Nasdaq is Leading the S&P 500

Nasdaq is Leading the S&P 500

Posted on November 05, 2019

Market State 1 (Bullish): The S&P 500 has now entered into Market State 1 following a change in Canterbury’s short-term indicator, from negative to positive.  From Canterbury’s studies, most new market highs occur in Market State 1. The characteristics of Market State 1 are as follows:

Long-term: Positive
Volatility: Positive
Short-term Supply & Demand: Positive
Canterbury Volatility Index (CVI)- CVI 64: Volatility continues to decline as the market rallies off its October 2nd low point.  Canterbury’s short-term volatility (a 10-day CVI), remains in extreme low territory (less than 45).  Extreme low volatility is similar to the squeezing down of a spring, meaning you may see a “spike” the further volatility gets squeezed down.
We have discussed the concept of trading ranges in some of the last few updates.  Recently, the S&P 500 broke out of the upper end of its trading range.  The chart below shows the S&P 500 with some short-term support and resistance lines.  Support and Resistance are where supply and demand shift.  At points of resistance, supply normally takes control, causing a drop in the market.  At support, demand takes control causing a rally.  The markets can sometimes enter into trading ranges, fluctuating between points of support and resistance.
Looking at the chart, we can see that the market just recently broke out above overhead resistance. This does not necessarily mean that the market will continue to rise, however.  While it is a good sign for markets to break out, often times we do see some sort of test of support (meaning the market will retrace back to the old resistance line to see if it functions as new support). 

Source: AIQ
It is normally a positive sign for markets when the Nasdaq is outperforming the S&P 500.  When this occurs, it is usually perceived as a sign that the market is willing to take on more “risk” since the Nasdaq is primarily composed of technology stocks.

Looking at the relative strength of the Nasdaq compared to the S&P 500, the Nasdaq’s relative strength to the S&P has been increasing over the last few weeks, since the beginning of October.  Prior to that, the Nasdaq’s relative strength had been basically flat. Overall, this is typically a positive sign for the market.

Source: AIQ
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.

Source: CIM
Since the market broke out of resistance and volatility continues declining, the Portfolio Thermostat has lowered its Benefit of Diversification slightly.  The goal of any adaptive portfolio is to maintain a comfortable environment, regardless of the market environment. Should the market continue to stabilize, the Portfolio’s Benefit of Diversification will continue to be lowered.  However, if we do see a spike in volatility, the Portfolio is currently efficient and has the ability to maintain a stable portfolio environment.

Bottom Line

There have a been a few positive developments in the market lately.  Volatility is declining (although there could be an outlier day due to extreme low short-term volatility), the market broke out of overhead resistance (continue to watch for a test of the old resistance level to be new support), and the Nasdaq is currently leading the S&P 500.

Having a dynamic, adaptive portfolio allows us to rotate with the market environment.  If the market has low, stable volatility, the Portfolio Thermostat can reflect this by holding securities that benefit in Bull markets.  If volatility increases in the markets, the Portfolio Thermostat can then adapt and stabilize to combat the more volatile market environment.  Investing is a lifetime endeavor, and risk management is crucial to investment success.  By maintaining consistent volatility within the portfolio, we can better compound returns for the long-term.
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 compl