Bull Market or Bull Trap?

Bull Market or Bull Trap?

Posted on August 15, 2016
Weekly Update
8/15/2016

Market State 1: Bullish. The Market States are calculated on the S&P 500. Last week the Dow Jones Industrials and NASDAQ 100 joined the S&P 500 in establishing new all-time highs.

Canterbury Volatility Index (CVI): Volatility continues to decrease and is now at CVI 58. Volatility at or below, CVI 75 is typically associated with a low risk environment. The current low and decreasing volatility, which we have been experiencing for some time now, is reflective of an efficiently traded market. In other words, diversification is working.

Surprisingly, the market is not over extended. In fact, our Overbought/Oversold indicator, remains 83% Oversold (Bullish). In addition, the S&P 1500’s only Advance/Decline line (number of stocks that are up verses down) registered a new high last Thursday. Meaning that the rising tide is lifting most ships. Broad market breadth (Bullish) is another primary bullish characteristic.

Will the Current Bull Market Last?
Let’s begin by looking at where we came from. Most all global equity markets have experienced several substantial declines, and bouts of high volatility, going back to late August of 2015. Through last month, the S&P 500 was trading at about the same level it was at the end of 2014. Keep in mind that most major market indexes are just now beginning to reach, or are still trading below, the December 2014 highs. As a result, the financial news media should dampen the hype and pandemonium regarding the S&P 500 hitting an “all time high.” The risk reward relationship has been terrible over the last year and a half.
 
Investors who spent the last year and a half just simply holding on, and occasionally rebalanced their portfolios, had a very difficult time. Some have just gained a random couple percent, while many others remain under water. All that said the Portfolio Thermostat is in Market State 1 which means we are currently in a bull market environment and have limited risk. The concern is that the current bullish environment is just a few weeks old and is somewhat fragile.
 
So, what if I am convinced the economy and the fundamentals look terrible. Should I just sell?
The financial markets are driven by the law of supply and demand. Almost all the information we know, is already known by the markets. When the majority of investors are bearish, believing that the market is going to decline, they would not be heavily invested. Instead, their money would be in cash and available to buy later pushing up prices. The opposite is also true. Bullish investors are already highly invested in the markets. There are only a few investors left to buy and push prices higher and many who could eventually sell if prices begin to stall. This is why liquid traded markets tend to behave counter to what most would expect.
 
Bottom Line:
The Portfolio Thermostat’s holdings are positioned to benefit from the current stable environment. If early warning signs begin to show potential trouble ahead, then the system is programmed to quickly adjust in order to move in concert with the markets.
 
 
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.