Awakening the Sleeping Volatility Giant

Awakening the Sleeping Volatility Giant

Posted on October 23, 2012

Sorry for the absence in writing the blog. I have invested the last four or five months, of writing time to my new Position/White Paper. The report describes our Canterbury Portfolio Thermostat process and is titled: Revolutionary Advancements in Risk and Portfolio Management. Please email or call me for a copy. I promise it will be worth your investment, of an hour or so, to read the report. In addition, you will learn concepts and terminology to help you to get the most from our blog.

Last Friday, the Dow was down more than -1% for the first time in 84 days. Monday was down about 130 points, during the day, and then rallied to close at slight gain. Today, the Dow was down 243 points.

I am recapping the last three days because, it “feels” volatile. Our primary indicator, for analyzing volatility, is called the Canterbury Volatility Index (CVI). The CVI measures increases and decreases in market volatility, similar to the way a thermometer measures changes in temperature. The purpose for studying volatility is to determine how rational or irrational the market is at a given point in time. For example, a low and decreasing CVI is typically associated with a rational bull market. A sharply ascending CVI represents high and increasing investor emotions and is associated with a Bear market or bubble.

Prior to Friday, our Canterbury Volatility Index was at the lowest level (CVI-56) since the middle of January in 2011. Recently the CVI had been declining since early August. The CVI finished today at 60, up from last Thursday’s CVI low at 56.

Low volatility is good a good thing but when it gets too low, for several months, it can be a sign of investor complacency. Complacency can be followed by an unexpected surprise leading to a short term “pop” in volatility. It is similar to squeezing a spring between your two fingers. When you let go, you can expect a sudden release of energy.

That said a 200 to 250 point one day move in the Dow is less than 2%. That is not a big deal unless we see a sharp increase of 20% or more in our CVI. Two big down days, back to back, can also put the Portfolio Thermostat model in a Bearish Market State.

Bottom line is we are in a Bull market. For now the Portfolio Thermostat indicators are reflecting a normal pull-back in a Bull market. The current correction is well within the norm. Volatility is still low which reflects a rational market. We can probably expect some additional sell-off. If the environment changes for the worse, it will be reflected in a shift to one of the more Bearish Market States and appropriate action will be taken.

The Canterbury Portfolio Thermostat Matrix identifies 12 different Market States (environments). Of the 12 Market States, 6 are Bullish Market States, 4 Market States are Bearish, and 2 States tend to precede a transition to a Bearish Market State, meaning caution.

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.