Russell 2000 Hits Resistance

Russell 2000 Hits Resistance

Posted on November 12, 2019


Market State 1 (Bullish): The Market, which is measured by the S&P 500, remains in Market State 1.  Most new market highs occur in Market State 1.  The flipside of that, is that market pullbacks often begin in Market State 1.  The Market has had a nice little rally over the last 2 weeks, but it will be interesting to see if it can maintain its current direction.

Canterbury Volatility Index-CVI 60: Volatility continues to fall, which is bullish.  Low and decreasing volatility is a sign of more efficient trading.  On the other hand, volatility can become too low.  Short-term volatility, which is faster moving, has fallen into extreme low territory.  A characteristic of extreme low volatility is that market outliers, or spikes in volatility, become more likely.  There is no telling when outliers will happen, nor to what extent or what impact they will have, but extreme low volatility, as shown in the short-term, does raise the likelihood for outliers.

Comment
We mentioned in last week’s update that the S&P 500 broke out of overhead resistance and has gone higher.  As a reminder, we also mentioned that markets can retrace back to the resistance level to test it for potential support.  While this has not occurred yet, we will continue to monitor for any sort of test of new support.

It feels like we are beating a dead horse, but the Russell 2000 continues to underperform, and unlike the S&P 500, has not yet broken above overhead resistance.  In fact, the Russell 2000 is currently sitting at that resistance level.


Source: AIQ

Canterbury Portfolio Analytics Group compared large cap stocks, mid cap stocks, and small caps stocks by looking at their Volatility-Weighted-Relative Strength Rankings (VWRS).  VWRS is a proprietary risk-adjusted ranking.  According to this risk-adjusted ranking, small caps have been ranked the last out of the 3 categories since September of 2018.  Prior to September 2018, small cap stocks had led the market.

Bonds
All assets, securities, and indexes will have both bull and bear markets.  Because of this, we cannot label a specific asset class as being either “conservative” or “risky”.  The best example of this is bonds.  Looking at the charts below of 20-year treasuries, the first chart shows the bonds in May 2016 to November 2018.  You can see this period was more volatile and had a 20% drawdown.


Source: AIQ

The next period shows November 2018 to present.  You will notice there is run-up on lower volatility. Recently, bonds have turned more transitional, breaking a lower support level following a parabolic run-up.


Source: AIQ

Portfolio Efficiency
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 is an Adaptive Portfolio Strategy designed to navigate various markets and create an efficient portfolio for today’s environment- Bull or Bear.
 
Canterbury benchmarks its portfolio against key “internal” metrics, in order to measure portfolio efficiency.  These metrics are Portfolio State, Portfolio Volatility, and Portfolio Benefit of Diversification.  Together, these internal benchmarks create the Portfolio Efficiency Score.


The Portfolio Efficiency Score remains at 90, with a volatility index of 28 and a Benefit of Diversification of 54%.  The portfolio currently has low risk for the existing market environment.

Bottom Line
The market continues to show low and decreasing volatility.  Small cap stocks, as measured by the Russell 2000, have had a nice little run-up recently but are now at overhead resistance.  It would be common to see a pullback in small caps from here.  20-year treasury bonds have pulled back since their significant run up through August.  Recently, 20-year treasuries, unlike the S&P 500, broke below support.
All liquid traded securities and indexes will have both bull and bear markets.  That is why it is important to utilize an adaptive portfolio strategy, like the Canterbury Portfolio Thermostat.  Adaptive portfolios can rotate out of transitional/bearish assets, into more efficient, bullish securities. The goal is to generate long-term compounded returns by limiting drawdowns.