Companies and Securities Require Management

Companies and Securities Require Management

Posted on November 21, 2016
Weekly Update
11/21/2016

Market State 1: Bullish (9 days): Market State 1 represents a long and short term bullish environment.  The market remains overbought and is likely to have a short term pullback to consolidate the most recent advance. In addition, the S&P 500 and NASDAQ 100 are both at key resistance levels. Please see chart 2 and 3 below.
 
Canterbury Volatility Index (CVI 53) Volatility, as measured by the CVI, is in the optimal range (CVI 50 to CVI 75). Canterbury studies have provided statistically significant evidence showing that market corrections rarely exceed a single digit percentage decline, from the peak value, when volatility is within the optimal range.
 
Market Comment:
The Dow, S&P 500 and NASDAQ 100 continued their rallies that began the day before the election. Last week the Dow was up 0.1%, the S&P 500 +0.8% and NASDAQ was up 1.6%. This is the first week the NASDAQ 100 has outperformed the Dow and S&P 500 in four weeks. The market environment is stronger when the NASDAQ outperforms the S&P 500 and the Dow. That said, one week of outperformance is not a trend.
 
Treasury bonds continued their four-month decline and are now down more than -15% from their July peak. The Treasury Bond ETF (TLT) has mainly been in a bearish - Security State since 7/8/16. 
 
The Canterbury Portfolio Thermostat evaluates each ETF as if it were its own asset class. Risk labels are not assigned to individual ETFs. For example, the Canterbury process does not accept the traditional belief that some asset classes are more or less risky than another; i.e. “bonds are safer than stocks.”
 
Any ETF that is in one of the bullish - Security States would be considered to be conservative and would have low risk. On the other hand, any ETF that is in one of the bearish - Security States would be considered to be risky and would have high or increasing volatility and potential for significate declines (drawdown). Therefore, the Treasury Bond ETF (TLT) is in bearish - Security State 12 and is currently a risky security. TLT would not be an appropriate holding for a conservative or moderately conservative portfolio. While, on the other hand, the S&P 500 ETF (SPY) and NASDAQ 100 ETF (QQQ) are both in bullish - Security State 1 and are currently considered to be conservative securities, with limited risk.  As of today, both SPY and QQQ are appropriate holdings for conservative portfolios.
 
Chart 1: US Treasury Bond ETF (TLT)-Security State 12

Chart 2: S&P 500: Bullish - Market State 1- Resistance 2190

Source all charts: AIQ

All liquid traded securities will fluctuate in price and each will experience low risk bullish periods and high risk bearish periods. This is true regardless of the current fundamentals of the underlying company or asset. For example, IBM is a great “company.” IBM has reported increasing profits from 2013 through 2015. The company’s ability to produce increasing profits did not relate to an increase in the price of the stock. In fact, IBM’s stock has declined about (30%) over the last three years ending 12/31/15. On the other hand, the company Tesla has lost more money, than the previous year, from 2013 through 2015 (more than a billion dollars in losses) while the TSLA stock increased more than 575%. Clearly, IBM has been the better company over the last three years while TSLA has been the better stock.
 
Bottom Line:
Do not confuse the profitability of the underlying company, or the direct ownership of an asset, with the profitability of the traded security that represents the company. In other words, companies and stocks are not the same thing.
 
The success or failure of an investment in a company is driven by the profitability produced through the company’s operations. For the most part, companies are not liquid and therefore they require ongoing “management” of all aspects of the company’s operations for the purpose of maximizing profits.
 
On the other hand, the price of a liquid traded security will fluctuate up and down based on the supply and demand in the market place.  Other than for luck, the success or failure in portfolio management is determined by how effective a process, or application, can be at “managing” the liquidity of the securities held in the portfolio.
 
The liquidity in securities can be either an advantage or it can be a disadvantage. Liquidity can make it possible to own securities when the risk is low and profit potential is high and one can avoid securities, or sell those with the opposite characteristics. Markets assume that investors can tell the difference between a security that has bullish versus bearish characteristics in the same way that direct owners of companies should be able to identify companies that have high potential to produce profits versus those that don’t. In other words, both companies and securities require effective and active management.


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.