Nasdaq Strength Weakening

Nasdaq Strength Weakening

Posted on May 20, 2019
5/20/2019
 
Market State 6 (Transitional/Bullish) – The current market environment is a transitional/bullish one.  Market State 6, as measured using the S&P 500 is one of the 3 transitional Market States.  Most Market State 6 environments go back to being bullish (75%).  The current Market State was caused by a volatility spike on 5/13/2019.  A velocity of volatility spike occurs when the Canterbury Volatility Index jumps by 7 or more points in a single day, turning short-term supply & demand indicators negative. The characteristics of Market State 6 are as follows:
 
Long-Term Trend: Positive
Volatility: Negative (volatility spike)
Short-term Supply & Demand: Negative
 
Canterbury Volatility Index (67 Day) – CVI 66- On May 13th, one week ago, CVI jumped by 8 points, or what we refer to as a velocity of volatility spike.  Typically, these spikes occur as volatility is declining, becoming squeezed down like a spring ready to “pop.”  Prior to the volatility spike, longer term volatility (67-day) had been as low as CVI 52, while short-term volatility (10-day) had been as low as CVI 25.  Volatility had been steadily declining since January 4th.
 
Comment
 
Up until the end of April, the NASDAQ had been showing strong relative strength over the S&P 500.  Typically, in bull markets, we would expect that the NASDAQ would lead the S&P 500, which would in turn lead the Dow Jones.  Since April 30th, the NASDAQ’s strength over the S&P 500 has been steadily falling while the Dow Jones remains weak when compared to the S&P 500.  Below is a chart of the NASDAQ 100 index, along with its relative strength to the S&P 500.  An increasing relative strength line indicates the NASDAQ is leading, while a decreasing line indicates that the S&P 500 is leading.  We can see that during the recent pullback, the NASDAQ has been lagging the S&P 500:
 
 
The Canterbury Investment Management Team will continue to monitor for any continued showing of negative relative strength in the NASDAQ.  This pullback in relative strength does not necessarily signal any continued falling strength.
Sector Rotations
 
One thing that we have seen over the recent years is the constant change of sector leadership.  Different sectors have had different periods of leadership and periods of lagging. It has been rare to see one sector dominate the market for an extended period of time.  According to Canterbury’s Volatility-Weighted-Relative-Strength Indicator (VWRS), the Utilities Sector currently ranks 5th in the sector rankings, while Consumer Staples is ranked 1st.  Just one month ago, Utilities ranked 8th and Consumer Staples was ranked 5th.  Both Staples and Utilities are currently in Security State 1.
 
 
May 17th, 2019 April 18th, 2019
Sector VWRS Rank Sector VWRS Rank
Staples 1 (+4) Discretionary 1
Technology 2 (0) Technology 2
Real Estate 3 (+1) Materials 3
Discretionary 4 (-3) Real Estate 4
Utilities 5 (+3) Staples 5
Industrials 6 (0) Industrials 6
Financials 7 (0) Financials 7
Materials 8 (-5) Utilities 8
Energy 9 (0) Energy 9
Healthcare 10 (0) Healthcare 10
 
Portfolio Thermostat Metrics
 
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 has the ability to adapt to various market environments in order to try and create an efficient portfolio for today’s environment- Bull or Bear.
 
Canterbury benchmarks its portfolio against key “internal” benchmarks, in order to measure portfolio efficiency.  These benchmarks are Portfolio State, Portfolio Volatility, and Portfolio Benefit of Diversification.  Together, these internal benchmarks create the Portfolio Efficiency Score. Below, you will find a description and reading of each metric:
 
Portfolio Efficiency Score: 100
 
The Portfolio Efficiency Score combines Portfolio State, Volatility, and Benefit of Diversification into one comprehensive scoring system.  A Portfolio Efficiency Score between 70 and 100 represents a Portfolio that efficient for today’s market environment, capable of limiting risk within the portfolio to compound returns.  A Portfolio Efficient Score between 60-69 is one with raised risk, while less than 60 is an inefficient portfolio.
 
Portfolio State: Bullish
 
Portfolio State is very similar to the Market State or Security State.  The Portfolio State is a measurement of whether or not a Portfolio is trading efficiently or inefficiently.  The Portfolio Thermostat constructs its portfolio to hold securities that are in Bullish security states, or a combination of securities that create a portfolio in a bullish portfolio state.
 
Volatility: CVI 50
 
Portfolio volatility, as measured by the Canterbury Volatility Index, measures how volatile the overall portfolio is.  Canterbury aims to keep the portfolio’s volatility less than CVI 75.
 
Benefit of Diversification: 32%
 
The Benefit of Diversification determines the degree of diversification within a portfolio.  Typically, diversification is thought to be combining several different asset classes that are noncorrelated and rebalancing them once or twice per year. We know that as markets become volatile, asset classes become increasingly correlated.  The Benefit of Diversification considers the volatility of each individual asset within the portfolio, along with the volatility of the portfolio itself.  For example if a portfolio held 3 assets, each with a CVI of 100, but the volatility of the portfolio itself was 75, that portfolio would have a Benefit of Diversification of 25%. 
 
In a Bull Market or Transitional/Bullish Market, Canterbury aims to keep the Benefit of Diversification in the range of about 25-40%.  In a Bear or Transitional/Bearish market, the Benefit of Diversification may be much higher to reduce risk within the Portfolio.
 
Bottom Line
 
Currently, the Market is having a bit of a pullback from its high.  The current Market State 6 was caused by a spike in volatility.  Canterbury will continue to monitor for additional spikes in volatility.  The NASDAQ is currently lagging over the last 2 weeks, which is not ideal for a bull market.  We would like to see the NASDAQ show leadership, which could still happen since 2 weeks is not a very long period of time.  Sector rotations have continued to occur over the last few months.
     
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.