Most S&P 500 Stocks are Bullish

Most S&P 500 Stocks are Bullish

Posted on February 18, 2020


Market State 1 (Bullish): The S&P 500 index is still in Market State 1, which is one of the five bullish Market State Environments.  As a reminder, there are 12 unique Market States, with 5 of them being bullish; 3 Transitional; and 4 bearish. Market States are characterized by their levels of risk.  Bullish markets are low risk, with market drawdowns being limited to a normal correction of about 10-12%.  Bearish Markets have unlimited risk.  Transitional markets can either have rising levels of risk or falling levels of risk, depending on what environment is being transitioned from (bull or bear).

Canterbury Volatility Index (CVI)- CVI 54: Volatility remains stable in the S&P 500.  Low and stable volatility is sign of an efficiently traded market, or one with low risk.  All bearish markets, unlike bull markets, have high or increasing volatility.  At the start of the month, we saw volatility temporarily spike out of extreme low volatility.  Since then, short-term volatility (a 10-day Canterbury Volatility Index, much faster moving) has fallen down to CVI 52. 

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Here is an example of some Canterbury Analytics Research.  Below is a typical table we often feature in our weekly updates.  It is a ranking of the S&P 500 sectors on a risk-adjusted basis (using Canterbury’s Volatility-Weighted-Relative-Strength ranking).  State Street sector Exchange Traded Funds (ETFs) were used to help measure each sector for rating purposes.
 
VWRS Rank Sector
1 Utilities
2 Technology
3 Communication Services
4 Discretionary
5 Healthcare
6 Financials
7 Staples
8 Industrials
9 Real Estate
10 Basic Materials
11 Energy
Source: CIM
Canterbury Analytics Group (CAG) analyzed the individual 505 stocks in the S&P 500 and gave them each a rating (bullish, bearish, or transitional).  Of the 505 stocks, 59% were bullish; 18% were transitional; and 23% were bearish. You can see from the chart below the breakdown of each S&P Sector:


Source: CIM
As you can see, most stocks within the S&P 500 sector are currently bullish, the exception being stocks within the energy sector.  Utilities, which was the leading sector on a Canterbury risk-adjusted basis, has the highest majority of stocks currently in a bull market.  Other leading sectors like Technology, Communication Services, and Healthcare also have a high majority of stocks in bull markets and a low minority of stocks in bearish markets.  Now, if we look at Consumer Discretionary, which currently ranks 4th on a risk-adjusted basis, it actually has a higher than average number of bearish stocks.  Why would that be?

The above chart only measures the pure number of stocks in each category.  Both sector ETFs and the S&P 500 are based on Market Capitalization (market cap).  Market cap is the equity value of a company, or the number of shares outstanding multiplied by the current share price.  For example, Apple, which is the second largest S&P stock behind Microsoft, currently has a market cap of $1.4 trillion (share price of $324 multiplied by 4.384 billion shares outstanding).  So, in both the sectors and S&P 500, stocks are weighted based on their size.  Apple makes up almost 5% of the S&P 500, while the majority of S&P stocks each make up less than 1%, or much smaller.

Below is chart of the S&P sectors showing their stocks as being either bullish, bearish, or transitional on a market cap-weighted basis.  Notice that Consumer Discretionary now shows almost 80% bullish.  This is because while the sector may have quite a few bearish stocks, they make up a very small percentage of the discretionary sector.  Most of the heavier weighted stocks within Consumer Discretionary are bullish.

In fact, when looking at market cap, 68% of the S&P 500 is bullish (was 59% of stocks) and only 12%  is bearish (was 23% of stocks).


Source: CIM
In addition, keep in mind that although Utilities is the highest ranked sector on a risk-adjusted basis, and has the highest majority of stocks in a bullish market environment, the sectors market cap is rather small, only making up 3.5% of the S&P 500.  On the other hand, the Technology sector makes up 25% of the S&P 500.


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.


Bottom Line
Currently, the majority of the S&P 500 securities are in bullish market environments.  Utilities is currently the number one rated sector on a risk-adjusted basis, but only makes up a small percentage of the total market.  We discussed a few weeks ago how it was rising up on Canterbury’s risk-adjusted rankings. Technology is still going strong.  At this point, the S&P 500 is made up of about 25% technology.  That has grown over the last year.  In January of 2019, it only made up 20% of the total market. 

This is because the S&P 500 is not an efficient portfolio.  The S&P 500, like many other indexes, was built to measure market capitalization, or the equity values of companies.  The S&P is not meant to be bought, held, or compared against as a stand-alone portfolio.  There will come a time when the charts being shown in this update look completely different, with the majority of stocks being in bear markets. 

That is why we use adaptive portfolio strategy.  Having an adaptive portfolio gives us the ability to rotate our holdings and allocations to sectors, industries, bonds, commodities, etc that are showing the right, bullish characteristics.  As the market environment changes, our adaptive portfolio will adapt to remain efficient, whereas a fixed portfolio or buy and hold strategy may be subject to high volatility and high drawdown.

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.