What Does the S&P 500 and a Duck have in Common?

What Does the S&P 500 and a Duck have in Common?

Posted on April 14, 2014

Canterbury Portfolio Thermostat – Weekly Update 04/14/2014

Market State 2 (22 trading days) - Long-term: Bullish; Short-term: Neutral

Canterbury Volatility Index is at CVI = 63: The CVI was up 8 points, for a 14.5% increase in volatility for the week. The Portfolio Thermostat’s "Velocity of Volatility” indicator fell just short of issuing a volatility alert last Thursday. A volatility alert would not have changed the Market State and would not have forced any changes in the portfolio. If an alert had been issued, it would have required any future sale of Exchange Traded Fund (ETF) holding, to be replaced by a new security listed on our abbreviated ETF list. The abbreviated list contains ETFs that have the potential to do well during volatile periods.

The market’s volatility, as measured by our Canterbury Volatility Index (CVI), continues to remain in our CVI 75 "safe zone.” As long as the CVI remains below 75, then a typical correction should be limited to about the -4% to -8% ranges. The CVI has ranged between 46 and 66 (low and stable) during 2014.

Overbought/Oversold indicator:
Our Portfolio Thermostat overbought/oversold indicator closed at 86% overbought (short term Bearish) for the previous week. Last week’s decline relieved the overbought condition and it is now 91% oversold (Bullish). It would be better if we could get this indicator to between 95% and 100% oversold.

The Canterbury Weekly Update, from eight weeks ago, gave an accurate case for the S&P 500’s most likely behavior based on the readings produced from the Portfolio Thermostat’s algorithms. The following is a quote from the Weekly Update on February 18, 2014: "The most likely move from here is another short term correction or a sideways consolidation of the most recent gains. The probabilities for a short term decline from here, if any, should be shallow and most likely would be less than -4% to -6% from the current or next peak.” Starting from when the Weekly Update was written through last Friday, the S&P 500 is down -1.36% and has remained in a narrow trading range. So far, 2014’s maximum, peak to trough, correction, or "drawdown,” was -5.57% which occurred back in January. Year to date, the S&P 500 is down -1.19%.

The purpose is to help us understand why 2014 has had periods that look a little boring. Appearances can sometimes be misleading. Instead of "boring,” a better comparison would be a duck swimming around a pond. Not much is happening up top but below the surface, its orange webbed feet churning and rotating like crazy. Below the façade of low volatility and a narrow trading range, the S&P 500’s Major Market Sectors have changed leadership to the point of an almost complete flip-flop.

Over the first three months of 2014, the two weakest S&P 500 "Major Market Sectors” flipped to being the strongest Sectors and the previous two strongest Sectors slid to the bottom and became the weakest. In other words, the S&P 500’s Sector leadership has actually turned upside down.

The Portfolio Thermostat draws from a Universe of 126 Exchange Traded Funds. Each of these ETFs is assigned to one, of two, Major Group categories:

Group 1 Group 2
Global Equity Markets Bonds & Alternatives to Global Equities
Investment Style Indexes Global Bond Indexes
Geographic Regions Commodity Group Indexes
Country Indexes Commodities (Long and Inverse)
S&P Major Market Sectors Global Real Estate
Industries within Major Sectors Inverse - Equity Indexes

Background on the S&P 500 Macro Economic Sectors:
The S&P 500 is composed of 9 Macro Economic Sectors. The "Capitalization Weight” reflects the each Sector’s percentage weighting in the S&P 500 index. The list below is in alphabetical order:

ETF Sector S&P 500
Symbol Name Capitalization Weight
(XLB) Basic Materials 3.5%
(XLY) Consumer Discretionary 12.0%
(XLP) Consumer Staples 9.7%
(XLE) Energy 10.2%
(XLF) Financials 16.3%
(XLV) Health Care 13.3%
(XLI) Industrials 10.7%
(XLK) Technology 21.1%
(XLU) Utilities 3.1%

The Portfolio Thermostat model produces a daily report that shows the status of every ETF in the Portfolio Thermostat’s universe of 126 Exchange Traded funds. The daily report will reflect any changes in the status of an ETF’s "Security State.” A "Security State” is similar to a "Market State” in that it reflects 12 different environments that range from; bullish to transitional and bearish. The report produces a Buy, Sell or Hold rating on each ETF.

The Portfolio Thermostat security selection begins by creating the list of all ETF’s with a buy "Security State” rating. The "Buy List” then ranks the ETFs from strongest to weakest. The ranking is based on our proprietary Volatility Weighted Strength Ranking.

My technician friend David Vomund, with Vomund Investment Management, uses a stocks-only Advance Decline Line. He reported that the AD line is showing more strength than the S&P 500 (Bullish). Meaning the market’s breadth is still strong. David said that some of the CNBC’s prognosticators are predicting a crash worse than 1987. His point is that as long as the featured market experts continue to freak out over a little normal market noise, then the Bull market should continue to "climb the wall of worry.” This has been the case for about two years now. Long term Bull markets tend to be most healthy when Wall Street is in the "worry” mode.

The American Association of Individual Investors sentiment survey shows only 28.5% of those polled to be Bullish. This is compared to the previous week’s 34.4% Bulls. Remember, a low percentage of Bulls is good. Market sentiment is a reverse indicator. If everyone is Bullish, then they are already in the market and there is no money left to invest. These bullish investors will be future sellers when their expectations for returns are not met. Investors who are not Bullish will have cash available on the sideline hoping for a decline so they can buy at a lower price.

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.