Alternative ETF's Can Benefit From Bear Markets

Alternative ETF's Can Benefit From Bear Markets

Posted on July 08, 2013

Canterbury Portfolio Thermostat Weekly Update-7/08/2013

Market State 6 (Last 11 trading days) = Short Term Bearish/Emotional – Market State 6 is one of the least predictable of the Portfolio Thermostat’s 12 Market States. It can lead to a new Bear market or it could mark the bottom in an ongoing Bull market.

Canterbury Volatility Index (CVI) = 69:
The CVI was down 2 points for the week and down 4 points, or 7% from the previous peak. The decline in volatility is a positive sign for the stock market. A CVI below 75 is typical of a low risk/Bullish stock market.

Velocity of Volatility:
Our short-term (one or two days) measure of change in volatility spiked through the defined threshold on 6/20, triggering a negative shift in volatility. As a result, the Portfolio Thermostat model moved from Market State 2 to Market State 6 on that day.

Market Update:
We had a short week because of the 4th of July holiday. That did not mean that it was uneventful. US stocks were up; international stocks were flat to down; bonds and emerging market stocks were DOWN BIG.

Weekly Comment:
The title of last weekly update was: "For The Times They Are a-Changin." Comment from last week: The Portfolio Thermostat is adjusting to the new environment and has made several changes in our ETF holdings. Our process adjusts the positions held in order to maintain low risk and consistent volatility during high risk environments.

Last week was a good example of benefits of the expansion in Exchange Traded Funds (ETFs) that have crossed into many new asset classes alternative to the traditional stock market. Successful security selection requires a process to make timely rotations in portfolio holdings to match the existing market environment. The primary goal of the Portfolio Thermostat is to maintain a stable portfolio, throughout all market environments – Bull and Bear.

Our security selection is based on two separate software models or algorithms. The first model ranks each ETF based on its risk adjusted strength compared to other ETFs in its Group. The ranking Ranges from number 1, the strongest through the weakest ETF which is last. The second security selection model is similar to the Portfolio Thermostat’s "Market States.” Each day, our universe of about 130 ETFs, is assigned a Buy, Hold or Sell "Security State” rating. An ETF holding is sold on the day a Sell signal is given and replaced with the highest rated ETF is a Buy Security State.

Bottom Line:
Our short term overbought/oversold indicator is now at 90% over sold. The US stock market has been in a trading range. The probabilities are most likely that the S&P 500 will digest some of its recent gains over the near term. Security selection is more important when in a transitional Market State such as what we are in now.

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.