Low Volatility Can Be Followed By A Pop

Low Volatility Can Be Followed By A Pop

Posted on December 15, 2014

Canterbury Portfolio Thermostat – Weekly Update: 12/15/2014

Market State 2 (4 Trading Days): Long Term (Bullish) Short Term (Bullish/Neutral).

Canterbury Volatility Index (CVI): CVI 59 (Bullish) - The market’s volatility increased 6 points for the week, from CVI 53 to CVI 59 (insignificant). As a point of reference, a CVI reading of 75 or below is considered to be a safe zone.

Overbought/Oversold "Oscillator” is now 97% oversold (Short term Bullish): This indicator tells us when the market has gone either up or down too quickly. It generally takes a move larger than a 3% or 4% pullback from the high to get an extreme oversold reading of 95% or higher. The indicator is now at an extreme 97% oversold level, following a small decline. This is a Bullish sign.

Market Comment:

The market’s pullback was normal and expected based on the 7 week streak of weekly advances. The trajectory of the rally had slowed down significantly while the trading range kept getting squeezed tighter and tighter.  That sets up the old “squeeze the spring and get a pop” analogy.

The S&P 500 was down 3.5% for the week to close the week at 2002, while the NASDAQ Composite declined 2.9%. The NASDAQ’s weekly relative strength continues to rise versus the S&P 500 (Bullish). The breadth of the market remains strong, yet another Bullish sign.

From a portfolio management perspective, there was nothing meaningful to report about last week’s market activities. The Market State changed from MS 1 to MS 2 (normal). The Portfolio Thermostat’s ETF holdings remain the same (no change) as the previous week. Volatility, as measured by the Canterbury Volatility Index (CVI), only increased slightly (expected/normal).

The following quote is from the Portfolio Thermostat’s Week’s Update on (12/08/14):  “The CVI volatility has either remained the same or decreased for 24 straight trading days (no up ticks in the CVI). During the same time period, the largest S&P 500, decline has been just 0.94% and occurred in just 2 days. In other words, the market has gone straight up since the October 15th bottom. The tight trading range over the last few weeks can bring one of those “one day outliers” 200 to 275 point days.” “Bull markets are always subject to a 4% to 8% correction that can happen at any time."  

 

 

S&P 500 Index: 12/12/2014 – Closed at 2002

 

First level of support is at 2000. Top of chart shows black horizontal trend line and the (red) 50 day moving average converging at 2000 (short term support). Red line at the bottom of chart, is the CVI (volatility); no meaningful increase for the week. Volatility is expected to have a pop, following periods of extremely low volatility and a tight trading range (normal).

 

What About the VIX Fear/Volatility Index Doubling Last Week? It is important to note that the VIX is NOT a good measure of market volatility. The VIX is an investor “fear” indicator. It is based on expanding options premiums, not true market volatility. Our studies show that the VIX has little, if any, meaningful predictive value other than potentially as an inverse indicator.

 

High investor fear is more connected to market bottoms than market peaks (investor tends to be optimistic at peaks and pessimistic, or “fearful”, at bottoms).  The VIX expands quickly and is affected by “market noise.” Market noise can produce emotions and lead to investors being faked out by whipsaws, like we experienced during October. See the chart above.

 

Bottom Line:

For now, we may see a little more volatility than we have had in a couple months. There are no indications of a meaningful change in the macro market environment at this time. The Portfolio Thermostat currently holds 13 Exchange Traded Funds (ETF’s) of which 10 are rated as outright Buys and 3 ETFs are holds.

 

The Portfolio Thermostat’s primary objective is to maintain an “efficient portfolio,” with low or declining volatility. Efficient portfolios produce high returns with low risk. Therefore, any comprehensive portfolio management strategy should be able to produce statistically valid evidence that it can make timely adjustments in portfolio holdings to match the market environment- bull or bear.

   
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.