The Market is Short Term Overbought

The Market is Short Term Overbought

Posted on February 22, 2016

Weekly Update

Market State 12 – Confirmed/Bear: The Portfolio Thermostat has been in one of the “Transitional/Bearish Market States, now confirmed “Bear” Market State, for the last 115 trading days.

Canterbury Volatility Index (CVI 99 - Bearish): Volatility, as measured by the CVI, remained at basically the same level as last week. The fact that volatility remained high, while the S&P 500 had an up week is an indication that the current market rally is most likely to be unsustainable.

Overbought/Oversold Indicator (94% overbought - Short Term: Bearish): Last week’s S&P 500 +2.8% advance did push the market to an overbought position, moving the indicator 41 points (from a 52% overbought position the previous week). A 95% to 100% reading is defined an as an extreme level.

Market Comment:

We opened our previous week’s (2/19/2016) update with the following observation and question: Friday (the week prior to last Friday or 2/12) recorded a huge reversal in oil prices and the stock market was up big as well. Does this mean that the bear market IS over or is this just another example of a dead cat bounce within a structural bear market?”

We drew the conclusion that the current bear market will probably be around for a while and is likely to get much worse. Based on the Portfolio Thermostat’s indicators, the rally on Friday (Feb. 12th) was just a normal bounce within a structural bear market. The rally continued last week until it hit a short-term level of resistance at 1940 (on the S&P 500) on Wednesday. The market remained pretty much sideways Thursday and Friday.

Overall, the S&P 500 was up 2.8% and the NASDAQ 100 was up 3.8% over a shortened four-day trading week. If we include the previous Friday’s rally and thus look at the market’s performance over five days, then the S&P 500 and NASDAQ would be up 4.85% and 5.57% respectively.

The following are some observations regarding the recent advance:

  • The sectors and industries that had previously been lagging the most were the primary leaders during the advance, while the past strongest were among the weakest during the rally. This is a Bear market characteristic.

Example - Last 5-Days: Financials - (XLF) +6.10%, Utilities - (XLU) +1.09%
Year to Date: Financials - (XLF) -11.96% Utilities - (XLU) +6.75%

  • The rally had less volume than the previous decline, which tends to be a Bear market characteristic.
  • Each of the 3-day advances were outliers, totaling almost 800 Dow points, 98 S&P 500 points and 267 NASDAQ points.
  • A sharp advance that is preceded by a substantial decline is a Bear market characteristic.

Bull Market Characteristics:

Bull markets have broad participation, with most stocks going up. Volatility tends to be low or decreasing. Each peak in value tends to be higher than the previous peak and each trough should be higher than the previous trough. Advances should occur with higher volume than during the periods of decline or consolidation. The price should be above the 200-day moving average, and the 50-day moving average should be above the 200-day moving average.

None of the above characteristics are being displayed in the current market environment (see the chart below). Therefore, most global equity markets are in a bearish mode.

Source: AIQ

The Generals are Falling:

A few of the large capitalized “Generals” that were holding up the S&P 500 have been breaking down. The chart below shows four of the stocks that were responsible for the S&P 500’s strong relative performance now unable to sustain its earlier performance:

S&P 500 5/21/15 Peak = 2131
Companies Ranked by Market Capitalization
Amazon 15th
Starbucks 48th
Nike 51st
Under Armour 277th

Source: AIQ

Bottom Line:

The S&P 500’s short-term upside should be limited. The next most likely move from here should be sideways or down. As always, the Portfolio Thermostat will make additional adjustments to match the current bearish market environment as needed with the objective of benefiting, regardless of how the overall markets behave.

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.