Small Caps Show Some Strength for the Holidays

Small Caps Show Some Strength for the Holidays

Posted on December 23, 2019

Market State 1 (Bullish)- The S&P 500 remains in a bullish Market State 1.  Market State 1 occurs when long-term indicators, volatility indicators, and short-term supply and demand indicators are all positive.  Most new market highs (about 85%) occur while in Market State 1.

Canterbury Volatility Index: CVI 48- Volatility continues to be low/decreasing throughout the month of December.  This is in sharp contrast to December 2018, when we saw the exact opposite.  In fact, longer-term volatility has not been this low since October 2018, when the Canterbury Volatility Index measured a volatility reading of CVI 38.  Short-term volatility (a 10-day volatility index) is currently at CVI 37).  Canterbury will continue to monitor for outlier days or spikes in volatility as the Canterbury Volatility Index approaches extreme low territory, where market outliers are more likely to occur to release pent-up pressure.

For most of 2019, the small cap stocks have failed to show much strength.  The chart below shows the Russell 2000 index (small cap stocks) along with a thick line of resistance.  You can see that since October of 2018, the Russell 2000 index has tested this line of resistance multiple times, with each time failing to breakout and pullback towards lower support levels.  Recently, the Russell managed to breakout of upper resistance levels, and then temporarily “throwback” to the resistance line and test it for support.  After doing so, the Russell continued to rally upward. 

Source: AIQ

Typically, during bull markets, one would expect small cap stocks to have leadership.  For most of this year, that has not been true.  Small caps have lagged large cap stocks for all of 2019.  It is a positive sign that we are finally seeing small caps push up through a line of resistance that has been tested multiple times. 

That being said, if we take a look at Canterbury’s Volatility-Weighted-Relative-Strength rankings (VWRS), which is a risk-adjusted ranking that accounts for a security/index’s strength as well as its volatility, we can see that large caps still lead in terms of risk-adjusted strength when compared to other style-specific indexes.
Style Index VWRS Rank
Large Cap Value 1
Large Cap Growth 2
Small Cap Growth 3
Mid Cap Value 4
Small Cap Value 5
Mid Cap Growth 6
 Source: CIM

Portfolio Thermostat
The Canterbury Portfolio Thermostat does not aim to compete against any individual index or blended benchmark.  We know that portfolio efficiency is a moving target, and all asset classes will go in and out of favor.  The Portfolio Thermostat is an Adaptive Portfolio Strategy designed to navigate various markets and create an efficient portfolio for today’s environment- Bull or Bear.
Canterbury benchmarks its portfolio against key “internal” metrics, in order to measure portfolio efficiency.  These metrics are Portfolio State, Portfolio Volatility, and Portfolio Benefit of Diversification.  Together, these internal benchmarks create the Portfolio Efficiency Score.

The Canterbury Portfolio Thermostat is currently efficient for today’s bullish market environment.  A Benefit of Diversification of 38% indicates that the holdings within the portfolio are not highly correlated.  At the same time, the Portfolio is in a bullish Portfolio State, with each of its holdings in Bullish Security States. The Portfolio also has low volatility. If the market environment shifts, the Portfolio Thermostat has the ability to adapt and navigate the everchanging market environment.

Bottom Line
Merry Christmas and Happy Holidays. The holiday season is one of my favorite times of the year.  I hope everyone is able to spend this week with their loved ones and reflect on everything there is to be thankful for- our friends, our family, and our faith.
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.

Canterbury Investment Management: Tom Hardin

More About Brandon Bischof

Brandon is directly responsible for managing the Canterbury Analytics Group (CAG). To date, Canterbury Analytics Group has played an important role in advancing portfolio management from a loose art form based on subjectivity and obsolete assumptions to an adaptive process with scientific rules and methods capable of providing evidence based results and statistically relevant value add results.

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.