NASDAQ Relative Strength Declines

NASDAQ Relative Strength Declines

Posted on September 25, 2018


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Over the next few weeks, Canterbury will be publishing , along with the blog, a featured video detailing an educational piece on the Thermostat and Adaptive Portfolio Strategy.  This week's video, titled Adaptive Portfolio Strategy gives an overview of what adaptive portfolio strategy is and why it is necessary.  We invite you to follow along with us each week. 
 


9/24/2018
 
Market State 1- Bullish (19 days): The “Market State” is based on a set of proprietary indicators built into algorithms that are designed to measure efficiency of the S&P 500. The internal characteristics of S&P 500 are used to provide a leading indication of the overall health of the equity markets.
 
Market State 1 currently holds the following characteristics:
Long-term: Positive
Volatility: low/decreasing
Short-Term Supply & Demand: Positive
 
Canterbury Volatility Index (CVI 42): Volatility remains low and decreasing.  A low and decreasing CVI volatility reading (preferably CVI 75 or lower) is a Bull Market characteristic. Bear markets occur during periods when volatility is high or rapidly increasing. High volatility is a direct result of increasing correlations among the stocks in the index which leads to a loss in the benefit of diversification.
 
A reading of CVI 75, or lower, is considered to be “stable and efficient.” While, on the other hand, increasing CVI volatility (above CVI 90) can give an early indication of a difficult market environment ahead. While still bullish, extreme low volatility is subject to higher probability of an “outlier day” (1.5% up or down).  Canterbury monitors and tracks all indicators, including CVI on a daily basis. 
 
Comment
On the surface, the market appeared to have a good week last week.  The Dow Jones Industrial average (composed of the 30 largest US stocks) was up 589 points +2.25% for the week.  Other stocks, however, did not experience the same success.  The S&P 500 was practically flat for the week  +0.85%, while the NASDAQ 100 was actually down (-0.3%).  While this is only a 5 day look at the market, let’s look at an indicator called relative strength to help give us a better look at what is happening.
 
Relative strength is an indicator that measures the strength of one index or security relative to another index or security (often the S&P 500).  If the index or security’s relative strength line is increasing, it means that it is outperforming its opponent on a relative basis.  In other words, if we are measuring the relative strength of Apple compared to the S&P 500, and the S&P 500 is declining but not as much as Apple, then Apple’s relative strength line would be increasing.  The same is true if both Apple and the S&P 500 are increasing, but Apple is increasing more. 
 
One of the primary characteristics, of a healthy bull market, is when NASDAQ 100 (which are mostly considered growth-based stocks) is outperforming the S&P 500. In turn, when the S&P 500 is leading the Dow Jones.  If we look at the following two charts, we will actually see that recently, the Dow Jones has been leading the S&P and the S&P is leading the NASDAQ.
 


Source: AIQ

The above picture shows the Dow Jones’s relative strength versus the S&P.  You can see the relative strength line was in a downward trend, but recently broke above upper resistance to begin outperforming the S&P 500 on a relative basis.
 

Source: AIQ

Conversely, the above chart shows the NASDAQ 100 relative strength line (versus the S&P 500) was in an upward trend but began flattening out and recently falling slightly. 
 
While this is only one indicator/outlook on the market, it would be much more bullish to have the NASDAQ ahead of both the S&P 500 and Dow as opposed to the other way around. Given the current stable conditions, the probabilities would favor a normal short-term consolidation of recent gains and not a sign of a new bear any time soon.
 
Bottom Line
 
The Market remains in a Bull Market State.  While relative strength indicators favor a short-term consolidation, we are still in a low risk environment.  Volatility remains low and studies show that could mean a one-day outlier could occur.  Canterbury’s adaptive portfolio management process continues to monitor for changes in the current market as well as the global markets, in order to maintain an efficient portfolio regardless of the external market conditions- 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.