The Dows 326 Point Decline is Now Just a Faded Memory

The Dows 326 Point Decline is Now Just a Faded Memory

Posted on February 18, 2014

Canterbury Portfolio Thermostat Weekly Update-2/18/14

Market State 2 (24 trading days) - Long-term: Bullish; Short-term: Neutral/Bearish. Market State 2 occurs during normal corrections in long term Bull markets. A typical Market State 2 correction would be in the -4% to -8% range from the previous S&P 500 peak. The largest correction during the current MS 2 environment is -5.76%. We have been in current MS 2 for 24 days and counting. The correction occurred between 1/5/14 and 2/3/14 and was followed by a +4.47% advance that began on 2/3/14 through last Thursday.

Canterbury Volatility Index (CVI) = 64 (rational market environment) The CVI was down 2 points for the week showing a slight reduction in an already low volatile environment. A CVI below 75 is considered to be a low risk environment.

Overbought/Oversold indicator: Our overbought/oversold indicator moved to 93% overbought (short term Bearish) from 44% overbought (Neutral) from the previous week. As a point of reference, a reading of 95% to 100% is considered to be an "extreme level.” The current overbought condition is the result of the recent +4.47% advance occurring over just 6 trading days.

Market Comment:
The market has had a pretty nice run over the last few trading days. I don’t remember many of the CNBC market experts predicting a strong rally following the Dows drop of 326 points on February 3rd. In fact, the financial media acted as if something terrible were about to happen.

The Portfolio Thermostat did NOT issue a volatility alert based on the February 3rd decline. The equity markets experienced a normal -4% to -8% correction which is typical of a Market State 2 consolidation. The total correction was -5.76%. Most major market indexes are now almost back to their previous highs.

In spite of the most recent rally, the Portfolio Thermostat’s indicators have NOT gone back to Market State 1. Most major equity markets are short term over extended (moved up too fast). In addition, there have been some rotations in leadership toward bonds, and alternative ETF’s.

Our universe consists of about 130 Exchange Traded Funds (ETFs). Of those approximately 45 ETF are included into the Bonds and Alternatives Group. These alternative securities compete with the global equity markets for investors’ dollars. An increase in the number of Buy signals in alternative markets can mean at least a short term change in leadership. This is what seems to be happening now.

The Portfolio Thermostat has begun the process of adjusting to the slight change in the market environment.

Bottom Line:
The most likely move from here is another short term correction or a sideways consolidation of the most recent gains. The probabilities for a short term decline from here, if any, should be shallow and most likely would be less than -4% to -6% from the current or next peak. The long term Bull market in stocks remains intact. Our volatility indicators remain positive and stable. The Portfolio Thermostat is designed to adjust to the existing market environment to maintain low and consistent portfolio volatility.

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.