Leadership Among Global Equities Needs to Expand

Leadership Among Global Equities Needs to Expand

Posted on October 06, 2014

Canterbury Portfolio Thermostat-Weekly Update-10/6/14

Market State 2 (61 trading days) - Long-term: Bullish; Short-term: Neutral.

Canterbury Volatility Index is at CVI = 50 (Bullish): The CVI volatility increased 2 points last week and has increased by 20% from its lowest reading at CVI 40 on August 18th. Increasing volatility is normally bad for financial securities. In this case, volatility has been squeezed down so low that it would be normal and expected to see the kind of market turbulence we have experienced over the last couple weeks. The CVI reading at 75 or less represents a low risk environment. 

Overbought/Oversold "Oscillator” is currently 92% oversold (Bullish): The indicator reached an extreme 97% oversold level last Thursday. As a result, Friday’s rally should not have come as a surprise. 

The Overbought/Oversold "Oscillator” is a leading indicator that will often give an early indication that the market is near a short term bottom.

Market Comment:

The S&P 500 and Dow continue to cover up the overall weakness in the broader U.S and international markets.  Both indexes are only down a little more than 2% from their all-time highs. At the same time, the Russell 2000 and many international markets have suffered some hits and are on the ropes.  Several well-known markets are actually down for the year:

Index                                                     Peak through 10/03/14                   Year to Date    S&P 500                                                                                                               +8.13% Dow Jones Industrials                                                                                        +4.42% Russell 2000                                            -9.16% (from peak 7/01)                     -4.13% MSCI EAFE (large Cap Intl)                -10.83% (from peak   6/19)                  -3.86% MSCI World Index                                -4.54% (from peak 6/20)                    +2.84% CRB Commodity Index (DBC)                                                                        -11.03%

Source: Orion Advisor

One of the most troubling aspects of the current market environment is the weak market breadth. The S&P 1500 Advance/Decline line helps point to the problem. There is a “negative divergence” between the large cap stocks and the broader market. 

Source: David Vomund – VIS Alert Market Letter and AIQ Systems

As can be seen above, the S&P 500 has worked its way higher by registering higher highs (in price) and higher lows. During the same time, the number of stocks advancing versus declining stocks continues to weaken. Notice that the green AD line just dropped below its August low.

 

The divergence between the S&P 500 and the S&P 1500 Advance/Decline line tends to give several month’s warning before the large caps finally fall back with the smaller companies.

In battle, the troops need to be at the front leading the charge. The generals follow behind. By “troops” I mean the mid and smaller-cap stocks should be performing better than the big-cap “generals.” This is not the case today. It is important to see more participation and maybe a new high in the AD line during the next rally. If this does not occur, then we could see the first 10% correction since 2011.

Bottom Line:

The market’s volatility remains historically low which is reflective of a low risk environment. We also have a very short term oversold condition (Bullish).  That said, as of today, there are only a total of 6 ETFs with Buy signals in the Portfolio Thermostat’s universe of over 80 Global Equity ETFs. Most of the Group’s ETFs are rated as Holds and 28 are rated as Sells. This is the lowest number Global Equity Group ETF Buys in about 3 years. On the other hand, we have 4 new Security State Buys in the Alternative Group of ETFs to bring the total to 10 Alternative ETFs with Buy signals.

For now, a short term rally and new highs in the S&P 500 and Dow are most likely. The leadership really needs to expand during any meaningful advance.  Regardless, the Portfolio Thermostat’s algorithms are designed to move in concert with the changing market environments.

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.