Don't Let Market Noise Drive You Nuts, It's Just Noise

Don't Let Market Noise Drive You Nuts, It's Just Noise

Posted on April 03, 2018
Market Update 4/3/2018

Market State 6 – Transitional/Long-Term Bullish:

Canterbury Volatility index (CVI - 96) Current volatility exceeds normal “rational” levels.
Compare the current volatility to last year’s volatility. The S&P 500 never had a single day when the volatility, as measured by the Canterbury Volatility Index, was higher than CVI 43. Volatility of 45, or lower, is considered to be extremely low. Extended periods of extremely low volatility, below CVI 45, are very rare. In fact, the average volatility for 2017 was lower than any other year going back to the beginning of our records since 1950. 

Expectations as long as the market remains in one of the Transitional Market States:
  • Expect more outlier days of 1.5% or greater (up or Down) will continue over the next few months.
  • Most of these “outlier days” will come over a small group of days. These outlier days will appear to be connected to some hyped news story about an unexpected event.
  • Large intraday swings, between the day’s high to low will most likely continue for the foreseeable future.
  • The talking heads, on financial news stations, will continue to make outrageous predictions about the bull market coming to an abrupt end.
  • Probabilities are higher that the S&P 500 will break below the low end of the much discussed trading range before it sees the upper end of the range.
Comparing 2017 to 1st Quarter 2018
The S&P 500 was up +19.42% for 2017.  Also, it never had a -3% decline through the entire year.

The year 2017 was nothing like the first quarter of 2018. At first glance, 2018 appears to be boring compared to 2017. The first quarter of 2018 was only down -1.22%. Please wake me up if the market gets into positive territory.

But wait!
2017 only had 2 outlier days (one day greater than 1.5%) out of 251 days. Please note that the 2 days just barely qualified as outliers. Contrast that with the 61 trading days so far in 2018; 10 days, or 17% of trading days, exceeded 1.5%.
The 5 largest outlier days, for the first quarter of 2018 were: -4.1%, -3.75%, +2.72%, -2.52% and -2.12%.
That was lot of movement to end the quarter down just -1.22%.
 
But wait! There is more!
The last 5 trading days, of the first quarter, had some wild intraday swings.
 
  • 3/23 – Trading Range = 599 Points                 Dow:  Open = 23,995
 
  • 3/26 - Trading Range = 491 points             
     
  • 3/27 - Trading Range = 737 points  
     
  • 3/28 - Trading Range = 363 points  
     
  • 3/29 - Trading Range = 386 points                  Dow:  Close = 24,103 (5 trading days)
      
Total points Covered = 2,576 points
Total Return                 +0.45%
That was a lot of movement for +0.45%
 
For those all those ancient Nobel Laureates who believe that markets are random, this chart is for you. Daily fluctuations for the last 5 quarters.

Source: CIM

Comment:
I remember Ronald Reagan’s speech in 1984. It was just days before he won the election for a second term as our President. He said: “Are you better off now than you were 4 years ago? Is there more or less unemployment today than we had 4 years ago? Do you feel more scarcity today than you did 4 years ago?”

Today one could ask, “Do you think that this year’s first quarter world events, were substantially worse than during 2017? Do you think that the first quarter’s news cycle was more hyped or more faked that it was last year?”

I, for one, would say that 2017 had just as many, probably more, unexpected negative events and hyped news stories than what we have seen during the 1st quarter of 2018.

The recent market volatility is not about the news cycle; it is not about the economy; it is not about the trade deficit issues; and it is not about Kim Jong Un’s next crazy idea. The news cycle and unexpected events bring about daily market noise. The amount of noise (daily fluctuations) is driven by the current Market State environment.

For example, 2017 was a very efficient year for most global equities. Efficient market behavior means that emotions are low and investors are less likely to have a “knee jerk” reaction to unexpected events. Periods like 2017, with extreme low volatility, are always followed by periods with much higher than normal volatility. Just like the periods of parabolic bubbles end with sharp declines.

Bottom Line:
Based on the current volatile market environment, which was preceded by an extended period of extreme low volatility, market behavior is acting exactly how it would be expected.  We remain in an extremely noisy, long-term bullish environment. It will take time to work through the pent-up emotions from former complacent investors.
 
With all that said, the actual downside risk from here should be limited to a little more than a normal bull market correction. 
 
Notice the S&P 500 is testing its early February low while the Advance Decline Line never fell below its end of February low.
 
S&P 500 with Advance/Decline – Positive Divergence (Long Term – Bullish)

Source: AIQ
 

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.