Nasdaq Underperformance Continues

Nasdaq Underperformance Continues

Posted on June 04, 2019
Market State 6 (Transitional)– The market continues its current streak of days in Market State 6.  The S&P 500 has been in Market State 6 for 14 days.  Market State 6 is one of the 3 Transitional Market State Environments.  This particular MS 6 was caused by a spike in volatility (CVI) which occurred on May 13th.  A change back to a bullish environment would occur with a positive signal in Canterbury’s short-term indicators.  Currently, according to AIQ Trading Expert Pro’s overbought/oversold indicator, stocks are 98% oversold.
Canterbury Volatility Index– CVI 65- Volatility remained flat last week, finishing, yet again, at CVI 65.  Since the initial CVI spike on May 13th, volatility (CVI) has stayed within a three-point range, ranging from a low CVI 64 to CVI 67.  Even with the recent market pullback, there has not been any additional increases in volatility so far.
The NASDAQ is continuing to underperform the S&P 500 on a relative basis as it has been since May 1st.  Typically, this is a poor sign for markets.  When the NASDAQ is outperforming the S&P 500, it is usually a strong indication of investors’ willingness to take on more “risk” in the markets. Although, the NASDAQ is underperforming the S&P, the Dow Jones Industrial Average is also underperforming the S&P 500. The least ideal situation would be to have the Dow lead the S&P 500, which leads the Nasdaq. 

Although the NASDAQ is currently underperforming, this could just be a short-term underperformance.  The NASDAQ’s relative strength index line (to S&P 500) flattened out slightly last week, temporarily stopping the falling relative strength it experienced over the majority of May.  The NASDAQ’s relative strength to the S&P 500 is by no means an end-all, be-all indicator for markets.  

According to Canterbury studies on the NASDAQ’s relative strength to the S&P 500, which date back to 1971, the worst drawdown ever experienced with the NASDAQ’s relative strength underperforming on a 2 week relative basis while the market is in a Bullish environment or a Market State 6, was -13%, and even that market reverted back to a Bull Market State over the next 2 months.  There have also been some several run-ups in the market when the NASDAQ is underperforming.  This is one of several indicators that Canterbury will continue to monitor.

Portfolio Thermostat
Canterbury uses a proprietary set of internal benchmarks to evaluate the efficiency of a portfolio.  For the current given market environment, the Portfolio Thermostat is currently positioned appropriately.

Portfolio State: Bullish- According to Canterbury’s Security/Market State indicators, the combination of securities being held creates a Portfolio that is in one of the 5 bullish states.

Volatility: CVI 41: The volatility of the portfolio is currently low and efficient.  As a reminder, we want to see the portfolio’s volatility below CVI 75.

Benefit of Diversification: 41%- A B.of.D. of 41% is efficient for the current market.  Transitional Market States can be somewhat unpredictable, but a Benefit of Diversification of 41% helps stabilize the portfolio and means that the risks (volatility) of securities being held in the portfolio are not highly correlated to one another.

Bottom Line
The market is still in a Transitional Market State 6, which was caused by a spike in volatility.  This spike in volatility followed a substantial run-up in the market, that barely experienced so much as a 3% drawdown.  There are several different factors that need to happen for us to transition to a bear market.  Volatility remains relatively stable, and while it is a negative sign that the NASDAQ is underperforming, history shows that this could just be short lived, and the market could still move upward.

Regardless of what is happening in the markets, Canterbury aims to maintain an efficient portfolio through all market environments- bull or bear. 
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.