Randomness Can Confuse Us All

Randomness Can Confuse Us All

Posted on July 28, 2014

Canterbury Portfolio Thermostat - Weekly Update – 07/28/14

Market State 2 (21 trading days) - Long-term: Bullish; Short-term: Neutral. 

Canterbury Volatility Index is at CVI = 42: The CVI (volatility) declined 2 points last week. The CVI is 6 points away from its lowest reading since 2/23/2007 (over 7 years ago) at CVI = 36. 

Last week, the Portfolio Thermostat’s Overbought/Oversold indicator shifted from what was a Bullish 88% oversold condition to a Neutral 67% oversold reading. 

Market Comment:
Most of the Portfolio Thermostat’s indicators remain positive. That said, there are some areas of concern. The "stocks - only” Advance/Decline line (number of stocks going up versus down) did not confirm the new S&P 500 high last Thursday. This causes a "negative divergence” between the index and the breadth of advancing stocks. The previous highs, for both the S&P 500 and the Advance/Decline line, were on July 3rd. Since that time, the S&P 500 has touched its old high but has been unsuccessful at making a decisive breakthrough while, at the same time, the A/D line is close to its July low. The probabilities would favor a sideways to lower short term market environment. 

Canterbury had a strong 4th quarter last year. It is typical to have a period of slight under performance when the Portfolio Thermostat Model rotates to new Exchange Traded Fund leadership. Most models have had similar performance over the last three quarters and trailing 12 months.

The Portfolio Thermostat’s goal is to maintain consistent portfolio volatility through all market environments. During the trailing 12 months, most U.S. equity indexes have had low volatility. For example, the S&P 500’s largest drawdown has been less than -7% during the period. Low volatility makes it less difficult to construct and maintain efficient portfolios. Times of low volatility introduce a higher level of randomness in performance because a rising tide is lifting most ships.

Volatility Report: 12/31/2013 through 06/30/2014:
The past 6 months volatility, as measured by the Canterbury Volatility Index (CVI), has been the lowest since the first 6 months of 2006. During such times, systematic risk and return of a market will experience a degree of randomness. A normal Bull market, peak to trough, correction is 10%. Taken another way, when volatility is abnormally low, different equity indexes and portfolios can easily vary 5% to 10% based strictly on randomness. 

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.