Revisiting Systematic Market Risk

Revisiting Systematic Market Risk

Posted on November 30, 2015

Weekly Update


Market State 8A – (11 days) Transitional/Bear Market State: The Portfolio Thermostat has been in one of the “Transitional/Bearish” Market States for the last 68 trading days. The transitional phase began on August 20th, when the Portfolio Thermostat shifted out of a “Bullish” Market State 2 and into Transitional - Market State 6 and then Market State 12A the following day.

The Market State “A” Series (7A, 8A, 9A, 10A, 11A, and 12A) denote Transitional/Bearish Market environments, which follow a Bullish Market State. Confirmed Bearish Market States follow the Transitional A-Series.

Canterbury Volatility Index (CVI 78) – Neutral: Last week’s daily fluctuations barely moved. The S&P 500 finished the week at less than one point from the previous Friday. A volatility reading between CVI 75 and CVI 90 is considered to be a Neutral reading when combined with the current declining trend, which has continued falling since the September 8th peak of CVI 115.

Overbought/Oversold indicator (43% Oversold) Short term - Neutral: An “oversold (bullish) reading of 95% or higher is considered to be an extreme level.


Bull Markets:
A normal “bull market correction” is defined as a 10% decline from the peak. The “systematic risk” during a bull market is typically in the 8% to 12% range.


Bear Markets:
A bear market is defined as a 20% or greater decline from the peak. For example, many major indexes have experienced “systematic risk” as much as 50% declines or higher.


Other important concepts investors must understand:

  1. Understand that the prices of all liquid traded securities are driven by the law of supply and demand. Supply and demand will change based on investors’ buying and selling actions which are influenced by their beliefs regarding future value. The volatility and size of these price changes is determined by investors’ rationality level and in the belief that their predictions, along with the timing of those predictions, will be correct.
  1. Understand that we, as investors, only make money when our portfolio registers a new peak in value. The October advance did not produce a new peak in the major indexes. Therefore, an advance that fails to register a new cycle high is just part of the random systematic fluctuations.
  1. Understand that all traded markets and securities will experience both bull and bear periods. Therefore, the long term maintenance of an efficient portfolio will require a systematic adjustments through changing market climates in order to maintain a “bullish portfolio” regardless of the existing market environment.

A primary objective of the Portfolio Thermostat is to maintain the “systematic portfolio risk” within the confines of a bull market correction (8% to 12% from the peak value). To accomplish this objective, the Portfolio Thermostat systematically and objectively adjusts the portfolio’s securities in order to maintain a Bullish Portfolio State” (Portfolio States 1, 2, 3, 4 or 5) even though most general asset classes are experiencing bearish market environments.


Bottom Line:

The markets remain is a Bearish/Transitional Market State. Markets tend to shift from one extreme to another. In other words, a period of extremely low volatility is often followed by high volatility and vice versa. It is not uncommon to experience short term kick-back rallies like the one we had in October.


It is interesting to note that the S&P 500’s last 5 days have barely moved at all. This is following a period of high volatility discussed above. If this tight trading range continues, expect a larger than normal short term move similar to a release of a tightly squeezed spring.


Please reread last week’s update.

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.