Volatility Is At Historic Low

Volatility Is At Historic Low

Posted on February 16, 2017
Weekly Update

Market State 1: Bullish (7 trading days): Bullish/Rational - Market State 1 is the most predictable of the Portfolio Thermostat’s 12 Market States (environments). The risk, while in MS 1, is typically around -2% to -4% from the most recent market peak.
Below is a chart that shows the different Market States that Canterbury has identified.

The Canterbury Portfolio Thermostat methodology stresses the importance of limiting risk to no more than a normal bull market correction through all market environments. The portfolio should also be in a position to participate in the upside of securities (ETFs) that can maintain those bullish Security State characteristics long enough to produce meaningful returns. 

Canterbury Volatility Index (CVI 38): Volatility is at a historic low reading. In fact, volatility as measured by the CVI has only been this low two other times since 1995 (over 20 years).

Market Comment:
Another week. Another advance to new highs.
How could so many market experts have been so wrong about the current bull market? Who would have guessed that a Trump win would lead to a substantial global stock market rally, a sharp decline in bonds and the lowest volatility in years?  
The Portfolio Thermostat’s Market States provides an objective rules based methodology to identify the existing market environment – bullish, transitional or bearish. The Portfolio Thermostat shifted from outright Bearish (Market State 12) to Transitional (Market State 11) on March 1, 2016. On April 12, 2016, the Portfolio Thermostat shifted from Transitional Market State 7 to Bullish Market State 1 and has remained in either Bullish Market State 1 or Market State 2 ever since.
The 20 Year Treasury Bond ETF (symbol TLT) shifted from Bullish Market State 2 to Bearish Market State 8 on September 12, 2016.
The current Canterbury Volatility Index has only seen a lower CVI level two times in over 20 years. The two previous times occurred in Market State 1, the same as the current environment. Both experienced a short term pullback shifting to Market State 2 and both saw new highs following the pullback.
There appears to be a strong similarity between the current S&P 500 chart, with volatility at an extreme low CVI 38, and “1995” when volatility was at an extreme low CVI 34.

The 1995 period was followed by a substantial advance.

Source: All Charts AIQ

Bottom Line:

Will the current extreme low volatility eventually produce a substantial advance? No two markets are the same. That said, we are in a bull market with low volatility. The most likely outcome from here, would be a normal pullback correction, that could be followed by another leg up and new highs.


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.