S&P 500 Up 0.008% for the Week-Boring

S&P 500 Up 0.008% for the Week-Boring

Posted on February 10, 2014

Canterbury Portfolio Thermostat – Weekly Update 2/10/2014

Market State 2 (19 trading days) - Long-term: Bullish; Short-term: Neutral: Market State 2 is indicative of a normal correction or period of price consolidation during a long term Bull market. A typical Market State 2 correction is typically in the -4% to -8% ranges.

Canterbury Volatility Index (CVI) is at CVI 66: The CVI was up 9 points for the week. Most of the increase (7 of the 9 points) occurred on Monday following a 326 (-2.1%) point drop in the Dow and a 41 point (-2.3%) drop in the S&P 500.

Overbought/Oversold indicator: Our short term overbought/oversold indicator is now Neutral at 56% oversold. We consider 95% oversold to be an extreme level that is typical of a low point in the market. The indicator did get to 94% oversold on Wednesday. What a difference a few days can make.

Weekly Market Comment: The S&P 500 was up 0.008% last week, boring. I’m just kidding. Not many people were laughing after the -2.28% drubbing the S&P took on Monday.

The Portfolio Thermostat produces a daily report every morning. The report gives me all the information and instructions I need to make any necessary adjustments in our portfolio. My guess was that Monday’s 40.69 point S&P 500 decline and the high velocity of volatility would have turned our volatility indicators negative. As a result, I expected Tuesday morning’s report to have a Sell on 3 or 4 of our current ETF holdings and instructions to purchase Alternative ETF’s with the proceeds. That was not the case.

Tuesday’s Daily Thermostat Report showed that Monday’s decline and volatility only qualified as an isolated, one day, outlier. It was the kind of trading day that occurs when the market’s volatility is coming off an extreme low level. The Portfolio Thermostat remained in Market State 2. Only one ETF Sell signal and one new purchase of an Alternative ETF were issued.

Lessons Learned: It is important to understand the difference between normal market noise verses a fundamental change in the environment. Normal corrections, or fluctuations, are part of the cost that we pay for real time pricing and the privilege of "liquidity.” Liquidity means that we can get our money out any time we want. On the other hand, allowing a portfolio to suffer substantial declines will likely ruin the ability to produce long term compounded returns.

Emotionally, it is difficult to tell the difference between market noise and a meaningful change in the environment. This is the reason why the Portfolio Thermostat Weekly Update always begins with the description of the current Market State and the expected short term risk. Short term risk is defined as the maximum decline (drawdown) measured from the most recent high in price to the lowest trough.

A normal Bull market will resemble a saw toothed pattern as it works its way higher by establishing a new high in price, followed by a correction, then a new high, a higher low, higher high and so forth.

Market State 1 will typically shift to Market State 2 following a -2% to -4% correction from the most recent S&P 500 peak. Market State 2 is expected to experience a correction in the -4% to -8% ranges, measured from the same previous Market State 1 peak.

Our studies show that there is about an 80% probability that the next shift in Market State following Market State 2 will be a return to a new Market State 1. On the other hand, a shift to a more risky Market State will occur about 20% of the time. Please make sure that you fully understand this paragraph and the previous one.

Bottom Line: The latest S&P 500’s correction (drawdown) was -5.76%. The market high was on 1/15/14 at 1848.38. The low was last Monday at 1741.9. So far, the correction has been pretty much what was expected. That said the occasional big one day declines, along with the noise from the financial media’s ongoing soap opera, can be scary.

Those long term investors who follow the markets every day will be subjected to unnecessary stress. Last Monday’s decline is becoming a distant memory because the market ended unchanged for the week. In fact, very few investors will remember the similar -5.75% correction in the S&P 500 between 5/21/13 and 6/24/13.

The Market State environment can change at any time. The Portfolio Thermostat’s algorithms were designed identify the day of any meaningful changes in environment and will make the appropriate adjustments in holdings for the purpose of maintaining a stable portfolio.

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.