This is What Volatility Looks Like

This is What Volatility Looks Like

Posted on May 09, 2022
The S&P 500 market index finished negative for the fifth consecutive week. Surprisingly, this is the first time the market has gone negative for 5 straight weeks since 2011, and only the eighth time it has occurred since the beginning of 2000.  We have stated that the buildup and initial drawdown look similar to the technology crash of the early 2000s.  The market had four separate occurrences of finishing down for five straight weeks from 2000 through 2002.

Over the last five weeks, the S&P 500 has fallen -8%.  Six trading days ago (Friday, April 29th), the market index experienced its largest outlier day of the year, falling by -3.63%.  Last week, it experienced both its second and third largest outlier days, as the index rose by +2.99% on Wednesday and fell by -3.56% on Thursday.  On Monday, the S&P 500 dropped another -3%.  In other words, volatility isn’t slowing down.  Nearly one-third of all trading days in 2022 have been outliers.  That is not bullish.

What has been worse for the average investor is the bond market.  As investor money flows out of equities, it has not gone into bonds.  Twenty-year treasury bonds (ETF: TLT) have also fallen for 5th consecutive week.  Since 2002 (when the ETF began trading), this has only occurred eleven times, with two of those occurrences happening this year.  While stocks fell -8% in the last five weeks, the long-term treasury bonds declined by -9%.  A +/-1.50% day is occurring in treasury bonds about once per week on average.

Summary of Volatility:
S&P 500, Nasdaq, 20-Year Treasury Bond Volatility Stats (through 5/9/2022)
  S&P 500 Nasdaq 20-Year Treasuries
Canterbury Volatility Index CVI 133 CVI 183 CVI 99
Year-to-Date Decline -16.25% -25.3% -22.6%
# Outlier Days (+/-1.50%) 28 (30%) 45 (50%) 16 (18%)
Bottom Line
The markets have been in a panic for most of this year.  According to Canterbury’s Market State indicators, the Nasdaq index turned bearish on January 21st.  The S&P 500 soon followed one month later.  Volatility is extremely high right now.  All markets experience bearish periods including treasury bonds.  Treasury bonds have been among the worst performers in 2022.  

How do we deal with a bear market?  Navigating a bear market requires a disciplined, systematic process that can maintain low volatility through “efficient diversification.”  It is not something an investor can deal with based on emotion or gut feeling. 
In this volatile environment, the Canterbury Portfolio Thermostat hold several ETFs, each providing a unique purpose.  These range from sectors and industries to alternatives and commodities.  The Thermostat will hold inverse ETFs, which move in the opposite direction of the underlying index.  These innovative positions create a more stable, efficient portfolio during a volatile period.  The goal is to limit portfolio fluctuations within a normal range.

We have seen volatile declines in the first few months of 2022.  Volatility works in both directions.  Bear markets are sensitive.  Just the tiniest bit of news can cause the markets to decline further and can also cause the markets to rise.  You will see volatile, upward moves.  The key for investors is to not be fooled into thinking a bear market is over.  Right now, we are only 4 months into it.
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.

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.