Overbought/Oversold indicator:
Our Portfolio Thermostat overbought/oversold indicator closed at 54% overbought (short term Neutral). This indicator has been in the neutral range for over three weeks.

I have discussed ad nauseam the major shift away from last year’s strongest Exchange Traded Funds (ETFs), primarily "growth” oriented, to some of the weakest performers which qualify as "value” or defensive. Instead of me trying to say the same thing over and over again, in an attempt to use different words, I would like to relay some observations from my good friend David Vomund.

David is the Chief Investment Officer at Vomund Investment Management. He has been recognized as a top market technician by several national publications and has been interviewed by more highly regarded sources than I can list. I have known David for over 20 years going back to the time when he was the Chief Analyst for an artificial intelligence based technical analysis software firm. David acted as an advisor in helping Canterbury develop one of the Portfolio Thermostat’s six algorithms.

David is an expert in the ETF space and was one of the first to write a book on ETF strategies. He now has two books; both are based on strategies to be used for ETFs. I felt honored when he asked me to contribute a chapter on portfolio strategy for his most recent book titled Exchange Traded Profits.

David commented 5/11/14: I can't recall a market like this one. The Dow is at its high and the S&P 500 is within striking distance from its high. It seems all is well until you look at other market measurements. The NASDAQ Composite is 286 points below its March high. More importantly, it is only 104 points above its critical 3968 support level. The Russell 2000, a measure of small-cap stocks, hit a new correction low on Thursday. This index sits at 8.4% below its March highs. Just look at last week’s activity: The S&P 500 was flat but the Russell 2000 fell 1.9%.

Clearly the large-cap stocks as measured by the Dow and S&P 500 are unaffected by sellers, but the rest of the market is falling. This is a time to own the higher yielding issues that offer predictable earnings and stability. Still, I don't see a large percentage move higher in these issues. Even if the S&P 500 moves to a new high next week, this is far from an ideal investment climate.

With the majority of our indicators either neutral or bearish, why are large-cap stocks doing so well? I believe it still a TINA environment. TINA which means: There Is No Alternative. Market bears appear on CNBC but after they recommend selling equities they don't tell investors where to put the money. Some can be put into fixed income but there are no longer many bargains there. With interest rates so low, dividend paying stocks are the answer.

David Vomund, VIS ALERT Weekly Newsletter

Market Comment:
As I discussed last week, the low and declining volatility is Bullish for the equity markets. Price stability reflects a rational and efficient market. That said very low volatility can also be a sign of too much investor complacency.

The S&P 500 is barely moving. Last week it was down a little over 2 points, the week before was down 1 point and the week before that was up 1 point. A sideways market is similar to squeezing a spring between your forefinger and thumb. The tighter you squeeze it down, the bigger the pop when you let go. The result of the tight trading range means that the probabilities are high that we could see the S&P 500 have one of those "one day outliers,” meaning a one day up or down move in the 2% range, most likely down. If such an event occurs, it will impact the low investor complacency and should not impact the long term Bull market.

The S&P 500 is a key proxy for the overall global equity markets, in particular large-cap stocks. The Dow is more indicative of large-cap value. The Dow has been stronger than the S&P 500 and the S&P is stronger than the technology heavy NASDAQ. As a result, the US equity markets are in defensive mode. Markets compete for investor’s dollars. When money begins to flow out of one market class, it flows into another. As the saying goes: "There is always a Bull Market somewhere.” This is even truer today because innovative ETFs allow us to have access to many more markets than in the past.

Bottom Line:
As of today, the Portfolio Thermostat portfolios hold 14 Exchange Traded Funds. 10 of 14 holdings have outright Buy - Security State Ratings while 4 are rated as Holds. Our Volatility Weighted Strength Ranking shows all of our ETF holdings, except 1, ranked higher than the S&P 500’s ranking. Our Portfolio currently holds the following: 4 ETFs in the Bond and Alternative Group, the top 5 of 9 ranked S&P Sector ETFs, 2 International ETFs, the top 2 ranked of 13 global index ETFs and 1 S&P Industry ETF.

The Portfolio Thermostat was designed to identify and hold a portfolio of ETFs with Bull market characteristics. Potential holdings are first identified by evaluating the 12 Security States and then the Volatility Weighted Strength Ranking. Finally, our allocation algorithm will provide specific guidelines for the appropriate classifications of ETFs to own by matching the allocations to each of the 12 Market States (6 Bullish, 4 Bearish and 2 transitional). The goal and objective of the Portfolio Thermostat is to maintain the most efficient portfolio designed to match and benefit from the existing market environment - Bull or Bear.

Canterbury Investment Management: Tom Hardin

More About Tom Hardin

As Chief Investment Officer, Tom Hardin, Chartered Market Technician (CMT), makes all the final decisions on all investment and portfolio management decisions for Canterbury Investment Management. Tom has more than 30 years experience in the investment management industry and has broad breadth of knowledge. He is known as an innovator, educator and been revolutionary in the advancements in 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.