Adapting to Market Leadership

Adapting to Market Leadership

Posted on August 20, 2018
Market State 2- Bullish (3 days):  Market environment is Bullish and Risk is low. Recently, the S&P 500 came within half a percent of the old high set back in January of this year.  Since then, the S&P 500 experienced a very minor pullback of (1.40%), causing a transition from MS 1 to MS 2.  Market State 2 has the following characteristics:
 
Long-term: Positive
Volatility (Risk): Low/Decreasing
Short-Term Supply & Demand: Negative
 
Below are some statistics (since 1950) on MS 2:
 
  • Market State 2 is the second most common market state, behind MS 1, occurring roughly 17% of the total days since 1950
  • Market State 2 returns to MS 1 approximately 75% of the time.
  • About 26% of all Bull Market State days are spent in MS 2.

Canterbury Volatility Index (CVI 50): The Market’s CVI levels remained flat for the week at CVI 50.  CVI 50 indicates a low risk environment.  As a reminder, high or increasing CVI is a characteristic of a bear or transitional market, whereas low or decreasing CVI is a bullish characteristic.  CVI has been declining since its prior high of 102 set in April.


Rotation is a law of the market
 
Rotation amongst favorable securities is inevitable.  There is no singular asset class that will always outperform; and no asset class that will always lag behind.  All liquid traded securities will have bull and bear markets.
 
As an illustration, lets look at international equities.  About one year ago, we discussed how the dollar and international equities were linked to each other (see August 7th, 2017 Blog).  In this blog, we showed how when the dollar was underperforming most major currencies, international equities were outperforming.  Today tells a different story.
 
Here is a chart of the US Dollar (UUP) compared to a few different currencies this year:
 

Source: AIQ

Here is a chart of the S&P 500 (SPY), EAFE (EFA), and Emerging Markets (EEM):

Source: AIQ
Notice how around March of this year, the dollar begins to pick up momentum while other currencies begin to fall.  At the same time, the S&P begins outperforming while both the EAFE and Emerging Markets falter. 
We can also see from these two tables, the rankings of each asset class on a risk adjusted basis (using Canterbury’s Volatility Weighted Relative Strength indicator), beginning August 17th, 2017 to August 17th, 2018.
 
Currencies

 

August 2017   August 2018
Currency VWRS Rank   Currency VWRS Rank
Euro 1   US Dollar 1
Canada Dollar 2   Canada Dollar 2
Japanese Yen 3   Japanese Yen 3
British Pound 4   Swiss Franc 4
Swiss Franc 5   Euro 5
US Dollar 6   British Pound 6

                                                            

 Equity Styles
 

August 2017   August 2018
Style VWRS Rank   Style VWRS Rank
Emerging Markets 1   Small Cap Growth 1
EAFE 2   Large Cap Growth 2
Large Cap Growth 3   Mid Cap Value 3
Small Cap Growth 4   Small Cap Value 4
Mid Cap Value 5   Mid Cap Growth 5
Small Cap Value 6   Large Cap Value 6
Mid Cap Growth 7   EAFE 7
Large Cap Value 8   Emerging Markets 8

 
  
From these tables, we can see that assets go in and out favor. Last year was not a great time to own the dollar, and it was a great time to own international equities.  Today, the opposite is true.  The dollar is strong, while international equities are weak.
 
Bottom Line
 
Since all assets will go in and out of favor, it is important to have an adaptive process that can put a portfolio in a position to limit risk and seek compounded returns. 
 
The Canterbury Portfolio Thermostat is an adaptive process specifically designed to rotate and adjust to ever-changing market environments.  The Thermostat is composed of a unique series of algorithms that recognize securities that are in favor and out of favor.  The Portfolio Thermostat rotates to always hold securities that create a bullish portfolio- one that has limited risk and potential for compounding.
 

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.