Bear Markets Aren't Bad Just Different

Bear Markets Aren't Bad Just Different

Posted on March 07, 2016

Weekly Update
3/7/2016

Market State 11 Confirmed Bear/Short-Term Bullish: The Market States are determined through a combination of long-term, short-term, and volatility algorithms. Currently, the long-term and volatility algorithms are firmly bearish, while the short-term algorithm turned bullish on March 1st. The short-term buy signal, though, is being overridden by the fact that the market is at an “extreme overbought” condition.

The market has burned up a lot of buying power recently, over the last 15-day rally, and is due for a correction soon. A counter-trend rally is typical when the Portfolio Thermostat is in a Bear Market State 11.

The Portfolio Thermostat has been in one of the Transitional/Bearish Market States, now confirmed “Bear” Market State, for the last 125 trading days.

Canterbury Volatility Index (CVI 96 - Bearish): Volatility did not improve during last week’s rally and remained at the same level as the week before. The current high volatility is reflective of a high correlation among the S&P 500 stocks, resulting in a loss in the benefit of diversification.

Overbought/Oversold Indicator (99% overbought - Short Term: Bearish): A reading of 95 or higher, either overbought or oversold, is considered to be an “extreme” level. This indicator increased from 96% overbought a week ago.

Market Comment:

The S&P 500 was up +2.2% for the week and up +9% over the last 15 trading days. A healthy transition from a bear to a bull market, though, requires time to work off the overhead supply (investors who bought at higher prices and are looking to sell into rallies). The “V” shape that occurs from parabolic moves does not represent the normal backing and filling process needed to build a strong base for a new bull market.

Will the current bear market rally end any differently from the others? NOT LIKELY. Consider the following reasons.

  1. The Portfolio Thermostat is in Bear Market State 11: Bearish.
  2. The five-year bull market trend is clearly broken on almost every major market index: Bearish.
  3. Almost every major market index is trading below its 200-day moving average: Bearish.
  4. Volatility is high: Bearish.
  5. The market is at a short-term “extreme” overbought condition: Bearish.
  6. Volume was low on the latest advance and high on the previous decline: Bearish.
  7. 58% of the Russell 3000 stocks were down 20% or more ON the 2/11/16 low: Bearish.
  8. Gold Miners are up +48.05% year to date??? Is that bullish for stocks?
  9. The short-term advance is parabolic (i.e. too high, too fast): Bearish.
  10. Leadership is coming primarily from the most beaten-down sectors and industries: Bearish.

Examples of the typical leaders are charted below:

Sector


Industry


Stock

Source all charts AIQ.

Bottom Line:
Bear markets are extended events and require patience. As long as our portfolio has adjusted its ETF holdings to match the realities of the market environment, then any fluctuations should be minor or even positive. Our Portfolio Thermostat benchmark, for bear markets, is to maintain daily fluctuations to less than 1% (with an occasional 1.25% outlier) and to maintain peak-to-trough declines to 10% (with rare 12% outliers). Bear markets are not bad for the Portfolio Thermostat, they are just different.


 

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.


Disclaimer
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.