"For The Times They Are a-Changin."- Bob Dylan

Posted on July 01, 2013

Canterbury Portfolio Thermostat Weekly Update-7/01/2013

Market State 6 (Last 7 trading days) = Short Term Bearish/Emotional – Market State 6 is one of the least predictable of the Portfolio Thermostat’s 12 Market States, in that it can lead to a new Bear market or it could mark the bottom in an ongoing Bull market.

Canterbury Volatility Index (CVI) = 71:
The CVI was down 1 point for the week. A CVI below 75 is typical of a low risk/Bullish stock market.

Velocity of Volatility:
Our short-term (one or two days) measure of change in volatility spiked through the defined threshold on 6/20, triggering a negative shift in volatility. As a result, the Portfolio Thermostat model moved from Market State 2 to Market State 6 on that day. If the short-term indicators turn from negative to positive and the CVI stays below 75, then the next change would be to Bullish - Market State 1.

Market Update:
Last week began with our overbought/oversold indicator at 93% oversold. It is common to see a short-term market rally when the reading gets above 90 and we did indeed experience a small one. The market is now at about 50%, neither overbought nor oversold (neutral).

S&P 500:
The S&P 500 was up a little less than 1% last week and is up 2.1% from the most recent low at 1573.09 on 6/24. The previous peak was on 5/21 and its fall to the trough on 6/24 made for a total decline of -5.67%.

20 Year Treasury bond Index (Symbol TLT):
Treasuries remain in Market State 12. MS 12 is the most Bearish of the Bear market environments. TLT had a small reflex rally, up 1.9% for the week. The rally was preceded by a peak (5/01) to trough (6/25) decline of -13%.

Emerging Markets (symbol EEM): Emerging Markets Index is in Bearish Market State 12. EEM was up 2.9% last week. The short-term reflex rally was preceded by a -17% peak-to-trough decline.

Weekly Comment:
Last week Kim Custer, Canterbury’s Chief Strategist and a Chartered Market Technician, made an interesting observation. She pointed out the fact that our CVI (volatility) registered the first uptick (increase), at CVI 55 on 5/31. The current reading is CVI 71, up 29% from the low. From that time through last Friday, the Dow Jones Industrial Average has had daily fluctuations, advances and declines, over 100 points on 17 of the last 21 days. The largest one day move was -354 on 6/20 and over 200 point moves were seen on four days.

Kim then compared the total number of days the Dow moved 100+ points, prior to the May 30th increase in CVI volatility. The Portfolio Thermostat was in a Bullish - Market State 1 (Market State 1 is the most stable of our 12 Market States). The Dow only had 7 of 22 days with fluctuations over 100 points. The biggest daily change was 142 points.

May June
More stable - 21 days Less stable - 21 days
(May prior to first CVI increase) (May 30th following a CVI increase)
DJIA – Days DJIA - Days
300 points or more = 0 days 300 points or more = 1 days
200 points or more = 0 days 200 points or more = 4 days
100 Points or more = 7 days 100 Points or more = 12 days
Total: 7 Days Total: 17 days

Small daily fluctuations are characteristic of a Bull Market. Frequent large daily fluctuations indicate a change to a less stable and more risky market environment.

Bottom line:
Last week’s small rally in the stock and bond markets was a normal and expected reflex rally following an oversold condition. Our Portfolio Thermostat’s Canterbury Volatility Index remains at a low CVI - 71 reading. A CVI below 75 is typically reflective of a low risk environment.

On the other hand, the spike in our Velocity of Volatility indicator triggered a change to a higher risk Market State. The speed of the change in volatility is more important than the actual CVI number. It is obvious, from Kim’s chart above, that the market environment after May 30th has changed from the period before. That being said, the most likely scenario from here is a trendless market.

The Portfolio Thermostat is adjusting to the new environment and has made several changes in our ETF holdings. Our process adjusts the positions held in order to maintain low risk and consistent volatility during high risk environments.Recent Portfolio Thermostat transactions:Sold: The EURO Currency Trust (FXE) - 6/27 Switzerland and Technology Sector ETFs were sold on 6/25Purchased: US Dollar (UUP) and Inverse-Emerging Markets (EUM) bought 6/27

The Canterbury Portfolio Thermostat Model:
The Portfolio Thermostat model is a dynamic rules-based process designed to stabilize portfolio volatility by adjusting to the changing nature of markets. It actively manages asset allocation and diversification to most benefit from each market environment’s unique characteristics-Bull or Bear. The Portfolio Thermostat is designed to identify, and then categorize, the various market environments into12 individual Market States. Market States 1 through 6 represent different market environments during a long-term Bull market. Market States 7 through 12 are different stages of a long-term Bear market. The Portfolio Thermostat assigns a custom asset allocation created to benefit from the unique characteristics of each Market State environment.

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.