World Events are Volatile but the US Stock Market Remains Stable

World Events are Volatile but the US Stock Market Remains Stable

Posted on September 03, 2013

Canterbury Portfolio Thermostat Weekly Update – 9/03/2013

Market State 2 – (last 12 trading days) - long term Bullish; short term neutral - Market State 2 typically represents a normal correction in a long term Bull market. The normal risk in MS 2 is -4% to -8% ranges from the previous S&P 500 peak. The total correction, from the August 8th peak, is -4.49%.

Canterbury Volatility Index (CVI) = 55 - A CVI below 75 reflects a low risk environment (Bullish). The CVI was up only 1 point last week. Low and flat or decreasing volatility are both characteristics of a Bull market.

Our overbought/oversold indicator closed the week at 99% oversold (Short term Bullish). An oversold reading above 95% indicates that the U.S. stock market has consolidated the previous gains. A 99% oversold would be considered "extremely short term oversold.” Meaning that the market is set up for a nice rebound if it can muster some upside momentum to get the rally started.

Market Update:
The S&P 500 was down -1.44% last week. The emotionally charged world events would have led most to believe that the correction would have been larger and that we had entered a high risk market environment. Our Portfolio Thermostat’s readings have clearly indicated that the equity markets are currently experiencing a normal and healthy correction while remaining in a long term Bull stock market.

Bottom Line:
The world events are what they are; pretty much always unstable. During the last twelve months, it seems that there has been more than the normal amount of troubling domestic and world events. Our Portfolio Thermostat’s Market States have remained Bullish for all but 11 days since August 15, 2012. During that time, our Canterbury Volatility Index (CVI) has never been above 75 and the indicators on the CVI have remained rational and stable. Consistent and low market volatility is the primary requirement for a sustained Bull market, which is exactly what we have seen over the last year.

Unless we see a meaningful change in the Portfolio Thermostat’s indicators, the next Market State shift should be back to MS 1.

  • Long-term indicators are used to identify the primary trend of the market or security.
  • The proprietary Canterbury Volatility Index (CVI) and related volatility indicators evaluate the degree of rationality in the current market environment.
  • Short-term supply and demand indicators determine which portfolio adjustments are to be made and indicate the strength of the current Market State.

The Portfolio Thermostat process identifies 12 individual Market States, which include

  • 5 Bullish (rational) Market States
  • 4 Bearish (irrational) Market States
  • 3 Transitional Market States (which tend to precede a change from Bullish to Bearish, indicating caution)

Each of the 12 Market States is assigned a percentage allocation of the 3 Groups

  • Group 1 – Countries, Sectors, and Industries
  • Group 2 – Alternatives
  • Group 3 – Styles and Indexes (Long and Inverse)

The portfolio’s assets are allocated to each of the 3 Groups and then used to purchase the strongest ETFs within each Group. Every ETF in the Portfolio Thermostat universe is assigned a "Security State” ranking that represents a Buy, Sell, or Hold rating. New purchases are determined by choosing the ETF with the highest Security State ranking. An ETF is sold when its Security State ranking changes to a Sell or when a shift in the Market State requires an adjustment in the percentage allocation of the 3 Groups. The number of holdings and the size of each holding are determined by the existing Market State and the subsequent Group percentage allocation.

Canterbury Portfolio Thermostat

Market States-Changing Market Environments

Canterbury Market State Long Term Risk/Volatility Market Environment
Market State 1 Bull Low Rational
Market State 2 Bull Low Rational
Market State 3 Bull Low Rational
Market State 4 Bull Low Rational
Market State 5 Bull Moderate Emotional
Market State 6 Bull High Emotional
Market State 7 Bear Moderate Emotional
Market State 8 Bear Moderate Emotional/Irrational
Market State 9 Bear Moderate Emotional
Market State 10 Bear High Irrational
Market State 11 Bear High Irrational
Market State 12 Bear High Irrational
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.