Growth Leads the Market

Growth Leads the Market

Posted on May 14, 2018
5/14/2018

Market State 4: Bullish (13 days): The S&P 500 remains in Market State 4.  As a reminder, the characteristics of the current Market State 4 are as follows:
 
Long-Term: Bullish
Volatility: Caution, but declining from previous highs
Short-Term Supply & Demand: Negative, but turning positive
 
According to studies conducted by Canterbury Portfolio Analytics Group, Market State 4 is often short-lived and improves to Market States 1,2, or 3 around 74% of the time.  In order to transition to one of those market states, the following would need to happen:
 
Market State 3: Canterbury short-term supply & demand indicator turns positive
Market State 2: Canterbury Volatility Index (CVI) turns positive
Market State 1: Both CVI and short-term supply & demand turn positive
 
Canterbury Volatility Index (CVI 82): Volatility continued to decrease throughout the week.  The decline in CVI off its previous high of 102 has caused the CVI indicator to go from Cautionary to Positive.  Declining CVI is a Bullish characteristic.  As volatility declines, the likelihood of seeing back-to-back “outlier” days (+/- 1.5%) decreases.
 
Comment:
 
Market State 4 is a Bullish Market State.  That being said, this does not mean that every liquid traded security is also in a Bull Security State.  Every liquid traded security will go through both bull and bear markets.  This is why it is important to not assign a “risk label” to any asset class.  Asset classes go through rotations of being “in favor” and “out of favor.” 
 
As an example, bonds, traditionally, have been said to be safer than stocks.  Today, Canterbury Indicators show that bonds are actually in a bear market and have been for some time.  Below is a chart of the 7-10 Year Treasury Bond (IEF).  Notice how these bonds are putting in lower highs and lower lows.
 

Source: AIQ

 

Compare that bond chart to a chart of the S&P small-cap 600 index (IJT)

 


Source: AIQ
 
The S&P Small Cap 600 (IJT), which represents small-cap growth, is putting in higher lows and higher highs, a bullish characteristic.  Assigning a risk label to asset classes is a piece of conventional wisdom that is wrong.
 
On another note, it is a bullish sign when growth stocks are leading the market.  Typically, bear markets begin when the Generals (value stocks) are carrying the market while the Troops (growth stocks) lag.  Today, growth stocks are leading the market while value stocks lag. 
 
Here are the rankings of various indices against each other, according to Canterbury’s Volatility Weighted Relative Strength Indicator.  As you can see, growth stocks are outperforming value stocks on a risk-adjusted basis
 

Style Rank
Small-Cap Growth 1
Large-Cap Growth 2
Mid-Cap Growth 3
Small-Cap Value 4
Mid-Cap Value 5
Large-Cap Value 6

 
Source: Canterbury Investment Management
 
Bottom Line
Every asset goes through bull and bear markets.  The overall market, as indicated by the S&P 500 is bullish.  This does not mean that all asset classes are also bullish.  Style specific strategies can go through various environments.  That is why it is important to have a portfolio management system that can select asset classes that exhibit bull market characteristics to limit risk, but also have the potential for high return. 
 
Growth stocks are leading the market, which is a bull market characteristic.  Canterbury will continue to monitor daily for any changes both the Macro Market Environment and the various asset class environments.
 
 

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.