NASDAQ, Emerging Markets are Picking Up Steam

NASDAQ, Emerging Markets are Picking Up Steam

Posted on August 11, 2014

Canterbury Portfolio Thermostat-Weekly Update- 8/11/14

Market State 2 (22 trading days) - Long-term: Bullish; Short-term: Neutral.

Canterbury Volatility Index closed Friday at CVI = 51: Volatility, as measured by the CVI, is up 3 points for the week. The total increase in volatility is up 28% from its July 16th low at CVI = 40. Normally, a 28% volatility increase would be enough to turn the Portfolio Thermostat’s volatility indicators negative. 

A CVI = 75 or lower is considered to be a safe level of volatility. Our studies show that it is normal to see periods with large "percentage” increases, in the CVI during times when the volatility is below CVI = 75. These increases can occur without having a major effect on the market’s stability and efficiency. The exception to this observation would occur when there is a sudden increase in the "velocity of volatility.” Generally, a two or three day downward spike of 2%, per day, over a 2 or 3 day period could trigger a Velocity of Volatility alert. 

The Thermostat’s Overbought/Oversold indicator is now at 85% oversold (Bullish). Markets can remain oversold for several months at a time. An oversold market requires signs of positive momentum to resume the previous upward trend.


Market Comment:

The S&P 500 has pulled back about 4% from its 7/24/14 peak.  Although last week was more volatile than what we have grown accustomed to during 2014, our studies show that a 4% to 8% correction represents normal "market noise” during a long term Bull market. 

Last week the laggards became the leaders as small-cap stocks outperformed the large-cap Dow and S&P 500. Here is a breakdown for the week:

S&P 500: +0.40%
Dow Jones Industrial Average: +0.41%
NASDAQ: +0.50%
Russell 2000: +1.50%

The Portfolio Thermostat’s universe of ETFs

The Portfolio Thermostat maintains a total universe of around 130 Exchange Traded Funds (ETFs). Of those, about 80 ETFs represent US and International (global) equities and about 50 ETFs represent alternatives to the equity markets. 

It is a positive sign for equities when the more speculative styles (like the QQQ and EEM) are leading the large cap styles. 

Sentiment Indicator:
The American Association of Independent Investors (AAII) produces a weekly investor sentiment survey. Last Friday’ survey produced the following results: Bullish investors: 30.9%
Neutral investors: 30.9%
Bearish Investors: 38.2%

Currently the AAII survey shows 69.1% of the investors surveyed are either Bearish or Neutral on the markets. Only 30.9% are Bullish. The survey is considered to be an "inverse” indicator. A high level of pessimism or fear is interpreted to be Bullish for the market. While on the other hand, a high percentage of Bullish investors is typically bearish. This is just the opposite of what most would think. The current relatively high level of Bearish and Neutral (or fearful) investors would be considered to be Bullish for the market.

For example, Bearish (Fearful) and Neutral investors are more comfortable with high levels of cash. These high levels of cash will eventually be invested which will increase demand pushing prices higher. On the other hand, optimistic (Bullish) investors are mostly fully invested and only have a small amounts of cash available for future buying. 

Markets move based on the law of supply and demand. Supply and demand are driven by investors’ expectations and beliefs regarding the future. When too many investors are Bullish, the lack of cash available for new buying (demand) means that prices will eventually stall. Their optimistic expectations will eventually not be met. These former Bulls will then become future sellers (supply) and their activities will push prices lower. The important point to grasp here is that markets are counter intuitive. Your gut feeling, regarding market direction, will most likely be wrong.

Bottom Line:
The current Portfolio Thermostat is in Market State 2 (Bullish). The Canterbury Volatility Index (CVI) is below 75 (Bullish). Our overbought/oversold indicator is 85% oversold (Bullish). The more aggressive NASDAQ 100 is leading the Dow and S&P 500 (Bullish). Investor sentiment as measured by the AAII is (Neutral/Bullish). 

Please keep in mind that a Bullish market environment does not mean that the market will go straight up. Most Bull markets tend to act sluggish. They will have normal corrections, typically when least expected. Most advances will occur during relatively short periods of time and those advances will also tend to occur when most investors least expect.

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.