Utilities and Large Caps Outperforming

Utilities and Large Caps Outperforming

Posted on March 25, 2019
Market State 1 (Bullish) – The S&P 500 has now entered a bullish Market State following Canterbury’s long-term indicators turning positive.  This is the first bullish Market State since early November.  The characteristics of Market State 1 are as follows:
Long-Term: Positive
Volatility: Decreasing
Short-Term Supply & Demand: Positive
Canterbury Volatility Index 67 Day - (CVI 78)
– Volatility only increased by 3 points following Friday’s “outlier” day (-1.89%).  Canterbury defines an outlier day as being +/-1.50%.  Friday was the first outlier day since January 30th.
Last Thursday marked the highest level for the S&P 500 since the October 9th of last year. The next day (October 10th) was an outlier day -3.3% on the S&P 500. It is interesting to note that the very short-term volatility as measured by the 10-day Canterbury Volatility Index, was at an extremely low 10-Day - CVI 30. I have discussed many times that extremely low volatility (CVI 40 or lower) will generally result in one or two outlier days of 1.5% or more.
Thursdays high was also recorded along with extremely low short-term volatility. The short-term volatility was at 10-Day – CVI 39. Again, volatility was squeezed down leading to a +1.1% day on Thursday and a -1.9% outlier on Friday. As of 2:00 EST, today (Monday) the S&P 500 is down just fractionally -0.4%. It is normal to see outliers following an extended period of extremely low volatility. It is also normal to have a renewed period of normal market volatility following outlier days.

On the other hand, a broader market index like the Russell 2000 (ETF: IWM) is -5.4% off its high, and midcap stocks (ETF: MDY) are -4.2% off of their high.  Overall, Large Cap stocks have been outperforming small caps and midcaps.
In addition to Large Cap stocks having strong relative performance to Midcaps and Small caps, international equities are also showing signs of strength.  According to Canterbury’s Volatility-Weighted Relative Strength (VWRS) ranking system, which ranks securities on a risk-adjusted basis, Large Cap Growth and Value, along with international equities, rank above mid/small cap growth and value.  The rankings can be seen in the table below:
Style VWRS Rank
Large Cap Growth 1
Emerging Markets 2
Large Cap Value 3
Mid Cap Growth 5
Mid Cap Value 6
Small Cap Growth 7
Small Cap Value 8
In the US Markets, the Utilities sector (XLU) and Real Estate (RWR) continue to show high risk-adjusted strength rankings in comparison to other US Sectors.  In addition, Technology (XLK) and Staples (XLP) rank near the top of this list.  On the other hand, sectors like Energy (XLE) and Financials (XLF) are the poorest ranking sectors. 
The table below shows the risk-adjusted ranking (VWRS) of each sector as well as each sector’s Security State.  As a reminder, Security States 1-5 are considered “bullish”, or low risk; Security States 6-8 are “Transitional”; and Security States 9-12 are “bearish” and high risk.  Securities in Bullish States will have better risk/reward relationships than securities exhibiting bearish characteristics.
Sector VWRS Rank Security State
Utilities 1 1 (Bullish)
Real Estate 2 1 (Bullish)
Technology 3 1 (Bullish)
Staples 4 1 (Bullish)
Discretionary 5 1 (Bullish)
Health Care 6 2 (Bullish)
Basic Materials 7 12 (Bearish)
Industrials 8 7 (Transitional)
Energy 9 7 (Transitional)
Financials 10 12 (Bearish)
Large Cap stocks and the Utilities, Real Estate, and Technology sectors are leading the market on a risk adjusted basis.  In Fact, Utilities has been showing strength for a while now.  Meanwhile, small/mid cap indexes are underperforming along with the Energy, Financials, Industrials, and Basic Materials sectors.
Bottom Line:
Financial Markets will experience many different environments.  Sectors and styles will go both in and out of favor.  There have been periods like today, where Financials is the worst ranking sector, but also periods where Financials will be the best ranking sector.  That is why it is important to have an Adaptive Portfolio Strategy, like the Canterbury Portfolio Thermostat, in order to adapt to the current market environment and hold securities that are exhibiting “bullish” characteristics.
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.