The Market Is Stuck In The Mud

The Market Is Stuck In The Mud

Posted on June 08, 2015

Canterbury Portfolio Thermostat™

Weekly Update


Market State 2: Long-term - Bullish; Short-term - Bullish/Neutral. The Market State 2 has been in place for the last 6 trading days. MS 2 typically occurs during a normal Bull market pullback. The S&P 500’s peak was at 2130.82 on May 21st and closed at 2092.83 Friday for a total pullback (drawdown) of 1.8%.

Canterbury Volatility Index (CVI): CVI 52- The volatility (as measured by the CVI) declined by another 3 points last week from CVI 55. In fact, CVI 52 marks the lowest volatility for 2015.

Low and decreasing volatility is a primary characteristic of a healthy Bull market environment. The current risk level is low. Keep in mind that the one day outlier (a move either up or down in the 2% range) is likely when volatility is at an extreme low level.

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.

Overbought/Oversold indicator continued to improve last week to finish 19% Overbought (81% Oversold) compared to 35% Overbought the previous week. This indicator is Short-term: Bullish/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 is stuck in the mud. The market had no follow through after breaking out to a new high last month, on low volume. The sideways trading range is putting us all to sleep. Now that we are back in the middle of the trading range and buying power has remained weak, the most likely move from here is a gradual descent to the lower end of the trading range around 2040. Additional selling is what we need to get the market to that 95% to 100% Oversold condition. If this happens the probabilities would favor another attempt at breaking out of this stagnate 7 month trading range.

So far year to date the Healthcare and Discretionary sectors have been the strongest, while the Utility sector is the weakest.  We are in a boring market environment. Nothing much out of the ordinary has been happening except the 15% drop in Treasury bonds. It appears that the only investors who have made money in fixed income this year are those few who hold the (Inverse) Treasury ETF, such as (TBF).

Canterbury Market State Study:

Canterbury’s ETF research recently completed a study of the period between 7/23/1929 through 5/29/2015 for a total of 21,563 trading days. The study examined the characteristics of the Portfolio Thermostat’s 5 Bullish Market States compared to the other 7 Market Sates (3 Transitional and 4 Bearish Market States). The Bull Market States were comprised of 71 segments, each segment ended with a shift to a Transitional or Bearish Period.

We found that 12,837 (59.53%) of the trading days qualified as being in Bull Market States. The Bullish periods were broken into 71 periods. Each Bull period ended on the day the Market State shifted to one of the 7 non-Bullish States. 8,726 days (40.47%) were in Transitional or Bear Market States.

Summary of findings

  • The longest uninterrupted Bull Market State lasted for 648 trading days (11/28/1962 through 6/24/1965).
  • The largest peak to trough decline (drawdown), when in a Bull Market State and the volatility was at CVI 100 or lower, was -12.7% in 1978. In other words, the maximum drawdowns, during the Portfolio Thermostat’s Bull market segments, were limited to normal corrections defined as a 10% decline according to Investopedia.
  • Of the 12,837 Bull Market State days, 8,934 (69.60%) were in stagnant trading ranges (periods when the market cannot exceed a previous high).For example, trading ranges similar to what the S&P 500 has experienced over the last 7 months.
  • The gains, during the Bull Market segments, were realized during 3,803 trading days (17.64%) of the total days identified as in Bullish Market States.

Bottom Line:

The evidence shows that The Portfolio Thermostat’s Market States have been successful at identifying Bull market segments with limited downside risk. The study also confirmed that most of the market’s gains occur during short periods. These gains typically occur when the majority of investors least expect them.

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.