Important Time For The Market

Important Time For The Market

Posted on May 11, 2015

Canterbury Portfolio Thermostat™
Weekly Update
5/11/2015

Market State 2 (MS 2 has been in place over the last 33 trading days): Long-term (Bullish); Medium-term (Bullish); Short-term (Neutral). Market State 2’s current stint of 32 consecutive trading days is getting a little long in the tooth. The inability to get back to Market State 1 is reflective of a trading range environment. This is not necessarily a bad thing which I will discuss in the Market Commentary section below.

Market State™ (calculated on the S&P 500). Current Macro Environment for Equities

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).

 

Canterbury Volatility Index (CVI): CVI 60 - The CVI volatility increased 2 points for the week. A 2 point increase, in the CVI, is hardly worth discussing. In this case, the slight increase was in “positive volatility” which came as a result of a 1.35% advance in the S&P 500 on Friday.

 

As a point of reference, a CVI of 75, or lower, is considered to be a “safe zone.” Canterbury has performed numerous studies on the impact of volatility on markets and securities. Our studies have provided evidence showing that low and decreasing volatility is a primary characteristic of a Bullish market environment.

The Overbought/Oversold indicator finished the week at 42% Overbought (short-term Neutral). This indicator declined by 15 points last week. The move back to the Neutral area was a result of Friday’s big advance.

 

Market Comment:

Last week was a small roller coaster ride. The S&P 500 dropped 1.62% on Tuesday and Wednesday followed by a 1.73% advance on Thursday and Friday. When all was said and done, the market ended the week up a little more than 8 points at 2116. The market has generally been in a sideways trading range for the last six months. One of the S&P 500’s most interesting characteristics has been its tendency to decline slowly and then shoot back up faster than it dropped. The reverse is more normal.

 

The chart below shows Friday’s close hitting the resistance area at 2118 on the S&P 500. “Resistance” is the point where the control between supply and demand has shifted from favoring demand to favoring supply. As can be seen at the top right corner of the chart below, the price rises until it hits the resistance area and is then followed by a decline. Thus far, the price has been unable to break above the 2118 resistance area. The resistance becomes more significant every time price fails to break through.

 

A decisive break above the 2120 area could be the beginning of a new leg up. If not, then expect a pullback followed by another attempt to break through the old highs. Most equity markets remain in a low risk environment as a result of the low CVI 60 reading (bottom of chart).  

20 Year Treasury bond ETF (TLT) Bearish-Security State 12

So far this year, bonds have been out of favor, as they were in favor during the second half of last year. Last week TLT broke below support at 123. In addition, TLT’s volatility has been high and is now beginning to increase again (bottom right of chart). TLT‘s CVI is at 77 compared to the S&P 500’s CVI 60. In other words, TLT (bonds) have about 30% more volatility than SPY (stocks).

Bottom Line:

Bull market environments spend a large percentage of the time in trading ranges that go nowhere fast. Supply and demand tend to be counter intuitive, in that most investors feel confident at market peaks and want to throw in the towel somewhere near the bottom.

 

Bull markets are a better predictor of risk than they are of the future upside. The risk, while in one of the Portfolio Thermostat’s Bullish Market States, is typically in the 5% to 10% ranges. On the other hand, Bull market advances tend to come in spurts when most investors least expect them.

Why? Because of the counter intuitive nature of supply and demand.

 
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.