The Healthcare Sector Continues Its Leadership

The Healthcare Sector Continues Its Leadership

Posted on June 01, 2015

Canterbury Portfolio Thermostat™

Weekly Update


Market State 2: Long-term: Bullish; Short-term: Bullish/Neutral. The Market State shifted from MS 1 to MS 2 last Friday. The previous Market State 1 lasted for a total of 7 trading days. The market had advanced 2.4% in 11 days leading up to the upgrade to MS 1. It is not unusual to see a pullback or a period of consolidation of previous gains following the first few days of a new Market State 1. In this case, the pullback was enough to shift back to MS 2.

Canterbury Volatility Index (CVI): CVI 55 - The CVI (volatility) only advanced 1 point last week. The S&P 500’s volatility remains at a very low level. This translates to a low risk market environment while keeping in mind that the one day outlier (a move either up or down in the 2% range) is likely when volatility is as low as it is currently.

As a point of reference, a CVI of 75, or lower, is considered to be a “safe zone.” Canterbury has performed numerous studies on the impact of volatility on markets and securities. Our studies have provided evidence showing that low and decreasing volatility is a primary characteristic of a Bullish market environment.

The Overbought/Oversold indicator improved last week to finish at 35% Overbought compared to 76% Overbought from the previous week. This indicator is Short-term: Neutral. A reading of 5% to 10% Overbought (or 90% to 95% Oversold) would be considered to be an extreme level and would be short term Bullish.

Market Comment:

The S&P 500 set a new high at 2130.82 on 5/21/15 followed by a sell-off that closed at 2107.39 on Friday. The previous market cycle high occurred on 12/29/14 at 2090.57. In other words, the S&P 500 is up just 17 points for a total gain of about 0.80% from last year’s high.

In the last Weekly Update (5/26/15), I discussed why the market was looking “tired.” The previous price advance broke above the resistance at 2118 and eventually ended after registering a new high at 2131. The S&P 500 advance lacked volume and investor enthusiasm. Those who were short the market did not panic in mass by putting in buy orders to close their positions. There was no emotional buying for fear of “missing the boat.” The previous buying that led to a short term Overbought condition (Bearish) eventually gave way to sellers last week. The wave of selling last week took the S&P back to 2107, to close just above more significant support at 2100 (50 day moving average).

Best Performers:

The Health Care Sector ETF was the best performing of the 9 S&P sectors over the last 12 months. The Consumer Discretionary Sector ETF was the 2nd best performer. The Healthcare industries, such as Pharmaceuticals and Medical Devices along with Small Cap International equities and Japan have remained at the top of the Portfolio Thermostat’s daily “Volatility Weighted Relative Strength rankings.

The Portfolio Thermostat produces a daily report. The report issues specific buy and sell signals on our universe of over 150 ETFs. All liquid traded securities will experience both Bull and Bearish market periods. The Portfolio Thermostat will only hold ETFs that are in Bullish - Security States.

Our studies show that the Portfolio Thermostat’s  Security States are most effective at identifying ETFs with risk limited to a typical Bull market correction (-5% to 10% from the peak value). Security States are also very good at avoiding ETF land mines that experience large drawdowns. We do not know how long a Thermostat buy signal will last before it eventually rotates out-of-favor. In the case of the Healthcare Sector, the Bullish Security State has lasted for a long time and the ETF (XLV) has doubled in price over the past 3 years.

Bottom Line:

Most global equity indexes remain in a low risk Bullish market environment. The S&P 500’s short term risk should be limited to a single digit percentage from the peak at 2131. At this point, little more selling would be healthy for the market. I would like to see our Overbought/Oversold indicator pullback to somewhere in the 90% Oversold range (currently at 76% Oversold). We are due for another leg up soon. Most markets have been pretty flat for 2015.

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.