So What is a Bull Market Anyway

So What is a Bull Market Anyway

Posted on August 18, 2014

Canterbury Portfolio Thermostat-Weekly Update - 8/18/14

Market State 2 (27 trading days) - Long-term: Bullish; Short-term: (Bullish/Neutral).

Canterbury Volatility Index is at CVI = 48 (Bullish): The CVI (volatility) declined 3 points last week. Low volatility is a reflection of a stable and efficient market environment which is a primary characteristic of a Bull market. As a point of reference, a CVI of 75 or below is considered to be a "safe zone” for the market.

The Thermostat’s Overbought/Oversold indicator is now at 75% oversold (Bullish/Neutral).

Market Comment:
Headline (8/15/14) Ukraine 'Destroys Russian Armoured Convoy'
Last Friday, the S&P 500 had a little over 1.0% drop. The decline was based on a low probability and potentially high impact event that flashed across the global news channels. Impactful geopolitical and other events can occur without warning. These headline news events can affect world markets over the short term, while most will not change the primary trend. The current unfortunate event in the Ukraine is an example of emotional driven short term "headline risk.”

The previous Weekly Update was titled: The NASDAQ and Emerging Markets are Picking up Steam. Last week’s leadership continued with the same theme as the NASDAQ 100 (QQQ) and Emerging Markets (EEM) were two of the strongest equity indexes.

Bottom Line:
Most global equity markets remain in a Bull Market State (market environment). The Portfolio Thermostat model currently holds 14 Exchange Traded Funds (ETFs). Our portfolio owns 7 ETF holdings with a Buy Security State rating and the other 7 holdings are rated as holds.

So What is a Bull Market Anyway?
The use of "bull" and "bear" to describe markets comes from the way the animals attack their opponents. A bull thrusts its horns up into the air while a bear swipes its paws down. These actions are metaphors for the movement of a market. If the trend is up, it's a bull market. If the trend is down, it's a bear market.
Source: Investopedia

Many investors believe that a bull market pretty much just goes straight up. According to Investopedia, "A bull market is represented by a rising price trend, and a bear market is indicated by a falling price trend.”

The truth is that bull markets do not always go up. In fact, most Bull markets can have several months of sideways movements and periods of emotionally painful declines. The traditional definition of a bull market "pullback” is a 5% decline from the peak value. A correction is defined as a 10% decline from the peak. It would be difficult to convince an investor that a bull market is alive and well after several months of negative returns. Traditionally a bear market is defined as a 20% correction from the peak. Unfortunately all liquid markets will experience bear market environments. A substantial 20% plus decline can easily negate the profits made during bull markets.

Bull and bear markets are not just different, they are opposite in almost every way. Both have very clear markers. One simple method to determine the difference between a long term bull and bear market is to add up the last 200 days of price, then divide the sum total of the days by 200. When the current price is above the (200 day moving average) then you are in a long term bull market. If, on the other hand the current value is below the 200 day average, then the long term outlook is bearish.

The beauty of using quantifiable indicators, such as the 200 day moving average or combining the 200 day average with other rules based indicators, is that they are testable. The analysts at Canterbury just completed several studies, using data going back to June of 1929. We have evidence based results that provide statistically relevant conclusions, that liquid traded markets do have identifiable bullish and bearish market environments (Market States).

The point of this discussion is to emphasize the point that bull markets are more about identifying "low risk "periods that are most likely to be limited to typical 5% pullbacks or 10% corrections. Actually, the largest market advances typically occur during volatile bear markets and follow a sharp decline.

The recent S&P 500 advance, of about 40%, occurred over only an 18 month period. The largest peak to trough decline was less than 7%. Most bull markets slowly grind out a series of new highs followed by intermittent single digit percentage corrections.

Overview of the Portfolio Thermostat Market States:

  • Long-term indicators are used to identify the primary trend of the market or security.
  • The proprietary Canterbury Volatility Index (CVI) and related volatility indicators evaluate the degree of rationality in the current market environment.
  • Short-term supply and demand indicators determine which portfolio adjustments are to be made and indicate the strength of the current Market State.

The Portfolio Thermostat process identifies 12 individual Market States, which include

  • 5 Bullish (rational) Market States
  • 4 Bearish (irrational) Market States
  • 3 Transitional Market States (which tend to precede a change from Bullish to Bearish, indicating caution)

Each of the 12 Market States is assigned a percentage allocation of the 2 Groups

  • Group 1 – Global Equities
  • Group 2 – Bonds & Alternatives

The portfolio’s assets are allocated to each of the two Groups and then used to purchase the strongest ETFs within each Group. Every ETF in the Portfolio Thermostat universe is assigned a "Security State” ranking that represents a Buy, Sell, or Hold rating. New purchases are determined by choosing the ETF with the highest Security State ranking. An ETF is sold when its Security State ranking changes to a Sell or when a shift in the Market State requires an adjustment in the percentage allocation of the two Groups. The number of holdings and the size of each holding are determined by the existing Market State and the subsequent Group percentage allocation.

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.