New Bull Market or a Dead Cat Bounce?

New Bull Market or a Dead Cat Bounce?

Posted on October 26, 2015

Weekly Update 10/26/2015

Market State 9A – (6 days) Transitional/Bear Market State: The Portfolio Thermostat has been in a Transitional/Bearish Market State for the last 44 trading days.

Canterbury Volatility Index (CVI 94) - Neutral: The market’s volatility continues to decrease but remains high compared to what is the norm during bullish Market State environments. In order to turn our volatility positive, the volatility will need to decline another 2 points to CVI 92, which would represent a 20% decrease in volatility from our peak of CVI 115.

The Overbought/Oversold indicator is currently 82% Overbought (Bearish): An overbought reading of 95% or higher is considered to be an extreme level.


The S&P 500 was up 2.1% while the Russell 2000 (small cap) index closed the week essentially unchanged, which illustrates that there is a growing gap in performance between large and small capitalized stocks. A healthy market will typically have the small and mid-cap stocks out-performing large cap stocks. Similar to a healthy battle plan, it is much better to have the troops out front pushing ahead while the Generals follow the action from behind the lines. It is a bad sign when you see the troops in retreat while the Generals move up to take their places.


The first chart shows a 6 month overlay of the S&P 500 (Generals) compared to the Russell 2000 (troops):

Source: AIQ

Market Comment:

Although a sharp increase in volatility is a sign of market inefficiency (bearish), while in Transitional and Bearish Market States, decreasing volatility does not mean an immediate return to market efficiency.


Likewise, the environment for global equities is better when the S&P 500 is in a bullish Market State, but big market rallies do not necessarily indicate a bull market environment. Some of the biggest market rallies occur during Transitional and Bear market environments, but in such cases, sharp declines typically precede sharp “kick-back” rallies. Advances of 7% in 7 days or 10.2% in 19 trading days are impressive but are more likely to occur following sharp declines, such as we saw in August or the second half of September.


Chart 2:

S&P 500: Sharp declines are typically followed by large kick-back rallies. It is possible for the S&P to go straight up and hit a new high but this is not likely and would not restore a healthy market environment.

Source: AIQ


The current rally does not have the characteristics that are typical of a stainable advance. The probabilities of retesting the old lows and establishing a new lower low is substantially more likely than the opposite (retesting the old S&P 500 high at 2131 on May 21st and establishing a new high, which would be highly unlikely based on the current Market environment).

Chart 3:

The Russell 2000 is in a “confirmed” bear Market State 11. It broke below the August low and has not exceeded the previous September high. Lower lows followed by lower highs equal a bear market.

Source: AIQ


Bottom Line:

Don’t confuse a market rally with making money. Investors only make money when their portfolio hits a new high in value. The peak in the S&P 500 and most portfolios occurred prior to August 20th. The current spread between the peak value and the low is quite simply random market noise.

The Portfolio Thermostat’s “portfolio” has made the necessary adjustments in its ETF holdings to maintain stability. Our Portfolio Thermostat model portfolio is currently in bullish Market State 2.

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.