The History of Extremely Low Volatile Markets

The History of Extremely Low Volatile Markets

Posted on October 09, 2017
Market State 1 Bullish/Rational (27 trading days): The S&P 500 remains in a low risk bullish market environment.
Canterbury Volatility Index (CVI 34):  Volatility, as measured by the CVI is at a low level. In fact, the CVI is only 4 points below its previous low which was registered at CVI 30 on August 9, 2017. Market volatility below 45 is considered an extreme, however low volatility is a primary characteristic of a low risk environment.
Today’s Weekly Update will drill down into the history of low volatile environments.

Market Comment:
Last week was good for most U.S. stocks. The Dow was up 1.6%, S&P 500 up 1.2% and the NASDAQ up 1.5%. The EAFE (large cap. internationals) was flat for the week. Last week’s advance was broad based as reflected by the participation of the Russell 2000 (small cap. index) was up 1.6%.

Most major U. S. and international equities remain in a low risk environment. Declines from previous peaks should be limited to a -4% to -6% which is defined as a normal bull market “pullback” as long as the volatility remains below CVI 45.

Here are some historical market facts for markets with extremely low volatility:
  1. Canterbury’s records on volatility is extensive going back 12/30/1897 (32,797 days of market data). Extreme low volatile days accounted for 14.73% of the total (CVI 45 or lower).
  2. Market periods with extremely low volatility are subject to one day outliers in price (one day move of 1% or greater.) It is typical for the day following the outlier, to be uneventful.
  3. Extremely low volatility, of CVI 45 or lower, is still considered to be a low risk environment. For example, the maximum total peak to trough decline when volatility was at CVI 45 or lower and the price was above its 200 Day Moving Average was only (-7.81%) . Keep in mind that a normal “bull market” correction is defined as a (-10%) decline from the highest peak in price.
  4. From 12/30/1897 to the present, 13.92% of the total trading days had volatility at or below CVI 45 and the price above its 200 Day Moving Average.
  5. The current streak of consecutive low volatility days (CVI 45 or lower) stands at 199 days for the Dow and 196 days for the S&P 500 and counting.

Source: AIQ
  1. Going back to 12/30/1896, only two periods that had a longer streak of days with volatility at CVI 45 or lower and price above the 200 Day Moving Average.
  2. The longest streak, with volatility below CVI 45, was 333 days.
  3. The second longest streak was 256 days.
  4. During such times, the most efficient portfolios should have a high percentage in equities.

Bottom Line:

Canterbury’s view is that a buy and hold strategy is subject to substantial losses during volatile periods in the markets. Investing was simpler in the past. Most investors and professionals either did their own brand of financial analysis on information that was already public, or went with their gut feeling, or just assumed that prices were random and markets would go up…eventually. Simplicity in investing has not worked well over the long run.
We have all the breakthrough technologies and tools needed to manage a portfolio through any market environment: bull or bear. The reality is that advancements in investment tools and technologies have far surpassed the capabilities of existing management practices. Technology and innovative tools are only as good as the methods and applications used to manage the complexities. Managing variable markets requires an adaptive portfolio strategy.

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.