60 Year Old Record Broken-5 Day Moving Average

60 Year Old Record Broken-5 Day Moving Average

Posted on November 25, 2014

Canterbury Portfolio Thermostat -Weekly Update- 11/25/2014

Market State 1 (19 Trading Days): Long-term (Bullish) Short-term (Bullish):

Canterbury Volatility Index is at CVI 58 (Bullish): The market’s volatility continues to decline for over 4 weeks in a row. The peak in Canterbury’s measurement of volatility was at CVI 71 on October 15th. CVI volatility has declined over 18% (bullish).  

Overbought/Oversold "Oscillator” is currently 89% overbought (Short-term Bearish). Last week the reading was at 93% overbought. It did improve 4 points with the S&P 500 up 1.16% but the Oscillator remains substantially overbought. A reading over 95% is considered to be an extreme. 

 

Market Comment:

The S&P 500, Dow and the NASDAQ all hit new highs last week. The major market indexes were up 1.16%, 0.94% and 1.72% respectively. The Russell 2000 continues to lag behind and was down -0.12% for the week. 

There has been a lot of talk about the S&P 500’s 5 day moving average. Moving averages of price fall in the category of supply and demand indicators called oscillators. A 5 day moving average is simply the average price for the previous 5 days. Each new trading day will replace the oldest (or 5th back) trading day in the average. 

As a result, the (5 day) moving average will form a smoothed line through price chart of a market or security, as can be seen in the chart below:

Oscillators:

Some oscillators can be used to confirm short, medium and long term trends or the strength/momentum of a trend. Other oscillators can help identify “extreme values in price, such as, overbought or oversold conditions. Overbought/oversold oscillators are most effective during periods when the overall price trend, or momentum, is weak.

The 5 day moving average is about as short term as it gets. To be honest, I can’t remember ever looking at a “5 day moving average” in the past. The feat of staying above such a short term average would mean that any down day would be small. We would not see the traditional “stair-step” pattern comprised of a series of higher highs and higher lows. Instead, the pattern above is pretty much straight up with no corrections. 

Will breaking the 60 year old record for the most consecutive trading days above the 5 day average a good or bad thing? Well…, it’s kind of both. 

•    Good - The price is above the moving average line. The market is going up; the trend is up and as the saying goes:   the trend is your friend.

•    Bad – An overextended period above a moving average will break eventually. In the case of a hyper overextended 5 day average, the probabilities would favor a sharp break when it happens.

•    Good – We are in a Bull market from the perspective of any time frame one would choose.

•    Bad - Market extremes tend to follow each other. The sharp sell-off, during the first half of October, was followed by an even more parabolic advance in the second half of October. The probabilities would favor another dose of volatility.

•    Good –There is no defined area of technical resistance. A “trend-line” would typically be drawn straight across from the previous high in price. The line would show the area where overhead supply (sellers) stopped the advance and forced prices lower in the past. New highs means there is no defined technical resistance. Investment managers and investors who were whipsawed out of the market in mid-October, sold at the bottom, have been the primary source of demand, pushing the market higher, as they put their money back to work.

•    Bad – The market is very overbought (too high - too fast). The next correction should come with more than the normal amount of emotion from investors.

Observation - 1:

The 5 day moving average just falls into the category of market noise or the normal "ebb and flow.” Any short term correction from here should be limited to the normal -4% to -8% ranges. In other words, expect a normal consolidation of the recent gains. Such temporary pullbacks, following a nice gain, are just part of the backing and filling process as a market works its way higher. 

Observation - 2:

The Canterbury Portfolio Thermostat has been in Bull - Market States 1 or 2 every day since 12/22/2011. Our CVI has not been above CVI 75 since 8/10/2012 (low volatility or “safe zone”). 

When the two conditions above are true then: Normal market declines (called “draw-downs” or “corrections”) should be limited to the -5% to 10% ranges. 

 

Current Low Risk Market Environment

 

 

(Bull - Market States 1 through 5 and CVI (volatility) CVI 75 or less)

 

(8/10/12 through present) 2 years and counting

Largest S&P 500 Draw-downs (peak to trough declines) from 8/10/12 to Present:

 

                                             -7.4%         (9/14/14 through 10/15/14)

                                             -6.2%         (9/14/12 through 11/15/12)

                                             -5.8%         (1/15/14 through 2/03/14)

                                             -5.8%         (5/12/13 through 6/24/13)

                                             -4.6%         (8/02/13 through 8/27/13)

Observation - 3

All liquid traded markets and securities will experience the variable pricing in the market place. Market prices are driven by the Law of Supply and Demand. Supply and demand is driven by the buying and selling actions of the markets’ participants. The fluctuation of the market price is referred to as its’ “volatility.” In fact, volatility and risk are widely viewed as the same thing. Therefore, the speed and rate of change in the market price determines its’ volatility (or market risk) at a given point of time. Increasing volatility can be an early indication of a change in market environment, typically a Bearish change.

Bull Market environments are more predictive of the risk of draw-down than they are for the amount to total “upside” returns. The draw-down risk is predictable during low volatile Bull market environments. We also know that the most meaningful market advances occur during Bull market environments. The amount of upside returns and timing of those returns are difficult to predict. We do not know how long a Bull market environment will stay intact, when and how many times the leadership among the various asset classes will change or how long or how strong the Bullish trends will be in the future. How many experts would have predicted that the S&P 500 would have been up over 30% in “2013?” 

Portfolio Thermostat:    

The portfolio holds 12 to 14 ETFs when in Bull - Market States. Only ETFs in Bull- Security States qualify to be held in the portfolio. When an existing ETF holding shifts to a Bear - Security State, it is sold and a new ETF is purchased.

Bottom Line:

The Portfolio Thermostat is in Bull Market State 1 and volatility is below CVI 75 and is decreasing.

Canterbury Investment Management: Tom Hardin

More About Tom Hardin

As Chief Investment Officer, Tom Hardin, Chartered Market Technician (CMT), 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.