Bull Market is Alive and Well

Bull Market is Alive and Well

Posted on May 06, 2013

The Canterbury Portfolio Thermostat-Weekly Update 5/6/13

Current Market Environment=Market State 1-Bullish/Low risk

Canterbury Volatility Index (CVI)=62: CVI reading below 75 reflects a rational/low risk market.

The primary purpose of diversification is to maintain portfolio stability throughout all market environments. When a portfolio's volatility begins to increase, we know that the diversified combination of securities that was successful in maintaining a stable portion is no longer working in the new environment. Canterbury's Portfolio Thermostat model is a comprehensive portfolio managment system designed to maintain stable porfolio volatility by adjusting asset allocation and porfolio's holdings to benefit from the unique characteristics of each market environment.

Since 8/15/12, the Portfolio Thermostat has shifted back and forth between Market States 1 and 2 (two of the Bullish environments). During this time, there has been more than normal bad news reported: weak economy, fiscal cliff, tax increases, sequesters cuts, etc. The Porfolio Thermostat has correctly indicated a Bullish and rational stock market environment. The S&P 500 has gone up +14.85%, not including dividends. In addition, every pullback fell within the normal and expected ranges. The last eight months are typical of a bull market creating a stair step pattern of higher highs and higher lows as it "CLIMBS a wall of worry."

Weekly Update:
Last week the S&P 500 closed at a new high. Even better news, the breakout was not just in large cap stocks. The S&P 400 Mid-Cap Index also reached a new high. The Russell 2000, which had moved sideways for two months, is at its highs. Our overbought/oversold indicator is currently 77% overbought (normal for a market putting in new highs). Our stocks-only Advance Decline Line closed at a new high confirming the broad breadth of the advance.

The Standard and Poor's 500 is comprised of 9 Macro Economic Sectors. The Portfolio Thermostat's "volatility weighted strength indicator" ranked the top 3 Sector ETF's: Utilities-XLU; Health Care-XLV; and Consumer Staples-XLP. The lowest ranked sectors, beginning with the worst: Technology-XLK; Energy-XLE; and Basic Materials-XLB. That said the 3 lowest ranked sectors played catch up last week. The Portfolio Thermostat will rotate to hold the top 3 sectors as the leadership changes.

RISK: Market State1 has the least risk of the 12 Porfolio Thermostat Market State environments. A "normal pullback," when in MS 1, would typically be in the -2% to -4% ranges as most equity markets work higher.

Portfolio Thermostat-Market States:
The Portfolio Thermostat identifies 12 different market environments called "Market States." The 6 Market States on the left side (below) represent a long term Bull stock market. Market States 7 through 12 occurs in a long term Bear market. Of the 12 Market States, 6 are Bullish (rational); 4 are Bearish (emotional/irrational) and 2 are Transitional (yellow) Market States. The transitional market states tend to precede a change from Bullish to Bearish, indicating caution.

The Portfolio Thermostat categorizes a universe of 130 Exchange Trades Funds into 3 Major Groups:

Group 1-Alternative to the global stock market (aproximately 40 ETF's)
Group 2-The Global Stock market (approximately 70 ETF's)
Group 3- Stock Index styles long and inverse (approximately 20 ETF's)

Each ETF is assigned a Security State rating (buy, hold, or sell) and is ranked, from top to bottom, based on its volatility weighted strength.

The Portfolio Thermostat's goal is to maintain a portfolio of ETF's with BUY or HOLD ratings. A security is sold when its Security rating shifts to SELL. The proceeds are used to purchase a new ETF with the highest buy rating. The model ETF rotation process makes it possible to maintain low portfolio volatility and benefit from all market environments- BULL or BEAR.

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.