The Market Environment Has Changed

The Market Environment Has Changed

Posted on October 14, 2014

Canterbury Portfolio Thermostat-Weekly Update- 10/14/14


Market State 2 (66 trading Days) Long-term (Bullish) 


Canterbury Volatility Index is at CVI = 64 (Bullish): The CVI volatility increased 14 points from the previous Friday. In other words the CVI increased 28% last week and has increased 68% (substantial) from its recent low of CVI 38 registered on September 22nd (only 14 trading days ago).


Overbought/Oversold "Oscillator” is currently 82% oversold (Neutral/Bullish). The 82% oversold reading would suggest the possibility of a further correction prior to a rally. A reading over 95% is considered to be an extreme reading (short term Bullish). 


Market Comment:  

I am often asked about the difference between “normal market noise” and a meaningful increase in volatility. Well, last week exceeded the normal noise and one day outlier we have discussed in past reports. Last week maybe a sign of a text book case of the early stage of a transition to a new macro market environment. 


The S&P 500 fell to its August low (about 1900) which represents important support and is at the 200 day moving average (blue line on chart below). You can also see the substantial increase in volatility at the bottom part of the chart (red line). Compare the most recent 68% increase in the CVI during -5.23%, peak to trough, decline versus the two similar pullbacks in February and April. The current decline is showing a much sharper increase in volatility. 


The bigger issue is the break down in the broader markets. Below is a recent chart of the Russell 2000. The price has broken the 50 and 200 day moving averages, the 50 DMA (red line) has crossed below the 200 DMA (blue line). This crossover is called a “Death Cross” and typically represents a long term Bear market for the Small Cap. Russell 2000. 


Last week was the worst week for stocks since May 2012: 
Stock Index           Week's Change               Year-to-Date 
DJIA                              -2.70%                   -0.20%
  S&P 500                       -3.09%                    3.13% 
NASDAQ Composite   -4.64%                      2.39% 
Russell 2000           -4.60%                        -8.57% 
MSCI World Index    -2.88%                      -.46%


Comment:  The Dow and S&P 500 are shifting away from a 2 year period of low volatility and complacency to a new market environment. Transitioning from one market environment to another will cause additional investor fear and emotion. When investors’ buying and selling is based on short term emotions, their actions will translate into increased volatility. 


The truth is, we have no control over the markets. All traded financial assets will fluctuate in value and we will always have both bull and bear markets. Fearful investors are more comfortable with high levels of cash. This is why emotional investors tend to sell at the bottom or change strategies at the wrong time. The important point to grasp here is that markets are counterintuitive. 

A rules based risk and portfolio management process, like the Portfolio Thermostat, should be designed to optimize the portfolio’s holdings to move in concert with the changing market environment. Such a process will not always be the best short term performer. The best models will still experience fluctuations caused by normal market noise and will have typical draw-downs (declines) in the 4% to 8% ranges. 

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.