Events Don't Move Markets-Investors Do

Events Don't Move Markets-Investors Do

Posted on April 24, 2017
Weekly Update

4/24/2017

Market State 2: Bullish/Rational (23 trading days): - Market State 2 will remain in place as long as the market continues its short-term correction. The S&P 500’s peak was registered on March, 1 at 2395.91. The maximum decline from the April 13th low was only -2.8% which we consider normal noise in a bullish market environment.
 
Canterbury Volatility Index (CVI 35) The S&P 500’s volatility has increased, just slightly to CVI 35 (The low was CVI 33 on 4/12/17). The CVI is at its lowest level since January 7, 1994 (23 years ago) at CVI 32.
 
Market Comment:
One day outliers (a single day move, up or down, of 1.25% or more) are expected when volatility gets squeezed down to an extreme level. The S&P 500’s volatility has reached historical low levels because of an absence of single day outliers.
  


Source: AIQ
 
Low volatility is a primary characteristic of a bullish market environment. That said, periods of extreme low volatility (CVI 45 or lower) are typically marked by single day outliers that help relieve the pressure. The S&P 500’s volatility declined below the optimal low volatility level (CVI 45) on January 5th this year. Since that date, 74 trading days have passed with two days that barely qualified as outliers (-1.24% and +1.37%). On the other hand,
59 of 74 days changed less than a 0.5% (up or down) and 40 of 74 trading days, had a change less than 0.25%.
 
Volatility gives an indication of how efficiently a market or a security is trading. A market with low or decreasing volatility is telling us that the buyers and sellers are in balance and emotions are stable. High or increasing volatility would reflect a wide variety of opinions about the future pricing and thus, higher investor emotions.
 
There are many axioms about why markets behave the way they do. Some of these sayings come from the wisdom gained from years of experience. That said, most of these sayings are simply not true. For example, The markets can handle good news and bad news, but the market hates uncertainty.” First, the future is always uncertain, and second, the markets are not driven by short term events. Short term market fluctuations (market noise) are more about the stability of the existing market environment than specific events.
 
There's also a lot of uncertainty right now in the world. Uncertainty, as a rule, is never good for stocks. Source: US News and World Report
Today’s markets are facing more short term “unknowns” than I can remember. So many, that I can’t begin to guess which current event the financial press will credit for the next short term blip in the markets. North Korea threatens pre-emptive nuclear attacks, U.S. fires 50 Tomahawk Missiles at Syria for atrocities against its own people, ISIS terrorist attacks occur in London and Stockholm. U.S. drops the “mother of all bombs” on ISIS stronghold. health care reform failed, the U.S. Government may run out of money to operate in a few months. Putin is threating renewal of nuclear arms race, etc. It is interesting that in spite of all these unknowns the volatility on the Dow and S&P 500 indexes are experiencing their lowest level in 23 years while facing a time of extreme uncertainty.
 
A shift from a stable bullish Market State environment to a volatile bearish Market State environment does not occur overnight. In other words, unexpected events that occur during bullish Market States have less impact than events that occur during bearish Market States.  Why? Because a shift from one extreme market environment to another is a process that typically requires time.
 
Bottom Line:
At the time of this writing, the Dow is up 218 points and the S&P 500 is up 1.06%. Per Market Watch: “The Dow is up more than 200 points as French vote triggers rally.” 4/24/2017
 
So, let me make sure that I am understanding why today’s market move may qualify as a 1 day outlier. Macron won a preliminary election with 23% of the vote. I didn’t know that France was so important and I don’t remember hearing the name “Macron” before last week.
 
Investors move markets events can create noise. Today’s outlier was a result of a counter reaction to extreme low volatility and was expected.
 
  
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.