Transitional Markets- You Never Know What You're Gonna Get

Transitional Markets- You Never Know What You're Gonna Get

Posted on March 11, 2019
Transitional Markets- You Never Know What You’re Gonna Get
Market State 8 (Transitional) – The S&P 500 remains in a Transitional Market Environment but has shifted to Market State 8 after short-term supply & demand indicators turned negative following a minor pullback last week.  Market State 8 has the following characteristics:
Long-Term: Negative
Volatility: Positive; decreasing
Short-Term Supply & Demand: Negative but oversold
Canterbury Volatility Index (CVI 80) – The Canterbury Volatility Index continues to fall lower.  CVI is now at its lowest point since October of last year.  Declining volatility is a bullish characteristic.  In fact, Canterbury’s shorter-term CVI has fallen to extreme low levels as the market has rallied off of its December lows.
Last week, the market (as measured by the S&P 500) pulled back -2%, while mid-caps were down -3.3% and small caps were down -4.3%.  This marks the first down week for the S&P 500 in quite some time.  The down week was the 1st one in 6 weeks, and only the second one in the last 11 weeks.  The only other down week was down -0.22%.  The 2% minor pullback is the largest pullback so far this year.  
Canterbury uses a proprietary set of indicators in order to identify securities that are either in Bullish, Transitional, or Bearish states.  These “Security States” are a measure of risk that consider the long-term trend, short-term supply & demand, and most importantly, the volatility of a security.  A bullish security is a stock that is exhibiting low risk characteristics (positive trend and low/declining volatility).  A bearish security is one that is showing high or increasing volatility.  Canterbury has the capabilities to measure a security state on any liquid-traded asset.
With the market being in a Transitional Market State, our Canterbury Portfolio Analytics team took the S&P 500 individual stocks and ran security states on each one of them.  From those results, 44% of S&P stocks are in a bullish security state; 16% are in a Transitional State; and 40% are in a Bearish State.  The chart below shows the percentage of stocks in bullish, transitional, and bearish states for each sector:

From the chart above, we can see that Utilities has the highest percentage of securities in bull market states.  In fact, all but 2 utility securities are in bull market states.  Technology, Industrials, and Real Estate are also showing signs of strength, with over half of their securities in bull markets (95/170) while only 28% (49/170) are in bear market states. The worst sectors are energy, materials, and financials with a total of only 22 total bullish stocks (out of 122) and 67 bearish stocks.
The market first turned to a Transitional Market State on January 29th.  Below shows a chart comparing the percentages of bullish versus bearish stocks in each sector for both January 29th and March 8th (Friday):

We can see that since the market first turned Transitional on January 29th, both technology and industrials have seen a significant increase in their percentage of stocks that are bullish, and a significant decrease in their percentage of stocks that are bearish.  Both utilities and real estate have remained relatively consistent in having a high number of bullish stocks versus bearish stocks, and health care has not seen much change. Energy continues to have a high percentage of bearish stocks since the market turned transitional. Financials, while still has a higher percentage of bearish stocks, has seen a significant fall in that number since January.  Most of those stocks have moved to being transitional.
Here are Canterbury’s sector rankings according the Canterbury’s volatility weighted relative strength (VWRS) indicator which considers volatility (risk) in its calculation.  You can see that the risk-adjusted ranking (VWRS rank) coincides with the amount of stocks bullish in each sector.  Utilities, real estate, industrials, and technology are ranked at the top while financials and energy are at the bottom of the list, on a risk-adjusted basis.
Sector VWRS Rank
Utilities 1
Real Estate 2
Industrials 3
Technology 4
Staples 5
Materials 6
Discretionary 7
Healthcare 8
Financials 9
Energy 10
Bottom Line
We have said it before and will say it again: Transitional Markets are like a box of chocolates, you never know what you are going to get.

The slight majority of stocks are showing positive, risk-adjusted strength, especially in utilities, real estate, industrials and technology.  It is kind of a rare occurrence to see both technology and utilities at the top of the rankings list together.  Typically, in a bull market, technology will be higher ranked while the utility sector is lower.  In a bear market, it is more likely that we see utilities highly ranked and technology have a lower ranking.  There is certainly a diverse array of stocks showing signs of strength in this transitional environment.

This market echoes the importance of having an adaptive portfolio strategy, like the Canterbury Portfolio Thermostat.  Markets will go through various environments: some will be bullish, but others will not be.  The Canterbury Portfolio Thermostat has the ability to adapt to the external market environment.  It manages the security selection, asset allocation, diversification and on-going maintenance to keep your portfolio in a bullish state with limited risk. 
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.