Now That Was Volatility!

Now That Was Volatility!

Posted on June 25, 2013

Canterbury Portfolio Thermostat Weekly Update-6/24/2013

Market State 6 (Last 2 trading days) = Short Term Bearish/Emotional – Market State 6 is one of the least predictable of the Portfolio Thermostat’s 12 Market States. Market State 6 can lead to a new Bear market or it could mark the bottom in an ongoing Bull market.

Canterbury Volatility Index (CVI) = 72:
The CVI was up 9 points for the week. A CVI below 75 is typical of a low risk/Bullish stock market. The fact that the CVI is increasing reflects increased risk.

Velocity of Volatility:
Our short term measure of change in volatility (one or two days) spiked through the defined threshold triggering a negative shift in volatility. As a result, the Portfolio Thermostat model moved from Market State 2 to Market State 6 on the close Thursday.

Our overbought/oversold indicator is currently at a 93% oversold level. It is typical to see a short term stock market rally, shortly after reaching a 90% or higher oversold level.

Weekly Comment:
Last week’s discussion about the VIX and volatility was certainly timely (please see last week’s update). The Portfolio Thermostat’s volatility index (CVI) and related indicators measure the actual change in volatility. The popular VIX is not an appropriate measure of volatility in markets. In fact, the low readings on our volatility indicators were reflective of a rational, stable and short term Bullish U. S. stock market environment.

The market environment and the current status of volatility changed during the second half of last week. Last Wednesday and Thursday combined to exceed the normal, two day, decline expected during a rational Bull market. The Dow was down 560 or -3.66%, for the two days, and the S&P 500 was down 64 points or -3.9%. The typical risk when the CVI is below 75 is about -4% to -8%. The total current correction, from the previous S&P 500 peak on 5/21/13 at 1669 is down -4.6% (normal).

The S&P 500 would need to drop below 1550 (currently at 1592) and the CVI needs to get above 75 before the current correction would be considered to be more than a normal pullback during an ongoing Bull market. On the other hand, if the short term supply and demand indicators turn back positive, we would move back into one of the Bullish Market States. Either way the current damage will take some time to work itself out.

Successful portfolio management must adapt to the dynamic nature of the markets. New strategies based on scientific rules and processes are required to take advantage of the recent technological advancements in the investment management industry. Producing long term compounded returns by managing portfolio risk requires a scientific /rules driven process to maintain the correct combination of securities to match each market environment.

Bottom Line:
The talking heads will continue their emotional debates about why they think the markets are behaving poorly. They are quick to offer their opinions on what will happen from here. Most of their comments relate to the current market noise and are subjective opinions. Serious discussions about what really matters rarely occur, such as how to successfully use new investment technologies and new strategies to manage risk by maintaining "true diversification.”

The U.S. Stock market is oversold and due for a bounce. As ugly as our market was, it is better than elsewhere around the globe. Our relative strength report shows the S&P 500 is higher than all other international ETFs. The emerging markets are by far the worst. We will see some adjustments in some of our current ETF holdings as the smoke clears this week.

The Canterbury Portfolio Thermostat Model:
The Portfolio Thermostat model is a dynamic rules-based process designed to stabilize portfolio volatility by adjusting to the changing nature of markets. It actively manages asset allocation and diversification to most benefit from each market environment’s unique characteristics.

The Portfolio Thermostat helps maintain acceptable portfolio fluctuations and avoid "substantial declines.” Substantial declines destroy the likelihood of generating compounded returns, which is the primary objective of all rational investors. The inspiration for the Portfolio Thermostat arose from the need to manage portfolio volatility and generate compounded returns throughout all market environments.

The Portfolio Thermostat is designed to identify, and then categorize, the various market environments into 12 individual Market States. Market States 1 through 6 represent different market environments during a long term Bull market. Market States 7 through 12 are different stages of a long term Bear market. The Portfolio Thermostat assigns a custom asset allocation created to benefit from the unique characteristics of each Market State environment.

Canterbury Investment Management: Tom Hardin

More About Tom Hardin

As Chief Investment Officer, Tom Hardin, Chartered Market Technician (CMT), makes all the final decisions on all investment and portfolio management decisions for Canterbury Investment Management. Tom has more than 30 years experience in the investment management industry and has broad breadth of knowledge. He is known as an innovator, educator and been revolutionary in the advancements in 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.