Large Caps, Technology Lead the Market

Large Caps, Technology Lead the Market

Posted on February 11, 2020


Market State 1 (Bullish): We mentioned in last week’s update that the stock market, as measured by the S&P 500 was in Market State 2 following the market’s slight pullback (only -3.1%).  We discussed that Market State 2 has a high probability of going back into Market State 1 (74% of the time).  Following the short market pullback where short-term indicators temporarily turned negative, the S&P 500 rallied back to its old high, turning short-term indicators back to positive.  This brought the S&P 500 back into Market State 1.

Canterbury Volatility Index (CVI)- CVI 57: The Canterbury Volatility Index remains low, following the volatility spike out of extreme low volatility.  This short spike in volatility was expected, since there is a higher probability of experiencing outlier days (+/-1.50%) when volatility becomes extremely low.  As with the majority of volatility spikes out of extreme low territory, the market appears to be moving on as if nothing happened.  Volatility has not continued to rise following the spike yet, and still shows signs of being low risk.

Comment
One of the themes so far this year, and continuing off last year, is the strength of technology.  The Nasdaq’s relative strength is still rising versus the S&P 500.  This is a bullish sign.  Typically, when the Nasdaq is leading, it shows investors are willing to take on more perceived “risk” in the markets.  Below is a chart showing the Nasdaq’s rising relative strength versus the S&P 500:


Source: AIQ

Another theme that seems to be continuing off of last year, is the weakness of the Russell 2000 (small cap stocks) versus the S&P 500 (large cap stocks).  The chart below shows the Russell 2000’s relative strength versus the S&P 500.  In this chart, you can see that for most of last year, and to start this year, the Russell, unlike the Nasdaq, has negative relative strength versus the S&P 500:


Source: AIQ

Currently, large cap stocks still lead the market.  If we look at our Canterbury Volatility-Weighted-Relative-Strength (VWRS), which shows the risk-adjusted strength of a security, we can see that large cap growth and value are showing leadership, while small cap value is lagging behind.  All of the style indexes are currently in either a bullish Market State 1 or 2, while small cap value is in Market State 6.
 
Risk Adjusted Ranking Style Index
1 Large Cap Growth
2 Large Cap Value
3 Mid Cap Growth
4 Small Cap Growth
5 Mid Cap Value
6 Small Cap Value
Source: CIM

Portfolio Efficiency
The Canterbury Portfolio Thermostat does not aim to compete against any individual index or blended benchmark.  We know that portfolio efficiency is a moving target, and all asset classes will go in and out of favor.  The Portfolio Thermostat is an Adaptive Portfolio Strategy designed to navigate various markets and create an efficient portfolio for today’s environment- Bull or Bear.
 
Canterbury benchmarks its portfolio against key “internal” metrics, in order to measure portfolio efficiency.  These metrics are Portfolio State, Portfolio Volatility, and Portfolio Benefit of Diversification.  Together, these internal benchmarks create the Portfolio Efficiency Score.
 


The Portfolio Thermostat remains efficient for today’s market environment. The thermostat effectively navigated the volatility spike that occurred last week and maintained its efficiency.  The Thermostat is a diversified portfolio consisting of many different asset classes ranging from equities, bonds, and alternatives. Should the market environment begin to shift, the Thermostat will adapt its holdings to maintain its efficiency through the variable market.

Bottom Line
Volatility was expected to spike last week and had a higher probability of continuing on as if nothing had happened.  This is typical of a volatility spike coming out of extreme low territory.  The S&P 500 fell a little over -3% and had 3 outlier days (+/-1.50%) in a short period of time. Volatility has not continued to rise yet, and the market has rallied back to the previous high.  The Nasdaq is still leading the S&P 500, which is a positive sign for the markets.  The S&P 500, made up of large cap stocks (both value and growth) continues to be one of the stronger market indexes, leading the Russell 2000 (small cap stocks) in terms of both relative strength and risk-adjusted strength.

Currently, the Portfolio Thermostat is efficient and holds a wide range of securities and asset classes in one, diversified portfolio.  Each asset class/holding plays an important role in maintaining portfolio efficiency.  The Portfolio Thermostat is currently in a bullish portfolio state, with low volatility, and efficient diversification.
 
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.

 
Canterbury Investment Management: Tom Hardin

More About Brandon Bischof

Brandon is directly responsible for managing the Canterbury Analytics Group (CAG). To date, Canterbury Analytics Group has played an important role in advancing portfolio management from a loose art form based on subjectivity and obsolete assumptions to an adaptive process with scientific rules and methods capable of providing evidence based results and statistically relevant value add results.


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.