Many Sectors Showing Strength

Many Sectors Showing Strength

Posted on April 22, 2019
4/22/2019
 
Market State 1 (Bullish) – The S&P 500 currently in Market State 1, a Bullish Market State Environment.  Market State has Long-Term indicators positive, Volatility indicators (based on the Canterbury Volatility Index) are positive, and Short-term Supply & Demand indicators are also positive.  The Market has been in MS 1 for one month (since March 21st).
 
Canterbury Volatility Index (63 Day) - CVI 63Volatility remained similar to where it was last week.  Low (below CVI 75)/declining volatility is a good sign for markets.  High/increasing volatility leads to erratic behavior in the markets and often comes with multiple, consecutive outlier days.  Back in December, volatility was high and had been increasing. Since the beginning of the year, volatility (CVI) has been steadily decreasing.
 
Comment
 
Last week, we noted that the S&P 500 was near a new high.  This week, the same is true.  The Dow and S&P 500 are within a few decimals of putting in a new high, while the Nasdaq is right at its old October high.  This has been led mostly by Large Cap stocks.  Small Cap stocks and Mid Cap stocks have some work to do to get back to putting in new highs.
 
Below is a table that ranks the style indexes according to Canterbury’s Volatility-Weighted-Relative-Strength (VWRS).  VWRS is a risk-adjusted ranking.  You can observe that Large Cap styles are currently outperforming small cap and mid cap styles on a risk-adjusted basis:
 
Style VWRS Ranking
Large Cap Growth 1
Large Cap Value 2
Mid Cap Growth 3
Mid Cap Value 4
Small Cap Value 5
Small Cap Growth 6
 
 
My good friend and market technician, David Vomund, points out:
 
Because of [small and mid cap stocks lagging] one would think market breadth is deteriorating, but my stocks-only Advance Decline Line says otherwise. Its chart pattern looks very much like the S&P 500. No warning signs there.” – David Vomund, April 20th, 2019
 
It would be a negative divergence for the Advance/Decline Line to be slowing or not putting in new highs while the S&P 500 puts in a new high. This is not the case today.
 
Sector Rankings
 
Sector Rotation is law of the markets.  Liquid-Traded securities will have periods of high risk-adjusted strength as well as periods of underperformance.  Canterbury utilizes its VWRS (as mentioned earlier) to rank securities on a risk-adjusted basis.  Each security is put on an even playing field by adjusting for volatility (CVI).  The table below shows the S&P 500 sector VWRS rankings for both today as well as just one month ago.  Observe that there the rotation in leadership:
 
April 18th, 2019 March 18, 2019
Sector VWRS Rank Sector VWRS Rank
Discretionary 1 Utilities 1
Technology 2 Real Estate 2
Materials 3 Technology 3
Real Estate 4 Staples 4
Staples 5 Healthcare 5
Industrials 6 Industrials 6
Financials 7 Discretionary 7
Utilities 8 Financials 8
Energy 9 Basic Materials 9
Healthcare 10 Energy 10
 
One important thing to note about the change in rankings is that although Utilities fell from first place on the list to eighth place, does not mean that the sector is not bullish.  A sector like Utilities is still showing all the right characteristics of a bullish stock, it is just that some other sectors have experienced a rapid increase in relative strength over the past month. Discretionary was experiencing more transitional characteristics last month but has since transitioned to a bullish security state.  Only one sector, healthcare, is showing negative relative strength at this time, while every sector besides energy and healthcare are in bullish security states.  We do not know how long these rankings will stay in place.  Since all liquid traded securities are based on supply and demand, these characteristics may stay in place for a long time or a very short period.  All we know for certain are the realities of right now.
 
Bottom Line
 
Canterbury has a process for identifying securities that are showing the correct characteristics to limit drawdowns, but also with potential for upside.  All liquid traded securities will have bull and bear markets, as well as periods of outperformance and underperformance.  By selecting bullish securities to hold in a portfolio, risk can be limited and compounding can be achieved.
 
The Portfolio Thermostat identifies securities that are Bullish, Bearish, or Transitional.  It chooses from a broad universe in order to select a combination of securities that will be efficient for today’s market environment.  Markets, like weather, go through constant change.  Adapting one’s portfolio is crucial to achieving investment success.
 
 
 
 
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.