Volatility Visualized

Volatility Visualized

Posted on June 21, 2022
This update will focus on putting volatility into perspective.  When volatility is discussed, there are many ways in which volatility is defined.  Our readers know that at Canterbury, we measure volatility using the Canterbury Volatility Index (CVI).  Another helpful way to visualize volatility in the markets is the use of “outlier days.”

Several of our updates talk about outlier days, and we have written additional pieces on them in the past, but we wanted to share a few quick charts that show outlier days in a bull market and in a bear market.

To start, let’s define an outlier day.  Canterbury defines an outlier day on the market (S&P 500) to be any single trading day beyond +/-1.50%.  We arrive at this definition by taking the standard deviation of the S&P 500 during a Canterbury Bullish Market State, dating back to 1950.  The daily standard deviation in a Bull Market State is 0.75%.  Using bell curve math, that would mean that 95/100 trading days should fall between -1.50% to +1.50%.  That would mean for a given year, about 13 trading days would be beyond +/-1.50%.

Bull Market Outliers

Bull markets are considered to be “efficient.  They are characterized by having low volatility, tighter fluctuations, and a series of higher market highs and higher market lows.  The calendar year for 2021 was generally considered an efficient bull market.  Most of the year featured low volatility, even nearing extreme low levels.  The market went up, with a series of higher highs and higher lows, while only experiencing 18 “outlier days” beyond +/-1.5% for the entire year.  That is very close to the expected number of 13 outlier days.

The chart below shows the S&P 500 during 2021.  You can see that the chart the market features a series of higher highs and higher lows.  The bottom half of the chart shows the market’s daily fluctuations.  The Red dots are the days that qualify as outlier days.  The blue horizontal line is at 1.50% and the red horizontal line is at 2.25% (which is a 3rd standard deviation day during a bull market and should occur about 3 times per year).

Source: Chart data sourced through Yahoo Finance. Charts created by Canterbury Investment Management.  Data is through close of 6-16-2022

Bear Market Outliers

The next chart, shown below shows the contrast between the bull market we saw in 2021 contrast with the bear market we are now seeing in 2022.  Through the first 6 months of 2022, you would expect see about 6 outlier days beyond +/-1.50%.  Remember, in 2021 only 18 outlier days occurred during the entire year.  In 2022, the S&P 500 has experienced 41 outlier days.  Out of only 116 trading days, 41 have been outliers (35%).  These outliers have occurred to both the upside and downside.  As a result, the S&P 500 has seen a series of lower highs and lower lows.

Source: Chart data sourced through Yahoo Finance. Charts created by Canterbury Investment Management.  Data is through close of 6-16-2022

Bottom Line
Outlier days are not a bullish indicator.  In 2022, the S&P 500 has had 41 total outlier days, which will likely be 42 at the close of Tuesday.  That would make 18 of the outliers up days, and 24 of them down days.  All-in-all, that is fairly close to even on both sides.  The reality, however, is that the S&P 500 is -20% off of its peak and coming off of its worst week so far this year.  Bull markets, like the one experienced in 2021, have low volatility and a low number of outlier days.

From a portfolio management perspective, we want to keep our portfolio in a Bull Market State regardless of whether the S&P 500 is in a Bull, Transitional, or a volatile Bear Market State.  This means we want it to have low volatility and a low number of outlier days.  Given all the volatility seen in both the equity markets and bonds (20-year treasuries are down more than -30% from their peak), the Portfolio Thermostat has only experienced 5 outlier days in 2022.  The Canterbury Portfolio Thermostat has been successful at adapting to the rapidly changing market 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.

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.