What is the Difference between Market States and Security States?

What is the Difference between Market States and Security States?

Posted on September 08, 2014

Canterbury Portfolio Thermostat-Weekly Update- 9/8/14

Market State 2 (41 trading days) - Long-term: Bullish; Short-term: Neutral/Bearish. 

Canterbury Volatility Index is at CVI = 42 (Bullish): The CVI (volatility) declined 2 points from the previous week.  The current volatility is extremely low. 

As you may recall from last week’s update (9/1/14):

Keep in mind that extremely low volatility will sometimes bring the "one day outlier” we have discussed many times in the past. Markets are supposed to move. Slow markets mean complacency among investors. Complacency will sometimes end with a knee jerk reaction to an unexpected short term event. The important point to remember is that such moves are just part of the random market noise and will have little impact on the overall trend.

Overbought/Oversold "Oscillator” is currently 89% overbought (Bearish). The indicator did improve enough to move out of the previous week’s "extreme” 99% overbought position (a reading of 95% overbought or oversold is considered to be an extreme reading). A couple of down days would probably be enough to move this indicator to a neutral reading. 

Market Comment:

The S&P 500 has been up 5 weeks in a row for a total gain of 5.34% from the 8/07/14 market low. The preceding decline of -3.85% occurred between 7/24/14 and 8/07/14. The point is that the S&P 500 has hit 6 new highs, over the last 11 days. The financial press gets excited about new highs but the market is about 1.5% higher than it was in late July.

Currently all of the Portfolio Thermostat’s indicators are Bullish except for the current overbought condition and some volume indicators. The Bullish Market State means that the wind favors global equities for the time being. 

Bottom Line:

Most major global equity indexes remain in an intermediate and short term Bullish environment. Short term will most likely be sideways to down until the markets can work off the current overbought condition. Of our current ETF holdings, 12 are rated as outright BUYS and 2 are HOLDS. For now, expect a short period of a sideways or declining market.

What is a Security State?

Most equity Exchange Traded Fund (ETF) asset classes perform best when the S&P 500 (the market portfolio) is in a low volatility Market State. However, there are also "alternatives to global equities” that can benefit from high volatility or a Bearish global stock market. The Portfolio Thermostat maintains a diverse universe of about 130 ETFs, each of which is categorized into one of two Major Classes: 

Global Stock Market Universe - Approximately 70 ETFs

Bonds and Alternatives to the Global Stock Market - Approximately 50 ETFs

The ETF’s Group assignment is based on several factors, such as the asset class represented, the correlation to the U.S. stock market, and the correlation to its Group and subgroups. 

Security States are very similar to Market States. Each ETF will be in 1 of 12 Security States on any given day. The Security State is determined by the long term market environment, volatility characteristics, and short term supply and demand characteristics. The Security State will issue a specific BUY HOLD or SELL that is calculated each day. Each ETF is then ranked, from first to last, based on the Portfolio Thermostat’s proprietary "volatility weighted strength” indicator. An existing ETF holding will be sold on the day that the Security State shifts to a SELL. The previous holding will be replaced by the highest rated (qualifying) ETF.

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.