Unexpected Events Have Little Impact On Bull Markets

Unexpected Events Have Little Impact On Bull Markets

Posted on July 24, 2017
Market Update 7/24/2017
Macro - Market State (Based on the S&P 500)
Market State 1: Bullish/Rational (8 trading days): The S&P 500 set 2 new all-time highs last week. That said the market was up only 0.5%. In fact, the S&P 500 has hit 14 new all-time highs   since March 1 of this year, while the market is only up 3.2% through last Friday. Bullish Market States do not necessarily mean that the market will go straight up. Bull markets are more reflective of stable and low risk environments.  There is more on bullish Market States in the Commentary section below.
Canterbury Volatility Index (CVI 36): Volatility below CVI 40 is an EXTREMELY low historical level. The last time the market experienced an extended period of volatility below CVI 40 was in back in 1994 and 1995. The current market has been at or below CVI 40 since January 31st of this year. 
Check out the similarities between the two charts below.
The current low level of volatility has not been seen in over 20 years. Notice the 15% plus advance following the break above the 6-month base building period. See the low volatility below CVI 40 (lower part of chart).

Source: AIQ
The second chart shows a 35% plus run, following the break out of a yearlong base building process (about half the time and half the move of the current advance). 
Not a prediction. Just an interesting observation.

Source: AIQ
The FANG stocks (Facebook, Amazon, Netflix, Google) accounted for most of the gains during the first half of the year. Most major market indexes are now at new highs. International markets have generally been even stronger than the U.S. markets. The stocks only advance/decline line (number of stocks going up versus down) is now at a new high. This confirms the bullish environment and makes a downside reversal unlikely over the near future. That said the market is a little overextended. A 2% to 4% pullback would help the market digest its recent gains.
Should we be concerned about one day declines that are driven by events?
I am often asked about the possibility of a sharp market decline following a low probability/high impact (black swan) event. Our studies clearly show that events tend to have little impact on market prices when the Portfolio Thermostat is in a Bullish Market State environment (like it is currently).
For example: Take the period between 12/31/1949 through 6/30/2017. The 67-year period was comprised of 16,984 trading days. Of those days, there were 41 (one day) outliers that were up, or down, more than 5%.
  • Bullish Market State environments covered 10,776 (64%) of the total days but only accounted for 3, of the 41, outliers (-6.87%, -6.6%, and -6.1%)
  • Bearish and Transitional Market State environments covered 5,998 (36%) of the total days but accounted for total of 38 of the outliers. The 5 largest one day declining outliers were: (-20.5%, -9.0%, -8.9%, -8.8% and -8.3%).     
The shifting from a bullish to a bearish market environment is a process and takes some time.
Bottom Line:
Markets are not impacted as much by events as they are by the existing environment (bullish or bearish). We remain in a low risk bullish environment. Owning a high percentage in equities is appropriate for conservative investors until the Portfolio Thermostat’s operating system indicates a shift to a different 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.