Sharp Advances are Characteristic of a Bear Market // February 1, 2016

Sharp Advances are Characteristic of a Bear Market // February 1, 2016

Posted on February 01, 2016

Weekly Update

Market State 12A - Transitional/Bear: The Portfolio Thermostat has been in one of the “Transitional/Bearish” Market States for the last 101 trading days, ever since August 20, 2015 when the Portfolio Thermostat shifted to Transitional - Market State 6. The next day (August 21, 2015), the market environment moved to Transitional/Bearish Market State 12A.

Canterbury Volatility Index (CVI 101) – Bearish: Volatility, as measured by the CVI, has been increasing since December 1, 2015. High and increasing volatility means that stocks are experiencing higher correlation (moving together) and the benefits of diversification are diminishing.

Overbought/Oversold Indicator (80% overbought) Short Term: Neutral/Bearish - Last week’s rally was enough to turn this indicator from “76% oversold” to “80% overbought”.

The Overbought/Oversold indicator’s purpose is to provide an early indication of a “short-term change in market direction.” Extreme readings of 95 or higher, either overbought (bearish) or oversold (bullish) would justify an adjustment in the portfolio’s ETF holdings.

Market Comment:

Last month recorded the S&P 500’s ninth worst January in history. The combination of a CVI over 100, the longevity (over 100 days) in a Transitional environment, and a clear break in the primary bullish trend is consistent with a shift to a BEAR market environment. Both of Friday’s 397 point rally in the Dow and 47 point rally in the S&P 500 far exceeded the common bull market “one-day” outlier that is typically in the 2% range. In other words, 400-point Dow days rarely occur during bull markets. On the other hand, such advances are common occurrences during unstable bear markets.

  • There is no question that the primary market environment has made an abrupt shift, for the worse, beginning on August 20, 2015.

Source: AIQ

  • It is quite evident that the S&P 500’s primary trend has shifted to bearish. In fact, most other major market indices look even worse.

Source: AIQ

Bottom Line:

Expect frequent and sharp market rallies and understand that they are NOT to be taken seriously until the Portfolio Thermostat shifts back to a transitional Market State.

Remember that normal portfolio corrections, in the 8% to 12% range, can and will occur randomly and when least expected. Such fluctuations are called systematic market risk and cannot be diversified away.

We must have an evidence-based process to distinguish the difference between and market environments if we hope to maintain a portfolio with anything resembling stability.

Understand that the Portfolio Thermostat model is designed to shift its ETF holdings to match the existing market environment – or

We must maintain a consistent investment strategy through variable markets. The primary risk is mistaking random portfolio noise with something more serious.

Portfolio Optimization is a Moving Target:

Portfolio optimization, through variable market environments, requires making systematic tactical adjustments. Our Canterbury portfolio has been successful at maintaining stability by holding “inverse” and other “alternative” ETFs, in combination with select long equity ETFs. As a result, the recent market turbulence has had no meaningful impact on our portfolio.



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.