Congressional Theater Creates Market Noise but Volatility Remains Low

Congressional Theater Creates Market Noise but Volatility Remains Low

Posted on September 30, 2013

Canterbury Portfolio Thermostat - Weekly Update - 9/30/2013

Market State 1 – (last 14 trading days) - Long and short term Bullish - Market State 1 is the most predictable of the Portfolio Thermostat’s 12 Market States (environments). In Market State 1, the risk is typically around -2% to -4% from the most recent market peak.

Volatility:

  • Canterbury Volatility Index (CVI) = 50. The "market’s” CVI is based on the S&P 500’s volatility. The CVI declined 3 points last week reflecting low and decreasing volatility (Bullish).·
  • Canterbury Portfolio Thermostat Model Portfolio’s CVI = 45.The Portfolio Thermostat Model Portfolio’ CVI declined 2 points last week reflecting low and decreasing volatility (Bullish). A CVI below 75 reflects a low risk environment (Bullish). Low and flat or decreasing volatility are characteristics of a Bull market.

Observation:
The US stock market’s volatility is now at CVI=50, the lowest level (as measured by the Canterbury Volatility Index - CVI) since June 6, 2007. There is a big difference between the low CVI reading between then and now. Back then, volatility was increasing from a lower level (Bearish characteristic) while now volatility is decreasing from a higher level (Bullish characteristic).

Lesson from History:
The last time we saw CVI=50 the market’s volatility had been increasing, over the previous three months. The market’s volatility registered its lowest level on February 26, 2007 at CVI=35. From that time forward volatility continued to increase. The Portfolio Thermostat’s volatility indicators eventually turned negative on August 3, 2007. The S&P 500 hit its final peak level, about two months later, on October 7, 2007. The CVI continued its well established upward trend in volatility following the market peak. The rest is history; we all remember too well the financial crisis that followed.

Market Comment:
Last week US stock market acted pretty much as expected as discussed in last week’ s update which said : "The short term overbought condition has not improved and will most likely cause a sideways and choppy market. A small short term pullback is likely.” "The market needs to consolidate some of its gains to get the reading back to the neutral area.” The last S&P 500 peak was on 9/18/13 at 1725.52 the index closed the week at 1691.75 which would make the peak to trough decline (maximum drawdown) -1.96%.The S&P 500 was down -1.06% last week.

The S&P 500 has now fallen six out of the last seven sessions. Last week’s overbought/oversold was 97% overbought. Last Friday closed at 62% overbought which is approaching the "neutral area.” More good news, the NASDAQ, Russell 2000 (small capitalized stocks) were both up last week. It is typical for smaller stocks to lead large company stocks during a Bull Market.

Bottom Line:
The Portfolio Thermostat’s current Market State is Bullish. The Canterbury Volatility Index is at CVI - 50 and declining (Bullish). Please be aware that the extremely low CVI number can set the stage for an isolated, one day, -200 to -275 point one day decline. The threat of Government shutdowns and possible default could increase the likelihood of such a market event. There should be no meaningful impact on the Portfolio Thermostat’s current Bullish market environment unless there is a substantial increase in the Canterbury Volatility Index.

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.