Low Volatility Tends to be Followed by High Volatility

Low Volatility Tends to be Followed by High Volatility

Posted on March 19, 2018
Market State 4: Bullish/Low Risk (2 trading days):
The Market State’s improvement last week came because of a decline in volatility. The weeks’ market decline: Dow-1.5%, S&P 500 -1.2% and NASDAQ100 -1.0% helped work off the short term overbought condition. Our overbought/oversold indicator (from AIQ Trading Expert) stood at 91% overbought, calling for a short-term sell-off. The week’s decline brought the market to only 32% overbought, which is much more positive short-term.
 
Canterbury Volatility Index (CVI 82): Volatility remains above its normal range but has fallen off previous CVI highs (CVI 93).  The 10% drop in volatility (from CVI93 – CVI82) was enough to move the overall market environment from a Transitional Market State 6 to a Bullish Market State 4.
 
 
Comment:
 
Please See Chart Below
 
Point 1: The Market remains in a trading range with resistance at the previous market high of 2,875 and support at the previous February low of 2,580.  We should expect the market to remain in this trading range for a few months to come as the market goes through its stabilization process.
 
Point 2: The market is currently converging on its 100-day moving average and December’s area of congestion at a short-term support level of 2,685. This is our first level of support. Meaning, if the market breaks through the 2,685 support level and then fails to get back above the 2,685 level on a rebound, then the probabilities of testing the old low in the 2,580 – 2,600 area would be high.
 
Point 3: More often than not, the 200-day moving average acts as a significant level of support.  The market’s 200-day moving average has now converged near the low of 2,580.  This indication further confirms the lower level of support, lessening the likelihood of a break below this low.
 

Source: AIQ
 
Bottom Line:
 
Today is Monday, March 19th.  Long periods of low volatility, like what we experienced up until the end of January, are typically followed by the opposite.  Meaning that low volatility would be followed by high volatility.  The market environment shifted to one of higher volatility since the beginning of February.  It is normal to experience multiple single-day outliers (beyond 1.50%) or more while the market progresses through its rebuilding and stabilization process.  This process will typically last for several months.
 
An adaptive portfolio strategy, like The Canterbury Portfolio Thermostat, is designed to manage volatile environments, such as the one we are having now.  Our primary goal is to hold any correction in the portfolio to a normal 8-10% from the highest peak in value. 
 
 
Canterbury Investment Management: Tom Hardin

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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.