The S&P 500 has Recovered From its Year End Decline

The S&P 500 has Recovered From its Year End Decline

Posted on February 18, 2019
Market State 7 (Transitional) - The market has become much more stable since January 4th.  The S&P 500 has only had 3 outlier days (up or down of 1.5% or more) over the last 29 trading days. The most recent outlier day was last Wednesday (+1.55%). In fact, a move to 2827 (about another 50 points from here) could put the S&P 500 back into bullish Market State 1.
Market State 7
Long-Term: Negative
Volatility: Decreasing - Positive
Short-Term Supply & Demand: Positive
Canterbury Volatility Index (CVI 95)The benchmark CVI index is based on the previous 67 days of data. Even though it is exponentially weighted, to the near term, it does not come down very quickly when volatility stabilizes. On the other hand, a shorter term (10 day) CVI responds much more quickly to the existing environment. The volatility on the 10-day CVI is at 60, which is well within the low risk rational range.

The market has been incredibly strong. That said, markets cannot go up or down forever.  In other words, the large decline we saw back in December could not be sustained.  Similarly, the large increase we saw in January and continue to see, can also not be sustained without some sort of a pullback to consolidate the gains.

The S&P 500 is rapidly approaching resistance at 2800. The market has been at this level 3 previous times without breaking through. On a Bullish note, the stocks only Advance Decline Line (A/D Line), which measures market breadth, does continue to put in higher highs, and in fact, is at a new high. This is called a positive divergence because the S&P 500 has yet to put in a new high. Strong market breadth shows that many stocks are participating in the rally, rather than just a few generals.

Since the low point of December 24, the S&P 500 has rallied 18% from the bottom, which was preceded by a -16% decline. Markets are not supposed to move that much or that fast in a normal market environment. The decline occurred much quicker and deeper than what would be expected because it was preceded by a period of extremely low volatility. Big declines are typically preceded by a period of increasing volatility and are more typical of a bear market.

Source: AIQ

In the rare case when low volatility precedes a substantial decline, then it is paramount not to make the “fatal mistake.” The fatal mistake is to follow your emotions and reduce exposure, after the fact, and miss the inevitable kick-back rally that follows.
Those who lacked discipline, or didn’t know better, sold into the decline. Now that the market has rallied back, they are finding that they are a long way away from getting back to where they were in early October. The markets have left them behind. Now they are being forced to buy at much higher levels. This leaves them vulnerable to getting whipsawed again.
Update on Sector Rankings

Below is a table showing S&P 500 sector rankings, according to Canterbury’s Volatility-Weighted Relative Strength ranking. Our ranking measures the relative strength of one sector verses another after adjusting for the differing volatility levels of each sector. This exercise puts all sectors on an equal playing field regardless of volatility.
The table shows the rankings on December 24th, 2018 as well as Friday, February 15th, 2019.  Notice that following the December decline, many of the more “conservative” sectors like Utilities, Staples, and Healthcare were ranked the highest while Financials and Industrials were near the bottom of the rankings.  Except for Industrials, the strongest sectors throughout the December decline continue to be the strongest sectors during the recent rally. 
December 24th, 2018 February 15th, 2019
VWRS Rank Sector VWRS Rank Sector
1 Utilities 1 Real Estate
2 Healthcare 2 Industrials
3 Real Estate 3 Utilities
4 Staples 4 Staples
5 Technology 5 Healthcare
6 Discretionary 6 Discretionary
7 Industrials 7 Technology
8 Financials 8 Financials
9 Basic Materials 9 Energy
10 Energy 10 Basic Materials
Bottom Line
The market bottom, on Christmas Eve, feels like a long time ago. The recent rally has made many investors forget how badly they felt at that time.
I will leave you with a quote from the Canterbury Weekly Update on December 26th (the day following the market bottom):

This decline still falls within the realm of noise because it is based on emotions and irrationality. It is all about portfolio management from here. The Canterbury portfolio is set where it needs to be based on where we are now.

All corrections are scary. This one is more so than most. Emotional markets eventually workout and are soon forgotten. There is a method to handling emotional environments. We will benefit from the fluctuations after it is over.

The Canterbury Portfolio Thermostat has recovered to the previous end of October levels and has made the necessary adjustments to remain stable even if the markets do decline from here. We had a process to deal with rare events and the process was executed successfully. Now, looking back, the year end decline is just a blip on the radar and will soon be forgotten.
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.