The State of the Portfolio // May 9, 2016

The State of the Portfolio // May 9, 2016

Posted on May 09, 2016
Weekly Update

Market State 8: Transitional/Bearish – The Portfolio Thermostat’s “Market State” is a reflection of the S&P 500’s current market environment (i.e. bullish, transitional or bearish), according to the following indicators.

In addition, each traded security (ETF) has its own Market State, called a Security State, that likewise reflects the security’s current bullish, transitional, or bearish characteristics. This too is rated from 1 to 12.  Last and perhaps most importantly, the Canterbury Portfolio Thermostat model portfolio will have its own “Portfolio State,” out of a possible 12 Portfolio States, which (again) is an indicator of the portfolio’s overall characteristic/tendency (bullish, transitional, or bearish).
As you can see, Market States, Security States, and Portfolio States are all related and interconnected but they are not necessarily identical. For instance, a portfolio may be in a bullish Portfolio State during a bearish Market State because its holdings all exhibit bullish Security States.
Portfolio Thermostat Model - Close of Friday
Portfolio State 1: Bullish A Bullish Portfolio State represents a diversified portfolio of securities that has maintained a low level of risk in the existing market environment. In other words, although the current market environment is Transitional/Bearish, the Portfolio Thermostat model is still in a Bullish State, with typical risk exposure about equal to a normal market correction, which is defined as a -10% decline from the portfolio’s peak value. Transitional and Bear Market States have wild swings, up and down, with almost undefinable risk, but the portfolio doesn’t have to have them too. 

Canterbury Volatility Index:
Volatility at CVI 75 or lower is considered to be normal.
The S&P 500’s CVI = CVI 64 (Low and Decreasing Volatility)
The Portfolio Thermostat model portfolio’s CVI = CVI 23 (Low Risk)
Portfolio Thermostat’s Primary Objectives:
The following are some comments taken from our Weekly Updates posted before and after the sharp market declines on August 20th, 21st, 24th, and 25th of 2015. The Market environment had shifted from a Bullish to Bearish Market State during that time and has remained in a bearish environment since.

 8/3/15 - For now, the bulls still have the ball. Narrow trading ranges are typically resolved by a decisive break one way or the other. Things should liven up soon.

Source: AIQ

 8/24/15 - The market is in capitulation mode. A rally should occur sooner rather than later. It will take a period of time for the markets to complete a stabilization process. The Portfolio Thermostat will make the necessary adjustments as our indicators shift to reveal the new market environment.

 9/8/15 - This is the kind of market environment that the risk of getting whipsawed is much higher than transitioning straight into a bear market. The last 11 trading days (beginning on 8/20) have had 9 large outliers (days that exceed 1.5% up or down). Large point moves are normal for an early stage bear market.

Throughout this period, the Canterbury Portfolio Thermostat made systematic adjustments in its ETF holdings in response to the changing environment.  

The following list outlines the primary objectives of the Portfolio Thermostat, while the S&P 500’s Market State was Transitional or Bearish:
  1. Stabilize the portfolio’s daily fluctuations to be no greater than 1.5%.
The last day the Portfolio Thermostat model had an outlier over 1.5% was September 1st, 2015.
  1. Limit the portfolio’s declines to normal “bull market” corrections, typically -10% from the peak value.
The largest peak-to-trough decline (maximum drop) in the Portfolio Thermostat model was -2.2% year-to-date.
  1. Maintain the portfolio in a Bullish Portfolio State regardless of the existing overall market environment.
The Portfolio Thermostat model has been in a bullish Portfolio State since September 15, 2015.
  1. Optimize the portfolio in response to the existing market environment.

Bottom Line:
Contrary to what one might assume, it is not the Market State that is the investment strategy’s key focus. Although we use the Market State to determine how the portfolio needs to adjust, it is not the primary concern simply because we cannot control it. Whether it is bullish, bearish, or transitional, we merely take it as is. The same applies for the Security State. Each security will go through risky periods and conservative periods, depending upon its correlation to the market. What we can control, though, is the Portfolio State. When the portfolio is on track with its objectives, it is positioned for long-term growth regardless of the broader market environment. 


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.