Volatility Goes in Both Directions

Volatility Goes in Both Directions

Posted on March 21, 2022
The S&P 500 and Nasdaq 100 had a big week, up 6.2% and 8.2%, respectively.  Technology and large cap growth moved from worst to first, for at least a one-week period.  On the other hand, some of the strongest areas, year-to-date, energy (-3.9%), Utilities +0.5% and Broad Commodities Index (COMB) (-1.65%) were flat to down last week.  Does this mean that the market’s leadership is changing once again?  Even more important, is the downturn in last year’s darlings reestablishing their dominance?

The answer is... not likely.  Make no doubt about it, the S&P 500 and the NASDAQ 100 are both locked into our “bear” Market State 12, and volatility (the weapon on the bear) is still climbing.  It is normal and expected to see short-term reversals, during bear markets.  It is also likely to see sharp short-term advances in the former poorest performers, while the strongest performers take a breather.  So far, the advance in the markets has not even turned our short-term supply & demand indicators positive.

It is important to note that outlier days (days that are +/-1.5% or greater) are a sign of market inefficiency and are a bear market characteristic.  In the current case, a 6.2% and 8.2% move in the S&P 500 and NASDAQ are not normal and are considered to be “bearish” indicators.

Looking at daily data since 1970, the S&P 500 has only gone up more than +5% in one calendar week 45 times.   Of those 45 weeks, only 10 of them occurred in a Canterbury bull Market State, half of them occurring in the months leading up to the technology crash in 2000.  On the other hand, 31 of those +5% weeks occurred in the middle of a Bear Market State.  We have said it in other updates but remember that the largest “up” days happen in the same market environment as the largest down days.  Some of the largest, fastest market rallies occur in the middle of a bear market.

If you look back at the most recent two major bear markets, the tech crash in 2000 and the financial crisis, each one featured several +5% or greater week rallies.  Both the financial crisis and early 2000s tech crash saw five calendar weeks exceeding +5% prior to retreating to a new low.

If we take a look at Canterbury’s risk adjusted rankings, which account for both a security’s relative strength as well as its level of volatility (risk), there has been minimal change in the sector rankings following last week’s rally.  Even though tech-related stocks led the markets higher, they still lag in risk-adjusted rank.  Currently, the bottom 4 market sectors are Financials, Consumer Discretionary, Information Technology, and Communications.

Bottom Line
Volatile markets go in both directions.  One-third of the trading days in 2022 have been outlier days (a day beyond +/-1.50%).  Ten of those days have been down, and eight have been up, with two of those occurring last week.  Four consecutive days of greater than 1% movement is not a bullish indicator--- it’s an indicator of high volatility.  Our Canterbury Volatility Index (CVI) now is at CVI 110 on the S&P 500 and CVI 157 on the Nasdaq. 

The recent rally in the market was led by the weakest areas.  This is normal for a bearish market environment.  Remember, markets will always try to confuse the masses.  Weeks like last week can have the effect of scaring investors back into those weaker areas, prior to another drop.  We cannot make a prediction outright that the market will fall from here, but volatility remains high and high volatility is a negative characteristic.

Even with the stock market’s recent movement, the “defensive” sectors continue to lead, while the tech-related ones continue to lag.  Energy remains the #1 rated risk-adjusted sector, and commodities are strong.  This has been the trend for all of 2022.  On the other hand, outside of equities, bonds are very week, have been weak, and have not shown signs of improvement.   
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.