How Many More Times?

How Many More Times?

Posted on March 17, 2015

Canterbury Portfolio Thermostat™
Weekly Update 
3/16/2015

The Portfolio Thermostat identifies 12 different market environments called “Market States.” Each Market State has its own unique characteristics and tendencies.

 

The Macro- Market States are used to provide a “big picture” view of the characteristics of the current equity markets. The S&P 500 is commonly referred to as “the market.” There are 5 Bullish (rational – low volatility) Market States; 4 Bearish (volatile and/or increasing volatility) Market States; 3 Transitional Market States (indicating caution).

 

The Current Macro - Market State™ (calculated on the S&P 500)-Market State 2 (6 Trading Days): Long-term (Bullish) Short-term (Bullish): Market States 1 and 2 are the two safest and most stable market environments. Market State 2 typically comes into play following a short term correction within a medium and long term Bull market.

 

Macro - Canterbury Volatility Index™ (calculated on the S&P 500)-Canterbury Volatility Index™ (CVI): CVI 66: A CVI of 75 or lower is considered a “safe zone.” Volatility, as measured by the CVI, increased 2 points for the week (insignificant).

 

Canterbury Overbought/Oversold indicator remained at the same 99% Oversold level (90% oversold or higher is Bullish) as last Friday. Currently, this indicator is at an extreme oversold (Bullish) level. The market just needs some upward momentum to move back to Market State 1.

 

Quote from Last Week’s Update:

The Portfolio Thermostat continues to reflect a positive and low risk environment for most equities. The stocks only advance/decline line hit a high on March 2nd. This is reflective of strong market breadth (more stocks going up than down). The new highs in the A/D line acted as a confirmation of the new highs in the S&P 500, Dow and NASDAQ 100.

 

Market Update:

The Portfolio Thermostat’s indicators continue to reflect a low risk environment for most major U.S. equity indexes.

 

Low risk markets tend to feel riskier than they are. It is interesting to note that over the last 10 trading days, the Dow has registered 7 days, up or down, 100 points or more. The following are the Dow’s 5 largest daily moves during the last 10 days: -333, -279, +260, +156 and -146 points.  Currently, the S&P 500 and the Dow are only down about -3% from their March 2nd highs 10 days ago.

Our Canterbury Volatility Index (CVI) was at CVI 64 on March 2nd market peak and is up only 2 points to CVI 66 through last Friday. No meaningful increase in volatility.

The CVI should not be confused with the VIX “Fear Index.” The VIX has increased 19.4% since March 2nd market peak. The VIX is a reflection of investor fear, not true volatility. High “fear,” is an indication of a potential market bottom. High “volatility” typically has a bearish or opposite market impact from high investor “fear.”

Observation:

One of the benefits of owning financial securities is that they are liquid. Accepting price fluctuation is part of the cost of owning liquid securities. Traditionally, a bull market “pullback” is defined as a 5% decline from the peak value and a “correction” is defined as a 10% decline from the peak. It feels like every market correction will be the beginning of the next bear market.

How many more times… will we hear predictions of doom and gloom and that we may have just seen the end of this six year bull market?

How many more times…will long term investors make short term decisions based on a lack of confidence and patience in an investment process?

How many more times… will investors and investment experts allow emotions and bearish confirmation bias to override rules based decision making?

An inherent flaw in traditional portfolio philosophy is its subjectivity. Subjective decision, by nature, cannot produce consistent or repeatable outcomes which opens the door for emotional decisions, randomness and luck. Therefore, any results produced will have no statistically relevant predictive value as an “application.”

The evolution in portfolio and risk management processes requires strategies that are more systematic and objective than in the past. These rules based strategies are designed to manage the complexities and the unique risks that come with change.

Bottom Line:

We remain in a Bull market and it will most likely continue until the Portfolio Thermostat’s indicators tell us that something has changed. Investors will gain more patience and confidence as they learn to trust the process instead of their emotions.

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.