Even Bull Markets Have Risk

Even Bull Markets Have Risk

Posted on November 18, 2014

Canterbury Portfolio Thermostat -Weekly Update- 11/17/2014

Market State 1 (14 Trading Days) Long-term (Bullish) Short-term (Bullish): The Portfolio Thermostat’s “Market State” provides a macro view of the global equity markets. There are 5 Bullish Market States, 3 Transitional and 4 Bearish Market State environments.

Canterbury Volatility Index is at CVI 61 (Bullish): The CVI volatility has declined 5 points for the week and has decreased 14%, or 10 points, from the highest reading at CVI 71 on October 21st.

Overbought/Oversold "Oscillator” is currently 93% overbought (Short-term Bearish). A reading over 95% is considered to be an extreme. 

Observation:

As of today, most U.S. equity market indexes are in a “bull market” and are at or near their all time highs. We all know that bull markets do not go straight up forever. The traditional definition of a “bull market pullback” is just a 5% decline from the peak value. A bull market “correction” is defined as a 10% decline from the peak

Market State 1 is the most Bullish of the Portfolio Thermostat’s 12 Market State environments. Most of the largest gains occur when in Market State 1. On the other hand, most of the largest “Bull market corrections” also begin while in Market State 1. The largest corrections begin from the highest peak and the highest peaks typically occur in Market State 1. Therefore, a market pullback or a correction within 5% to 10%, from the peak value, is considered normal market noise. These “fluctuations” should not be confused with a “substantial decline.” 

Market comment:

Both the Dow and the S&P 500 hit new highs last week. Don’t get too excited, the Dow was up 0.3% and the S&P 500 was up 0.4%. Here is a chart of the S&P 500. It kind of looks like a check mark doesn’t it?  The chart pattern is not something we likely see very often. When it does happen, money managers are likely to get “whipsawed”, meaning they catch the downside and miss the upside.

It is important to note that the Market State’s primary purpose is to give direction in terms of which ETF asset classes, of the Portfolio Thermostat’s broad universe of over 130 Exchange Traded Funds (ETFs), best match the current environment. Markets are dynamic and ever-changing. The Portfolio Thermostat will move in concert with the markets by holding ETFs that are in bullish “Security States.”

Bottom Line:

The S&P 500 index is moving higher but the percentage of stocks near their highs is declining (Bearish). The Market is over extended short term. A normal Bull market pullback is expected sooner than later. 

 
Canterbury Investment Management: Tom Hardin

More About Tom Hardin

As Chief Investment Officer, Tom Hardin, Chartered Market Technician (CMT), 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.