The Summer Doldrums

The Summer Doldrums

Posted on August 23, 2016
Weekly Update

Market State 1: Bullish. The Market States are calculated on the S&P 500. Market States 1 through 5 have shown to have the least risk of the Portfolio Thermostat’s 12 Market States. As I have discussed before, bullish market environments are more predictive of risk than the potential for upside return. That said markets or securities that tend to experience high returns have many of the same characteristics as those in Market States 1 through 5.
Canterbury Volatility Index (CVI) closed Friday at CVI 55. The current volatility is extremely low. Our studies have shown that volatility tends to have an optimal volatility range. In the case of the S&P 500 (the market) the optimal range is around CVI 90 to 75 on the high side and CVI 60 to 55 on the low end.
Low Volatility ALERT:
The volatility is currently at CVI 55. About the same level it was prior to the sharp two day outlier decline that was centered on the BREXIT vote (CVI 54).
The following is an excerpt from the June 22nd - Weekly Update titled:

Volatility Can Move From One Extreme to Another
Canterbury’s studies show that volatility is likely to experience  certain times of extremes, with periods of very high volatility often followed by periods of very low volatility and vice versa. The current CVI of 54 is only one point off of the volatility reading (of 53) that was registered approximately this time last year. Last year, the low volatility reading was followed by a sharp decline several weeks later.

Summary: The S&P 500 declined -5.3%, over two days, within a week following the above writing. This is not a prediction, just an observation.

Market Comment:
The Portfolio Thermostat’s indicators are firmly in the bullish camp for most global equities, especially in the U.S. and emerging markets in general. We have been seeing a rotation in leadership as profit takers have put pressure on the Utilities sector. The Utilities sector is now ranked 9th out of the nine S&P 500 sectors on a risk adjusted strength basis. The same is true for most of the higher yielding stocks.
The NASDAQ 100 has been outperforming the S&P 500 (key bullish confirmation). In addition, the S&P Technology sector (XLK) is rated as a Buy and ranked as the strongest, of the nine sectors, based on the Portfolio Thermostat’s risk adjusted relative strength ranking. The new market leadership has been coming from some of last year’s weaker areas. For example, the Emerging Markets ETF (symbol EEM) has appeared to have turned the corner by putting in a series of higher highs, in price, and higher lows. EEM’s relative strength is even stronger than the NASDAQ’s and its Money Flow, a “smart money” indicator, is at a new high.
Emerging Markets ETF (EEM)
Source: AIQ
Source: AIQ
The rotation from defensive to risker assets confirms the Bullish – Market State the surprisingly low risk market environment. The shifting process from Transitional to Bullish began in mid - July, a few weeks following the Brexit vote.
Bottom Line:
The markets remain in a low risk environment. Other than for a couple potential daily outliers (up or down 1.5% plus a day) as a result from the current extremely low volatility. The most likely scenario from here is a continuation of the summer doldrums and a slow backing and filling process of higher highs and higher lows. 

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.