International Equities Remain Bearish

International Equities Remain Bearish

Posted on October 08, 2018
10/08/2018
 
Featured Video
 
This week’s featured video discusses the importance of adapting the diversification within a portfolio to match the characteristics of the existing market environment. Such a process requires a method to measure the percentage “Benefit of Diversification” (B. of D.).  The Benefit of Diversification calculation can provide an early indication of the impact of a change in the market environment on a portfolio.
 
Last week’s video was about volatility and our proprietary volatility index called the Canterbury Volatility Index (CVI). It is best if you watch the two videos together. If you haven’t seen last week’s video, then I would suggest that you watch it before viewing the one for this week. 
 
Below are links to last week’s video on volatility followed by this week’s video about the benefit of diversification.
 
CVI Video Link:
https://www.youtube.com/watch?v=Oq7I6erOcdk
Diversification Video:
 
Market State 1- Bullish (29 days): The Market remains in Market State 1 following a slight down week last week (-0.97%).  This could be the start of the short-term pullback or correction we have been discussing in the past few week’s blogs.  If the pullback or correction continues, we may see a temporary move to Market State 2, where our short-term supply and demand indicators turn negative.
 
Canterbury Volatility Index (CVI 39): Volatility remains at extreme low levels.  We have not seen any outlier days (+/-1.5%) in quite some time.  When this happens, volatility compresses to extreme low levels and often has the same effect as “squeezing down a spring.”  When volatility falls to extreme lows (less than CVI 45), the market is prone to experiencing an outlier day.  Canterbury Portfolio Analytics Group will continue to monitor for changes in volatility. 
 
Comment
 
As we have discussed in past updates, rotation is among asset classes and investment styles is expected.  There will never be a singular asset class or investment style that always outperforms.  To illustrate this, below is a chart showing the Volatility-Weighted-Relative-Strength (VWRS) rankings of investment styles.  Canterbury’s VWRS is a risk-adjusted relative strength ranking utilized in the Portfolio Thermostat’s internal process. The chart below compares the investment style’s rankings from August 20th (which is the last time we showed these rankings) through Friday (October 5th).
 
August 20th 2018   October 8th 2018  
Style Rank   Style Rank Change in Rank
Small Cap Growth 1   Large Cap Growth 1 +1
Large Cap Growth 2   Large Cap Value 2 +4
Mid Cap Value 3   Small Cap Growth 3 -2
Small Cap Value 4   Mid Cap Value 4 -1
Mid Cap Growth 5   Mid Cap Growth 5 0
Large Cap Value 6   Small Cap Value 6 -2
EAFE 7   EAFE 7 0
Emerging Markets 8   Emerging Markets 8 0
 
From the chart above, there are two big takeaways.  The first is the rise of Large-Cap Value over the last month and a half.  Large-Cap Value went from being ranked last (among US styles) to the second best rated currently.  This can be expected to happen because in markets, every dog has its day.  Often times, assets that have a period of very poor performance will transition to a period of high performance.  There is no predicting when or if this will happen.  Large Cap Value has not yet put in a new high since January. 
 
The other takeaway is the poor performance of international equities, both developed and emerging.  The EAFE is currently in a transitional market and currently has a drawdown of -11.75% from its January high.  Emerging markets are currently in a bearish state and down -21.58% from its January high. 
 
Bottom Line
 
The Market, as measured by the S&P 500, remains in a Bull Market State with extreme low volatility (CVI).  As a reminder, low volatility is a primary Bull Market characteristic, but at extreme lows, is prone to single-day outliers.
 
All asset classes, investment styles, and any other liquid-traded security will go through various market environments. Just because the S&P 500 is in a bullish Market State and has put in a new high recently, does not mean that every asset class or investment style is a bullish state and put in a new high.  Large Cap Value has experienced a good run over the last month and a half but has yet to surpass its January high.  International Equities are currently not even close to resembling anything Bullish.  We did not discuss it in this week’s update, but bonds are also in either Bearish or Transitional Market Environments.
 
The primary goal of the Portfolio Thermostat is to maintain an efficient, stable, Bullish Portfolio State through all market environments-whether they are Bull or Bear.  This means rotating to asset classes and securities that exhibit the right characteristics of a Bull Market and avoiding asset classes that show signs of high or increasing volatility. This also requires efficiently diversifying the holdings within the Thermostat.  As mentioned at the beginning of this blog, The Portfolio Thermostat uses its own unique diversification indicator, called the “Benefit of Diversification” to measure how efficiently diversified the portfolio is.  I recommend checking out the featured video, which discusses that indicator, at the beginning of this blog. 
 
 
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.