A Picture is Worth a Thousand Words

A Picture is Worth a Thousand Words

Posted on March 12, 2018
Market Update 3/12/2018
 
Market State 6: Transitional (25 trading days):
The Market continues to be in a Transitional state.  Market State 6 is characterized by having negative short-term supply and demand indicators but has Bullish long-term indicators.  The transition to market state 6 first occurred on 2/2/2018 and was caused by a velocity of volatility spike in the Canterbury Volatility Index.
 
Canterbury Volatility Index (CVI 87): Volatility levels remain high following the velocity of volatility spike that occurred back in February.  This spike was to be expected after the extended streak of low volatility (CVI less than 45) that occurred from 12/23/2016 to 2/1/2018 (278 trading days- the second longest low volatility streak ever).
 
One thing to note on the recent spike in volatility:
 
The Canterbury Volatility Index (CVI) is an indicator that utilizes a 67-day moving average in its calculation.  Because of this, it can take some time before CVI gets back into a normal range following a spike.  The following chart shows both the normal 67-day CVI and a 10-day CVI:
 

Source: AIQ
As can be seen in the chart above, while CVI is declining slightly, it is not close to its previous low ranges and could take a while to get there.  This is due to the longer calculation period.  The 10-day CVI, however, reacts much faster is very close to crossing into its previous range of low volatility.  This is a bullish sign, as the volatility spike is not being sustained by continued high volatility in the shorter term CVI. 
 
Comment:
One bullish indication within markets is when the NASDAQ 100 (mostly technology stocks) is leading the S&P 500 and the S&P 500 is leading the Dow Jones Industrials Index.  The following charts show the current state of the NASDAQ (as highlighted by the ETF QQQ), the S&P 500, and the Dow Jones. 
 
NASDAQ 100

Source: AIQ

S&P 500

Source: AIQ

Dow Jones Industrial Average

Source: AIQ
 
As seen in the above charts, the NASDAQ 100 has now put in a new high, while the S&P 500 has put in a higher relative high just outside of its symmetrical triangle trading range.  The Dow Jones, on the other hand, has yet to break its previous relative high of 25,709.  Additionally, note the 10-day Canterbury Volatility Index (CVI) on each of the indices.  It was mentioned previously that the S&P 500 Index is close to breaking into its previous low volatility range that occurred prior to the volatility spike in early February.  The NASDAQ, which is leading the S&P 500, has already entered its previous range on the 10-day CVI.  The Dow, which is lagging the S&P 500, has yet to touch that range. 
 
It is a good sign that the NASDAQ has put in a new high with declining volatility.  The NASDAQ showing leadership over the S&P and Dow is a bullish indication.  The S&P 500 and Dow Jones have formed symmetrical triangle formations, which is a series of lower highs and higher lows. We may expect to see this trading range continue for a little bit of time before breaking out one way or the other. 
 
Bottom Line:
 
The past few weeks have been a reminder that markets are like weather.  They go through various environments whether it is a low volatility, Bullish environment, like we saw last year, or a more volatile Transitional environment like we have seen recently.  To manage these environments, we need an adaptive process that can navigate all external conditions.  Only a systematic process can create efficient portfolios.  As the market continues in its current trading range, the Canterbury Portfolio Thermostat will continue to monitor changes and make the necessary adjustments to keep your portfolio stable. 

Canterbury Investment Management: Tom Hardin

More About Tom Hardin
As Chief Investment Officer, Tom has more than 30 years of experience in the investment management industry and has a broad breadth of knowledge. He is known as an innovator, educator and has been revolutionary in the advancements of 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.