Summer Doldrums Are Almost Over

Summer Doldrums Are Almost Over

Posted on August 30, 2016
Weekly Update

Market State 2: Bullish (2 days). Market State 2 tends to occur following a normal pullback, even though a 1% decline from the August 15th peak doesn’t count as much of a “pullback.” Bullish market environments are more predictive of risk than the potential for upside return. That said, markets or securities that tend to experience high returns have many of the same characteristics as those in Market States 1 through 5. Please see Market States chart below.
Canterbury Volatility Index (CVI 52): Volatility closed 3 points lower than last week at     CVI 52 which is the lowest level seen since June 25, 2015. The Portfolio Thermostat places several volatility indicators on the Canterbury Volatility Index. These indicators measure the direction, velocity, rate of change as well as other measurements that provide insights into the current market environment. As a side note, our studies have provided evidence showing that the changing characteristics in volatility can give an early indication of a change in the markets’ trading efficiency, meaning either continued stability or potential trouble ahead.
Low Volatility ALERT:
As mentioned last week, “Our studies have shown that volatility tends to have an optimal volatility range. In the case of the S&P 500 (the market) the optimal range is around CVI 90 to 75 on the high side and CVI 60 to 55 on the low end.” In other words, low and decreasing volatility is a primary characteristic of a bullish/low risk environment. While high and increasing volatility is characteristic of a high risk bearish market environment.
Volatility has now declined below the optimum range of CVI 55 (now CVI 52). Extremely low volatility is similar to squeezing down a spring. The longer and tighter it gets squeezed, the bigger the pop. In addition, our system also uses a shortened version of the CVI (10 day calculation). The “shortened” CVI is used specifically for identifying periods that are most likely to experience potential single day outliers that could exceed 1.5% plus, either up or down. Even though some short term market turbulence may be expected soon, our current bullish market stance remains intact.
Volatility tends to move from one extreme to another. Low volatility can be followed by high short term volatility.

Source: AIQ
Market Observation:
Most global equity markets have been slowly consolidating. Contrary to popular belief, most global markets have gained very little, if any at all over the past 18 months. For example, one of the strongest equity markets (S&P 500) is only up 4.68%* since Christmas 12/24/2014. It is important to remember that we only “make money” when the market, or our portfolio, registers a new high in value. All price movement below the previous highest peak is just either market noise or worse, a substantial decline that could take years to recoup. Market advances are only good for trying to get back above water following a substantial decline. For example, the S&P 500 has accepted risk equal to 14.68% standard deviation risk** (from 12/24/2014 to 8/27/2016) meaning that statistically one could have suffered more than a 40% decline over a 12 month period. Most would agree that the market’s risk return relationship has not been very good this year. In fact, this year’s largest peak to trough decline has been more than 14% in the S&P 500. Most other major market indexes have been worse.
Source: *Orion Advisors
           **Orion Advisors
Market Comment:
Not much happened last week. Only two S&P Sectors managed to go up, while the rest were down:
Financials                          +0.33%
Technology                       +0.10%
Energy                               -0.46%
Basic Materials                  -0.50%
Consumer Discretionary    -0.60%
Industrials                          -0.61%
Telecommunications         -0.67%
MSCI US REIT Index       -0.92%
Consumer Staples              -1.22%
Health Care                        -1.94%
S&P 500 Index                   -0.62%                                                                             
Source: Carter Worth, CMT Cornerstone Macro
The good news is that the stocks only Advance/Decline Line (number of stocks going up versus stocks going down) hit a new high last Tuesday. It is common for the A/D Line to begin declining well before the large cap indexes go into a bear market. As the keeper of this indicator, David Vomund, said: It’s a bull market.
Bottom Line:
Expect some market volatility soon but it should not impact the current bull market State environment.

Source: Canterbury Market States Chart

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.