New Risk Management Tools Make Possible to Benefit from both Bull and Bear Markets

New Risk Management Tools Make Possible to Benefit from both Bull and Bear Markets

Posted on June 05, 2012

History has shown that financial markets are stable and rational most of the time. That said there are periods when markets become emotional. We are now in one of those emotional periods.

Our Portfolio Thermostat shifted to (Bearish) Market State 12, from Market State 2, on Friday, June 1st. Market State 2 occurs during an orderly pull-back (decline) in a long term Bull market.

Market States 1 and 2 typically switch back and forth, during a Bull market, as the market continues to trend higher by making higher highs and higher lows.

Our Portfolio Thermostat process will shift to one of the Bear Market States when volatility begins to increase and the equity markets start to sell off more than what is expected during a normal consolidation.

Our Velocity of Volatility indicator spiked up on Friday causing the Canterbury Volatility Indicator to shift from Rational to Emotional (Red). In addition, the percentage of S&P 500 and S&P 1500 stocks trading above their 200 day moving average declined to less than 45%. Our long term market indicator turns Bearish (Red) when less than 45% of the S&P 500 and 1500 stocks trading above their 200 DMA.

The first days of a new Market State change tend to be unpredictable. This is especially true for (Bear) Market States 6 and 12. Sometimes we get a short term “rally” over the first few days. A rally would be likely because the market is “short term over-sold.” Other times we have seen a sharp decline during the first couple weeks. Whipsaws (big up and down days) are likely in the early stage of Bear Market States 6 and 12. That is why Market State 12 is labeled as “Irrational.”

We made several adjustments in our portfolios yesterday (Monday June 4th) as a result of the change in Market State. Our primary objective to limit portfolio declines to a single digit percentage. Single digit declines have very little impact on generating high long term compounded returns.

A successful investment /risk management process must be rules based; it must adapt quickly as conditions warrant and have no emotion. The investment process should first identify the current market environment (Market State). Then manage the various specialized tools (securities) to match and benefit from the current climate.

Our Portfolio Thermostat Matrix identifies specialized ETFs that benefit from each Market State. The process is designed to perform well in both Bull and Bear markets.

We should see volatility increase as the market continues to bounce up and down. Expect even more, than normal, “hype” and “noise” from the media.

We fully expect our portfolios to benefit as we work our way through current market environment.

The Canterbury Portfolio Thermostat Matrix identifies 12 different Market States (environments). Of the 12 Market States, 6 are Bullish Market States, 4 Market States are Bearish, and 2 States tend to precede a transition to a Bearish Market State, meaning caution. Please call me with any questions.

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.