The S&P 500's Attempt to Hold a New High // July 26, 2016

The S&P 500's Attempt to Hold a New High // July 26, 2016

Posted on July 26, 2016
Weekly Update
Portfolio State: The Canterbury Portfolio Thermostat has been in Bullish Portfolio State 1 since May 4th (55 trading days). The model’s volatility, as measured by the Canterbury Volatility Index, is at CVI 22 (low risk).

Market Comment:
The S&P 500 remains in a Bullish-Transitional Market State. The difference between a Bull and a Transitional or Bear Market State has to do with the range of possibilities for maximum peak-to-trough declines (also known as the max drawdown from the highest peak value).

A Bullish Market State is marked by:
  • An extended period of low and decreasing volatility
  • Limited declines (from the highest peak value) in the 8% to 12% range
  • A pattern of higher highs, in price, and higher lows (a stair step pattern)
  • Isolated trading days that have a daily fluctuation of more than 1.25%
Compare this to the current Transitional market environment, which began on 8/20/2015. From that date until last Friday:
  • Since 8/19/2015 (less than a year), the market has had 6 volatility alerts from our Velocity of Volatility indicator. The previous 12 months, which had been in a bullish Market State, only had 1 volatility alert.
  • The market has been locked in a trading range since the February low of 2014 up until the recent break above the May 21, 2015 high. This, however, is not the normal bull market scenario of consecutive higher highs and higher lows.
  • The S&P 500 has had two declines of -12.3% and -14.2% since its May 21st high of 2130. Prior to May 21st, the largest decline had been -7.4% going all the way back to the beginning of 2012. 

Source: AIQ

The good news for the market is that the S&P 500 and the Dow have both broken above their trading ranges over the last couple weeks. Time will tell if the two indexes will be able to remain above their old highs.
The majority of the major market equity indexes, however, have not broken above their old highs and remain in trading ranges. The defensive sectors, such as Utilities, Consumer Staples, and Real Estate Investment Trusts (REITs), look good, but Energy, Basic Materials and Industrials continue to trade well below their May 2015 highs.
Percentage change since the May 21, 2015 high:
Utilities:                                     +17.8%
MSCI US REIT Index:               +14.0%
Consumer Staples:                  +11.8%
Basic Materials                          -4.8%
Energy:                                       -12.0%
Source: Cornerstone Macro
Bottom Line:
The shift from a Transitional market environment back to a Bullish Market State is a process. Assuming that the market can hold above the old S&P 500 high, it will most likely require some time to consolidate the gains and build a base before the next substantial leg up.
The key to managing this uncertain environment is to maintain a low risk, efficient portfolio regardless of which direction the market eventually breaks. Either way, expect to see some adjustments in the portfolio as the direction becomes clearer.

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.