The Market Leaders Take A Break

The Market Leaders Take A Break

Posted on May 04, 2015

Canterbury Portfolio Thermostat™
Weekly Update


Market State 2 (MS 2 has been in place over the last 28 trading days): Long-term (Bullish) Short-term (Neutral).

Market State™ (calculated on the S&P 500). Current Macro Environment for Equities

Portfolio Thermostat identifies 12 different market environments called “Market States.” Each Market State has its own unique characteristics and tendencies. The Macro- Market States are used to provide a “big picture” view of the characteristics of the current equity markets. The S&P 500 is commonly referred to as “the market.” There are 5 Bullish (rational – low volatility) Market States; 4 Bearish (volatile and/or increasing volatility) Market States; 3 Transitional Market States (indicating caution).


Canterbury Volatility Index (CVI): CVI 58 - The CVI volatility declined a couple points by mid-week and was followed by a 2 point increase at the close on Friday.  The S&P 500 declined about 1% on Thursday, then gained it back the next day. The S&P 500’s current volatility, as measured by the CVI remains stable reflective of an efficient and low risk environment.

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 finished the week at 27% Overbought (short-term Bullish/Neutral). This indicator improved by 27 points last week. The improvement is attributed to Thursday’s decline and last week’s general weakness in the mid to small cap growth stock areas.


The chart below shows last week’s consolidation of the small cap Russell 2000 compared to the large cap S&P 500 (the numbers on the right side of the chart represent the percentage returns):


Market Comment:

The overall market leadership has been shifting toward a broader base of securities with growth, as opposed to value characteristics over the last 5 or 6 months. Specifically, ETFs representing mid to small cap U.S. equities and, more recently, the international stock indexes have been outperforming.


Last week was one of the few times when the lagers beat the leaders. This year’s weaker Sectors like the Basic Materials and Energy Sector had a good week. At the same time, the year’s big winners like the Health Care Sector and Consumer Staples sold off.


There is a natural ebb and flow in the performance among the various market classes. It is normal to see the strongest areas of the market experience a short period of underperformance or a pullback. This phenomenon does not mean that the old leaders are dead. Actually a consolidation period like last week can be healthy for the leaders as weak holders are shaken-out and eventually replaced by new investors. This process helps create a more secure base of shareholders to begin a new leg higher.


On another front, the new surge in international equities is continuing to gain momentum. The top ranked ETFs on the Portfolio Thermostat’s Volatility Weighted Strength report is now loaded with country ETFs. U. S. Real Estate Investment Trust (REIT) was traded for the International Small Cap index ETF last Friday.


Bottom Line:

Financial markets and securities do not typically go up in a consistent manor. In fact, a large percentage of time is spent in sideways trading ranges, much like we have experienced over the last few months. Most of the money made, or lost, occurs during short spurts typically in the opposite direction that majority of investors least expect.


The most effective portfolio management process will only hold securities that display Bullish characteristics for the purpose of limiting risk and maximizing the advances. One of the most Bull market characteristics is low or decreasing volatility. The Portfolio Thermostat draws from a diverse universe of about 150 Exchange Traded Funds. We now have the technology and evidence based processes making it possible to manage a portfolio of securities that can potentially benefit from any market environment…Bull or Bear.

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.