Defensive Sectors Lead as Trading Range Continues

Defensive Sectors Lead as Trading Range Continues

Posted on October 01, 2019


Market State 2- Bullish (8 Days): The S&P 500 remains in Market State 2 following last week’s slight downtrend.  Market State 2’s characteristics are Long-Term (positive); volatility (positive/declining); short-term supply & demand (negative).  The current Market State 2 comes following a spike in volatility that began in August.  Since then, volatility has declined off of its highs causing volatility indicators to turn back positive. 

Market States do not measure return, but instead measure some of the current risk characteristics in the market.  Most all market highs occur in either Market States 1 or 2.  This does not mean that new highs are guaranteed and that pullbacks are less likely to happen.  In fact, to come out of a transitional market means that some sort of run has already occurred (to shift back to a bullish state) and that a pullback could be more likely to happen as the market approaches overhead resistance levels.

Canterbury Volatility Index (CVI)- CVI 69: Volatility continues to decline at a slow pace as the market has been basically flat over the last few weeks.  Volatility reached a high on August 19th, where the Canterbury Volatility Index measured CVI 83.  As the market rallied back to resistance, and began flattening out, volatility started declining to its current point.

Short-term volatility (a 10-day CVI) remains at an extreme low (CVI 40).  At extreme lows, outliers are more likely to occur.  In the case of outliers and extreme low volatility, there is no way to tell when the outlier will happen, whether it will be up or down, or the extent of the outlier, only that outliers are more probable in this environment.

Comment
It appears the market continues to show us some support/resistance.  In the chart below, we can see some short-term support and resistance lines.  Support and resistance show us where supply and demand shift.  At support levels, demand takes over causing investors to enter a market and cause a rally.  At resistance, sellers become active as investors exit the market and supply takes over.  Looking at the chart blow, you can see where supply and demand shift.

In late July, you can see the S&P 500 put in a new high at point A. From here, there was a market pullback, and overhead resistance is established (Line 1 Resistance).  The S&P 500 falls to point B, where support is established at Line 2 Support.  The market then enters a trading range, fluctuating between lines 2 and 3, with demand taking over at Line 2 and supply taking over at Line 3.  Finally, at point C, demand continues to push through and causes the market to rise to point D, which is back at Line 1 resistance.  Then, as of the last 2 weeks, the supply took over at resistance and pulled back to Line 3, which for now is support. One of two things can happen from here- a break of support, or a rally back to resistance.
 
 
Source: AIQ
Sector Rankings
Even after that slight rally back to resistance, if we look at the S&P 500 sectors, many of the more “defensive sectors” are leading the market in terms of risk adjusted strength.  Canterbury uses a proprietary “Volatility-Weighted-Relative-Strength” (VWRS) to measure risk-adjusted strength.
 
S&P Sector VWRS Rank
Utilities 1
Staples 2
Real Estate 3
Financials 4
Technology 5
Industrials 6
Discretionary 7
Communications 8
Basic Materials 9
Healthcare 10
Energy 11
 
Portfolio Thermostat
The Canterbury Portfolio Thermostat does not aim to compete against any individual index or blended benchmark.  We know that portfolio efficiency is a moving target, and all asset classes will go in and out of favor.  The Portfolio Thermostat is an Adaptive Portfolio Strategy designed to navigate various markets and create an efficient portfolio for today’s environment- Bull or Bear.
 
Canterbury benchmarks its portfolio against key “internal” metrics, in order to measure portfolio efficiency.  These metrics are Portfolio State, Portfolio Volatility, and Portfolio Benefit of Diversification.  Together, these internal benchmarks create the Portfolio Efficiency Score.
 
 
The Portfolio Thermostat maintains an Efficiency Score rating on 90.  An Efficiency Score between 70-100 is considered to have limited risk, with the potential for compounded returns.  The market has been flat recently, fluctuating in a slight trading range.  It is impossible to know where the market will go from here, or where the market will be at this time next year.  One thing we know for sure is the characteristics of the market right now, and the combination of securities that create an efficient portfolio for today’s environment.

Currently the Portfolio Thermostat maintains a low risk portfolio, holding many of the top ranked risk-adjusted sectors and industries, as well as some inverse positions that help stabilize the portfolio in case of added volatility to the markets.

Bottom Line
The S&P 500 is in a slight trading range.  Short-term volatility has fallen very fast and entered extreme low conditions, which makes the market prone to seeing an outlier day at some point.  Many of the more “conservative” sectors like utilities, staples, and real estate are currently leading the market on a risk-adjusted basis, which is not typical in a normal bull market.

As this market fizzles out, and breaks out of the trading range (either breaking above resistance or down through support), the Canterbury Portfolio Thermostat will make the necessary adjustments to maintain an efficient portfolio regardless of the overall market environment.
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.

 
Canterbury Investment Management: Tom Hardin

More About Brandon Bischof

Brandon is directly responsible for managing the Canterbury Analytics Group (CAG). To date, Canterbury Analytics Group has played an important role in advancing portfolio management from a loose art form based on subjectivity and obsolete assumptions to an adaptive process with scientific rules and methods capable of providing evidence based results and statistically relevant value add results.


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.