Proper Diversification Must Adjust Holdings to Match the Ever Changing Markets

Proper Diversification Must Adjust Holdings to Match the Ever Changing Markets

Posted on January 20, 2014

Canterbury Portfolio Thermostat Weekly Update – 1/20/14

Market State 2 (5 trading days) – long-term Bullish; short-term Bullish/Neutral - Market State 2 is indicative of a normal correction, or period of price consolidation that would be preceded by a short term market advance. A typical Market State 2 correction would be in the -4% to -8% ranges. The current market environment is more reflective of a sideways "consolidation,” than an actual correction. Therefore, the probabilities are that any further decline from here, if any, should be shallow most likely less than 4%.

Canterbury Volatility Index (CVI) = 49 (reflects a low risk rational market environment). The CVI finished 3 points above the previous week’s close. The slight increase in volatility is meaningless. The current risk remains low for U.S. and most International equity markets.

Our short term overbought/oversold indicator finally made a meaningful move lower from 85% overbought (Bearish/Neutral) to 52% overbought (Neutral). The market continues to work off its overbought position by trading sideways (Bullish).

Market Comment:
The Weekly Update on January 13, pointed out that the extremely low volatility can reflect too much short term compliancy and can result in some larger than normal daily moves in the market. Here is a quote from last week: "The probability for a one or two day market move in the 1% to 2% range is likely in the current environment. Such events typically occur when complacency is high.” Last week started off with a couple surprises. On Monday, the S&P 500 closed down -1.3% and on Tuesday it advanced +1.1%. The market went back to sleep the last three days, which is typical of the current low volatility environment. The week finished up 3 points which is about as flat as you can get.

Bottom Line:
As expected, January is off to a slow start. So far the S&P 500 is down 0.005% for the month. Interestingly, the 20 year Treasury Bond ETF (symbol TLT) registered its 52 week low on 12/12/13. It is now up +3.55% for January. The Treasury Bond ETF (symbol TLT) was down about -14% last year. Treasury’s experienced a lot of tax loss selling in December creating an oversold condition that is usually followed by a bounce.

Last year, stocks were up big and bonds were down. As a result, institutional investors’ "asset allocations,” the percent divided between stocks and bonds, were out of whack at the beginning of the year. Many portfolio managers have been rebalancing their portfolios, by selling stocks and buying bonds, to get back to their original allocations.

The 20 year Treasury Bond ETF (symbol TLT) has been rated a Buy for the last 5 days. The Portfolio Thermostat’s Volatility Weighted Strength indicator has TLT ranked 11th on the Alternatives list (alternative to global stocks). During Bull Market States (Market States 1, 2 3, 4 and 5), our allocations to Alternatives are limited to 21% that can be invested in either 2 or 3 ETFs. TLT’s 11th ranking will not allow it to be added to our portfolio anytime soon. That said High Yield bonds have moved up to the top of the Buy list.

Portfolio Thermostat’s ETF - Rating and Ranking methodologies:

  • ETF Security State (rating similar to Market States) Ratings 1 to 12 (Buy, Hold, Sell)
  • ETFs with Buy Security States are ranked in order of its Volatility Weighted Strength. A new purchase will be the strongest ETF with a Buy rating.

*Market States, Security States and Volatility Weighted Strength are proprietary to the Canterbury Portfolio Thermostat.

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.