All Securities Will Have Bull and Bear Markets

All Securities Will Have Bull and Bear Markets

Posted on June 17, 2019
Market State 1 (Bullish)- The Market, as measured by the S&P 500 has now entered back into a Bullish Market State Environment. This comes after a Transitional Market State 6, which was caused by a spike in volatility (signaling a volatility alert).  Since the recent pullback, short-term indicators have now turned back positive, causing volatility indicators to turn positive.
 
Following the large decline that took place in December, the S&P 500 rallied back to its old high on April 4th (a little more than 3 months) at 2943.  Throughout that entire rally, it never had a correction of more than 3%.
 
The fact that the market rallied back without a retest of the low or even a meaningful pull back, has never happened before. The bottom line is that Market State 1 is in place for now. It will not necessarily stay in place for an extended period. Market State 1 is in place when almost every new market high occurs. On the other hand, Market State 1 will typically have slightly more risk of a correction because the market is close to a new high. It is important to keep in mind that the S&P 500 declined about 20% and rebounded more than 20% over just a few months. With all that movement, the market will not stay where it is for long.
 
Canterbury Volatility Index (CVI): CVI 65- Volatility remains in a similar range that it has been in over the last few weeks.  Since May 13th, which was one month ago, volatility, as measured by the Canterbury Volatility Index, has stayed within the 65-70 range, neither really increasing nor decreasing.
 
Volatility reached a high of CVI 129 on January 4th (irrational volatility) and the declined to a safe zone at CVI 75 on March 27th. The S&P 500 has never been a decline exceeding 10% when the volatility was at CVI 75 or lower. The Current CVI 65 could shoot back up quickly with a couple one-day outliers of about 1.25% or more.
 
Comment
 
All liquid traded securities will have both Bull and Bear markets.  The S&P 500 is an all equity index.  It is meant to measure market capitalization of US companies and not meant to be an efficient portfolio.  In fact, the S&P 500 has no risk management capabilities.  It will experience sharp declines in the future.  An efficient portfolio is a moving target.  Sometimes equities will be efficient, and sometimes they will experience significant drawdowns.  Bonds are no different. There will be periods when bonds will be safe, and periods where bonds will be riskier.  Creating the efficient portfolio requires the ability to navigate all different types of market environments, throughout many different asset classes.
 
Looking at various asset classes and securities, the S&P 500 has been one of the stronger indexes.  For instance, long and intermediate term treasury bonds are at the same point they were back in October of 2016.  20-year treasuries (Ticker: TLT) have experienced a -22% peak to trough decline over the last 3 years, while 7-10 year treasuries (Ticker: IEF) went through a -12% peak to trough drawdown over the same time frame.  According to conventional wisdom, bonds are supposed to be conservative.
 
Looking at equities, international markets have not experienced nearly the same results as the US markets.  While the S&P 500 put in a new high, the emerging market index (Ticker: EEM) is still 21% off of its old high, which was back in January of 2018. Even the EAFE index (Ticker: EFA), which measures developed markets outside the US and Canada, is 13% off of its high. 
 
S&P 500 Stocks
 
Just because the overall market environment indicates that we are in a bull market, does not mean that all securities or all asset classes are in a bull market. Looking at the S&P 500, Canterbury Analytics ran security analysis on each of the 505 stocks within the S&P 500.  The chart below shows the percentage of bullish stocks, transitional stocks, and bearish stocks from each sector:




The majority of S&P 500 stocks are in bullish Market States.  Out of 505 S&P stocks, 291 are bullish (58%), 37 are transitional (7%), and 177 are bearish (35%).  Overall, utilities, Real Estate, and Consumer Staples are some of the strongest sectors, with 71/93 stocks (76%) being in 1 of the 5 bullish Security States.  On the other hand, energy, communication services (which consist of companies like Google, Netflix, Verizon), and healthcare have many stocks that are bearish.  For those 3 sectors, only 44/117 stocks (37%) are in bullish Security States.  Not all sectors and industries will be in bullish states just because the overall market may be bullish.
 
Bottom Line
 
Investing is a lifetime endeavor.  Over the course of your investment life, many different market environments will occur.  There will be periods of low volatility and strong, upward markets, as well as periods of extreme high volatility, full of erratic movements and large drawdowns. 
 
The S&P 500 has been one of the stronger equities over the past few years.  That does not make it the gold standard.  International markets have struggled recently, but will eventually have a period, that could even last years, of strong performance over the US markets.  “Conservative” asset classes, like bonds, have had periods that have not looked so conservative. 
 
Looking at individual stocks within the US markets, there are many that are experiencing bullish environments, but also some that are in bear markets.  Because all stocks, indexes, and asset classes derive their value from liquidity, then every dog will have its day, and eventually the leaders may become losers.
 
Navigating varying market climates requires an Adaptive Portfolio Process.  An adaptive portfolio can adjust to varying market environments and adapt the portfolio to maintain consistency throughout those environments.  Adaptive Portfolio Strategy is all about Portfolio Efficiency.  An efficient portfolio in a bull market will look much different than an efficient portfolio in a bear market.
 
 
 
 
     
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.