Volatility on the Rise

Volatility on the Rise

Posted on October 20, 2014

Canterbury Portfolio Thermostat-Weekly Update- 10/20/14

Market State 2 (71 Trading Days) Long-term (Bullish) Short-term (Transitional): A Transitional environment is one that has experienced a larger than normal increase in volatility. Transitional markets are less predictable and can eventually break down into a Bear market or it could consolidate for a period, within a trading range, and then return to the previous Bull market environment. 

Canterbury Volatility Index is at CVI 67 (Bullish): The CVI volatility increased 3 points from the previous Friday (not a meaningful increase). The total increase in volatility has been 67.5% (27 points) from the most recent low of CVI 40 registered on September 22nd (19 trading days ago). 

A volatility reading of CVI 75 or lower is reflective of a low risk market environment. The exception occurs when the Portfolio Thermostat’s “Velocity of Volatility” indicator sees a short term spike in volatility and flashes a “volatility alert.” Last week, our Velocity of Volatility indicator came nowhere near issuing a “volatility alert.” 

So, why didn’t the portfolio strategy issue a “volatility alert” on Wednesday’s wild and wooly trading? No alert was issued because the Portfolio Thermostat’s volatility indicators are based on the closing prices. 

Overbought/Oversold "Oscillator” is currently 66% oversold (Neutral) versus 82% oversold (Bullish/Neutral) a week ago. There is no clear indication of short term market direction. A reading over 95% is considered to be an extreme reading (short term Bullish). 

Comment on Volatility: The global equity markets saw the largest intraday swings/fluctuations in years. For example, the Dow was down about 460 points by mid afternoon Wednesday. It was enough to scare many “long term investors”. 

Many of those same emotional “long term investors” were equally surprised when the Dow rallied back almost 300 points to close down 173 points (-1%) for the day. Looking at Wednesday’s closing price it appears to be just another typical day. 

In fact, sometimes a sharp intraday decline can be good for the market. Wild days like Wednesday, that begin with a big drop then finish in the upper half of the trading range can be a sign of a capitulation. A capitulation means that the emotionally weak holders tend to throw in the towel at the bottom, while the more experienced investors will begin buying near the close after the selling is finally exhausted. 

Portfolio Thermostat’s Goal: The Portfolio Thermostat’s goal is to maintain consistent portfolio volatility through all market environments. The purpose of the Portfolio Thermostat is to help maintain acceptable portfolio fluctuations and to avoid "substantial declines.” Substantial declines destroy the likelihood of generating long term compounded returns, which is the primary objective of all long term investors. 

The Portfolio Thermostat model continues to meet its primary objectives: 1)    It has limited declines to normal fluctuations/market noise.  2)    It has maintained the investor’s initial investment as well as past gains within the range of normal fluctuations/market noise.  3)    It has participated in meaningful major market advances* *The Canterbury Portfolio Thermostat was ranked 9 in total return of 573 Separate Managed Account (SMA)   strategies for 2013. Source: Pension and Investment Magazine data provided by Morningstar. 

The Portfolio Thermostat’s goal is NOT to beat the short term performance of any fixed benchmark comprised of a fixed allocation of market indexes.

Bottom Line: A decision to circumvent any sound investment discipline as a result of short term underperformance and/or emotional “gut feelings” usually results in a failure of risk management. Subjective and emotional investment decisions based on short term worry or over confidence will have virtually no chance for long term success.

Canterbury Investment Management: Tom Hardin

More About Tom Hardin

As Chief Investment Officer, Tom Hardin, Chartered Market Technician (CMT), makes all the final decisions on all investment and portfolio management decisions for Canterbury Investment Management. Tom has more than 30 years experience in the investment management industry and has broad breadth of knowledge. He is known as an innovator, educator and been revolutionary in the advancements in 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.