Own Securities with Low or Decreasing Volatility

Own Securities with Low or Decreasing Volatility

Posted on April 20, 2015

Canterbury Portfolio Thermostat™
Weekly Update


The Portfolio Thermostat identifies 12 different market environments called “Market States.” Each Market State has its own unique characteristics and tendencies. The Macro- Market States are used to provide a “big picture” view of the characteristics of the current equity markets. The S&P 500 is commonly referred to as “the market.” There are 5 Bullish (rational – low volatility) Market States; 4 Bearish (volatile and/or increasing volatility) Market States; 3 Transitional Market States (indicating caution).


Current Market State Environment:

Macro - Market State™ (calculated on the S&P 500).

Market State 2 (MS 2 in place over the last 18 trading days): Long-term (Bullish) Short-term (Neutral).


Canterbury Volatility Index (CVI): CVI 61 - The CVI decreased 1 point last week (declining volatility). A CVI of 75, or lower, is considered to be a “safe zone.” The CVI has been steadily decreasing since mid-March. Last Thursday, registered the lowest volatility reading for the year at CVI 59. Friday’s -1.14% drop, in the S&P 500, had only a minimal impact on volatility.  The CVI increased just 2 points for the day. Low and decreasing volatility is reflective of a stable and efficient environment; a primary characteristic of a bull market.


The Overbought/Oversold indicator finished the week at 53% Overbought (short-term Neutral). The previous week’s 82% Overbought condition set the stage for last week’s weakness. The 29 point improvement moved this indicator from the “Bearish side of Neutral” to Neutral.


Market Returns:                                      2014                       Week                       YTD S&P 500 ETF (SPY)                              +13.48%                 -1.13%                     +0.88% EAFE Intl. Large Cap ETF (EFA)             -6.20%                 -0.44%                     +5.47% EAFE Intl. Small Cap ETF (SCZ)             -6.07%                  -0.33%                    +5.91% Source: Morningstar


Observation 1:

The major international market indexes have been performing better than most US equity indexes over the last few months. Our Style/Index Group ranks the EAFE Small Cap International (SCZ) as the 2nd strongest on the Portfolio Thermostat’s Volatility Weighted Relative Strength report. The EAFE Large Cap International index is gaining strength and is moving up the list. The strength in the international indexes is in stark contrast compared to their weak performance in 2014. Currently, both EAFE international equity index ETFs are in Security States 1 (Security State 1 is the most Bullish of the 12 Security State environments).


Observation 2:

All markets and securities will experience both; bull (conservative) and bear (risky) market environments. Markets and securities with low or decreasing volatility are considered to be conservative and those with high or increasing volatility are considered to be risky. Therefore, it is not appropriate to assign any traded asset class or security a risk label; such as, conservative moderate or risky.

Most would assume that bonds are safer than stocks. This assumption is not always true. The 20 year Treasury Bond ETF (symbol TLT) spent most of 2013 in one of the Bearish-Security States. TLT’s volatility hit a high of CVI 87 on 7/5/2013.  During the same time, the S&P 500 was in a bullish – Market State and its volatility was only CVI 69 (the volatility on Treasury Bonds was almost 30% higher than stocks.)  The Treasury Bond ETF (TLT) was down -13.37% for 2013, while the S&P 500 was up +32.31%. In other words, stocks produced a higher return with lower volatility (risk) than Treasury bonds during 2013.

Last year, 2014, the Japan ETF was down -6.22%. The volatility reached as high a CVI 97. This year Japan’s volatility is low, currently CVI 68, and is decreasing. Japan would have been a risky investment for most of last year. So far this year, Japan meets the characteristics of being a conservative investment.


Bottom Line:

Evidence based research has shown that increasing volatility can be a leading indication of a future down turn in a security.  The most efficient approach is to own securities that the Portfolio Thermostat defines as having low or decreasing volatility.

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.