How to Manage Changing Market Environments

How to Manage Changing Market Environments

Posted on June 11, 2012

6/11/12 - Current Market State 12 (Bearish)

Days in current Market State = 5 Days

Canterbury Volatility Index (CVI) = 77 (the CVI has increased 17% in 9 days)

The Portfolio Thermostat Matrix shifted to an “irrational” Bearish Market State on June 1st. The fact that the DJIA had its first two and a half percent day, since last year, reflects irrationality (typical of a Bear market).

As noted in last week’s blog, the market was oversold and would likely see a normal short term rally. That said an “unacceptable” decline could have just as easily have occurred.

The first few days after a change from a Bull to Bear Market States feel similar to shifting gears without pushing in the clutch. Results are unpredictable.

So what actions need to be taken when the Portfolio Thermostat makes a major SHIFT from a BULL to BEAR Market State?

First, on the day following a move to a Bear Market State, the Portfolio Thermostat identifies specialized ETF’s to lower portfolio volatility.

Second, the existing ETFs will continue to be held until each is issued a sell from the Thermostat model. The model does not require a complete and immediate shift to the Bear market allocation.

Third, any new ETF buy signals will tend to be in Alternative ETFs if the shift from the Bull to Bear Market State continues to remain in place. If on the other hand, the Thermostat moves back to a Bull Market State, then the specialized volatility reducing ETFs will be sold and the existing ETFs will continue to be held. Our studies show that rotating this way helps limit the impact of whipsaws.

Fourth and most important, the Thermostat Matrix will make the necessary rotations to own the most attractive ETFs based on the characteristics of each Macro Market States. The Portfolio Thermostat’s goal is avoid potential whipsaws and to limit volatility to “acceptable” fluctuations. This is how we achieve long term “compounded” returns. “Unacceptable” declines ruin the chance to benefit from compounding.

The Canterbury Portfolio Thermostat Matrix identifies 12 different Market States (environments). Of the 12 Market States, 6 are Bullish Market States, 4 Market States are Bearish, and 2 States tend to precede a transition to a Bearish Market State, meaning caution.

Please call me with any questions.

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.