The Generals Move Forward as the Troops Fall Back

The Generals Move Forward as the Troops Fall Back

Posted on November 12, 2018
Featured Video: This week’s featured video is a reminder on Adaptive Portfolio Strategy and the importance of limiting drawdowns in your portfolio.  The Canterbury Portfolio Thermostat is an Adaptive Portfolio Strategy- designed to navigate everchanging market environments- Bull or Bear

Market State 6 – Transitional: The stock market, as measured by the S&P 500, remains in a Transitional Market Environment following October’s large spike in volatility.  Canterbury continues to monitor for any changes in the current market environment, whether it be from Transitional to Bear or Transitional to Bull. 

Canterbury Volatility Index (CVI 85): The Canterbury Volatility Index is at CVI 85.  CVI has remained stable at this level for the past 3 weeks.

Last week, the Dow and S&P 500 were up 2.8% and 2.1% respectively. On the other hand, the NASDAQ  100 was only up 0.7% and the Russell 2000 (small cap) index closed the week essentially unchanged. This illustrates that there is a growing gap in performance between large and small capitalized stocks.

A healthy market will typically have the small and mid-cap stocks out-performing large cap stocks.  Similar to a healthy battle plan, it is much better to have the troops out front pushing ahead while the Generals follow the action from behind the lines. It is a bad sign when you see the troops in retreat while the Generals move up to take their places.

These rallies, like the current one, give investors hope that the worst is behind them. History shows that most transitions begin the same way with a decline, kick back rally during which time adjustments are made. After the first rally, the market remains volatile and will continue to swing in both directions, up and down.

Our objective is to maintain stability until the new bear market is confirmed or the previous bull has been reestablished by our indicators.

Although a sharp increase in volatility is a sign of market inefficiency (bearish), while in Transitional and Bearish Market States, decreasing volatility does not mean an immediate return to market efficiency.
Likewise, the environment for global equities is better when the S&P 500 is in a bullish Market State, but big market rallies do not necessarily indicate a bull market environment. Some of the biggest market rallies occur during Transitional and Bear market environments, but in such cases, sharp declines typically precede sharp “kick-back” rallies. These rallies can be impressive but are more likely to occur following sharp declines, such as we saw during October.
Bottom Line:
The S&P 500, and most other equity indexes, have gotten back about 50% to 60% of October’s correction. The market is now 98% overbought. The most likely next move, from here, is another down leg as the markets continue their erratic behavior.
The current rally does not have the characteristics that are typical of a stainable advance. The probabilities of retesting the old lows and establishing a new lower low is substantially more likely than the opposite (retesting the old S&P 500 high at 2930) and establishing a new high.

The Portfolio Thermostat’s “portfolio” made adjustments in its ETF holdings prior to the first correction and has continued to make tactical adjustments through the recent volatility to maintain stability. The Portfolio Thermostat process is designed to benefit through the up and down stabilization process by limiting declines and the rebounding off a larger base.
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.