Portfolio Thermostat shows declining volatility

Portfolio Thermostat shows declining volatility

Posted on December 12, 2012

Market State 1 (Bullish Rational) Total days in Market State = 1 day

Canterbury Volatility Index (CVI) = 59 (Lowest CVI for current cycle)

Yesterday, the Portfolio Thermostat shifted to Market State 1 from Market State 2. Typical characteristics, during the “early stage” of Market State 1 are as follows:

  1. Low and declining stock market volatility.
  2. Stocks are typically short term overbought, when entering Market State 1. This is the result of the advance required to move prices high enough to shift from MS 2 to MS 1. a) It is normal to see a few days of consolidation (sideways or down) or slow advances following an upgrade to Market State 1.
  3. Market State 1, is known for slowly grinding out higher prices with intermittent -2% to -4% consolidations.
  4. The low volatility and slow advance can get a little boring.
  5. The Portfolio Thermostat will hold a higher, than normal, percentage allocation in global equities to offset the low volatility and slow price action.
  6. We performed a study, using data from 7/19/1929 through 3/31/2011 (20,516 trading days. The results, of the study, revealed that the Portfolio Thermostat spent 35.89% of the trading days in Market State 1. Market State 2 accounted for 17.65% of the total trading days. The Portfolio Thermostat spent a total of 53.54%, of the 20,516 trading days, in either Market State 1 or 2.
  7. The maximum peak to bottom, Market State 1 drawdown, during the last 83 years of testing, was -6.45%. The maximum advance, after shifting to MS 1, was +29.73%. Please contact me with any questions.

The Canterbury Portfolio Thermostat Matrix identifies 12 different Market States (environments). Of the 12 Market States, 6 are Bullish Market States, 4 Market States are Bearish, and 2 States tend to precede a transition to a Bearish Market State, meaning caution.

Market State Description
MS 1 Bullish
Rational
MS 2 Bullish
Rational
MS 3 Bullish
Emotional
MS 4 Transitional
Emotional
MS 5 Bullish
Emotional
MS 6 Bearish
Irrational
MS 7 Transitional
Rational
MS 8 Bearish
Emotional
MS 9 Transitional
Emotional
MS 10 Bearish
Emotional
MS 11 Bearish
Irrational
MS 12 Bearish
Irrational
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.