The Market's Rally and Breadth

The Market's Rally and Breadth

Posted on August 15, 2022
This week’s update will be brief and discuss some minor developments we have seen in the markets.

Recent Rally & Market Breadth
Since putting in a low on June 15th, the markets have rallied.  Our good friend and expert market technician wrote about this recent market rally over the weekend:

The S&P 500’s 16% rally since mid-June has recovered half of the bear market losses. Its strength has shocked many hedge fund managers who were holding too much cash.  No doubt they are buying now for fear of missing out.  These strong rallies occur at any time when there is a an exceptionally high level of cash on the sidelines – David Vomund, VIS Alert 8-14-2022

Here is a positive note. One characteristic you hope to see during a market’s rally is a rising tide lifting all ships.  In other words, you want the market’s rally to be participated in across the market’s components.  Looking at the Advance-Decline Line, which measures market breadth, or in other words, market participation, it appears that the recent rally has seen broad participation.  A rising tide is lifting all ships, as opposed to just a few large vessels carrying the rally while the smaller ships fall off.  You can see in the chart below that the Advance-Decline Line has surpassed its late-March level, even though the S&P 500 index has not.


Source: Optuma Technical Analysis Software

As noted by Vomund above, the S&P 500 has regained 50% of what it lost from the June low.  It still, however, has a way to go before putting in a new high.  Remember, large declines require larger advances to break even.  The larger the drawdown, the larger the advance needs to be to get back to zero.  That is the power of negative compounding.  Oftentimes, a retracement of 50% during a bear market can act as resistance. 

Bottom Line
The markets have rallied, and it has been on broad participation.  That is certainly a good sign for the markets, but the market is not in the clear just yet.  Bear markets can have several large rallies, just as we saw back in early March before experiencing a -15% decline from the March peak.  The market’s rally has been led by stocks that had declined the most this year, which are those technology-related stocks.  As David Vomund wrote, anytime you have a lot of cash on the sidelines, you’re due to see a large rally.  Panic selling often leads to panic buying.

At Canterbury, we have a process for dealing with bear markets.  That process is to adapt the portfolio as market characteristics change.  The efficient portfolio today looks much different that the efficient portfolio looked to start the year.  No one can control, nor predict, the direction of the markets.  What we can control is our portfolio’s volatility.  We want to create stable, low volatility through all market environments- 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.

 
Canterbury Investment Management: Tom Hardin

More About Brandon Bischof

Brandon is directly responsible for managing the Canterbury Analytics Group (CAG). To date, Canterbury Analytics Group has played an important role in advancing portfolio management from a loose art form based on subjectivity and obsolete assumptions to an adaptive process with scientific rules and methods capable of providing evidence based results and statistically relevant value add results.


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