Nasdaq Relative Strength Remains Flat/Declining

Nasdaq Relative Strength Remains Flat/Declining

Posted on September 09, 2019

Market State 6 (Transitional)- According to Canterbury’s Market States, the S&P 500 is still in a Transitional Market State 6.  The market has been in Market State 6 for the past 24 trading days and was caused by a spike in volatility (CVI) on August 5th. 

As a reminder, Market State 6 is one of the 3 Transitional Market States.  Its characteristics are: Long-Term (positive), Volatility (negative), and short-term supply & demand (negative).

Other Markets:
Dow Jones Market State 6- Transitional
Nasdaq Market State 6- Transitional
Russell 2000 Market State 12- Bearish
EAFE Market State 6- Transitional
Emerging Markets Market State 12-Bearish
Dollar Market State 1- Bullish
Treasury Bonds Market State 1- Bullish
Gold Market State 1-Bullish
Canterbury Volatility Index (CVI)-CVI 83- The volatility of the S&P 500 remains high at CVI 83.  Short-term volatility (a 10-day CVI) is, however, starting to fall.  Canterbury uses short-term volatility (10-day CVI) to gauge the direction that volatility may be heading.  While it is beginning to decrease, short-term volatility is still relatively high at CVI 80, and therefore we still could see some outliers.
Dow Jones CVI 81 (flat)
Nasdaq CVI 103 (flat)
Russell 2000 CVI 101 (flat)
EAFE CVI 67 (flat)
Emerging Markets CVI 88 (flat)
Dollar CVI 24 (flat)
Treasury Bonds CVI 71(flat)
Gold CVI 79 (increasing)
The market had a nice little run last week, breaking above some of the resistance levels we have mentioned in the past few updates.  That does not mean we are out of this Transitional Market State just yet.  Keep in mind that back in late July, volatility (CVI) was in the low 50s and has since jumped by 70% to the mid 80s.  The market still has potential to behave erratically.

After Thursday’s upward move, David Vomund, a close friend to Canterbury, wrote that “the market is overbought with 93% of stocks giving AIQ (a technical analysis program) unconfirmed sell signals.”  Additionally, the Nasdaq continues to underperform on a relative basis.

Below is a chart of the Nasdaq ETF (QQQ) with its relative strength to the S&P 500.  Typically, in an ideal bull market, we would like to see the Nasdaq lead the S&P 500.  From the chart, we can see that this is not the case.

Source: AIQ
For reference, relative strength is a measure of how strong one index, in this case the Nasdaq is performing against another index, like the S&P 500.  When relative strength is increasing, it means that the Nasdaq is outperforming on a relative basis (either going down less than the S&P 500 or going up more). When relative strength is decreasing, the Nasdaq is underperforming on a relative basis (either going down more or going up less).  As mentioned above, we would like to see this line increasing, but has been flat to decreasing over the recent transitional market.

Additionally, Large cap stocks, the same stocks that are in the S&P 500, have led the market while small cap stocks continue to underperform.  Below are the Canterbury Volatility-Weighted-Relative-Strength (VWRS) rankings for the style indexes.
Style VWRS Rank
Large Cap Growth 1
Large Cap Value 2
Mid Cap Growth 3
Small Cap Growth 4
Small Cap Value 7
Emerging Markets 8
Portfolio Thermostat
The Canterbury Portfolio Thermostat does not aim to compete against any individual index or blended benchmark.  We know that portfolio efficiency is a moving target, and all asset classes will go in and out of favor.  The Portfolio Thermostat is an Adaptive Portfolio Strategy designed to navigate various markets and create an efficient portfolio for today’s environment- Bull or Bear.
Canterbury benchmarks its portfolio against key “internal” metrics, in order to measure portfolio efficiency.  These metrics are Portfolio State, Portfolio Volatility, and Portfolio Benefit of Diversification.  Together, these internal benchmarks create the Portfolio Efficiency Score.

The Portfolio Thermostat’s current Portfolio Efficiency Score remains at 95.  The portfolio is currently holding a combination of securities that create a portfolio that is in a bullish portfolio state.  The Thermostat’s CVI is low and stable.  The Benefit of Diversification remains high/efficient to accommodate for the current transitional market environment. Transitional markets can often be accompanied by erratic, highly volatile days.  Having a higher B.of.D helps to stabilize the portfolio.

Bottom Line
The Market remains in a Transitional Market State.  While the market broke above some resistance levels, AIQ Trading expert indicates that 93% of stocks are unconfirmed sells and the market is overbought.  The Nasdaq and small cap stocks continue to underperform the market on a relative basis.

Transitional markets bring about a lot of uncertainty.  From Canterbury studies, news events are more likely to be impactful in a Transitional market than in a bull market.  This is why we see so many more outlier days during transitional markets.  The Canterbury Portfolio Thermostat, which currently has low volatility and an efficient Benefit of Diversification, is properly positioned to handle the wide swings that could occur in this market environment.
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.

Canterbury Investment Management: Tom Hardin

More About Brandon Bischof

Brandon is directly responsible for managing the Canterbury Analytics Group (CAG). To date, Canterbury Analytics Group has played an important role in advancing portfolio management from a loose art form based on subjectivity and obsolete assumptions to an adaptive process with scientific rules and methods capable of providing evidence based results and statistically relevant value add results.

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.