The Canterbury Thermostat Issued a Volatility Alert

The Canterbury Thermostat Issued a Volatility Alert

Posted on October 14, 2013

Canterbury Portfolio Thermostat-Weekly Update-10/14/2013

Current Market Environment:
Market State 2 (last 10 trading days): Bull - Market State 2 is reflective of a normal correction in a long term Bull market. The risk in MS 2 is typically in the -4% to -8% ranges. Through Friday, the S&P 500 is only down -1.3% from its most recent peak.

Canterbury Volatility Index (CVI) = 59. The CVI was up 8 point last week for a 16% increase in volatility. Last Thursday’s 322 point advance triggered a volatility alert in our proprietary Velocity of Volatility indicator. The Portfolio Thermostat gives a volatility alert when a "spike” in the market’s price far exceeds the norm. A spike in volatility can occur when the market’s participants get too emotional or irrational. Our studies show that such volatility spikes tend to lead a short term period of higher than normal market risk.

Observation:
Prior to last week, the market, and our volatility indicators, had been surprisingly quiet. The previous Portfolio Thermostat Update (10/07/13) gave us an indication that things, on the volatility front, could change. "The Dow Jones Industrials may experience a few moves over 100 points as a result of the government posturing and theater. There may also be an isolated 200 to 275 point one day move in the event surprise development. Other than that, the US equity markets should see new highs continue to work higher as long as our CVI volatility doesn’t spike higher.”

Well, the CVI’s volatility did "spike higher.” As discussed in previous updates, an isolated 200 to 275 point day can occur at anytime and should have little or no impact on the existing market environment. Last Thursday’s 322 point move exceeded the outer limits of one of those isolated fluky days. The good news is that the spike was on the upside.

Market Comment:
Monday and Tuesday saw the Dow decline -136 and -159 points respectively, enough to put the market into a 96% oversold condition which helped set up the big advance at the end of the week. Thursday’s spike up was followed by another 112 Dow points on Friday. It is interesting to note, the Portfolio Thermostat’s short term indicators did not shift back to Bullish (Market State 1) following the 432 point two day advance. As a result, the Portfolio Thermostat remains in a short term corrective phase which is representative of Market State 2.

Bottom Line:
The Portfolio Thermostat remains in a long and medium term Bull market. We have entered a period of higher market volatility; meaning higher risk and less predictability. Our short term overbought/oversold indicator went from 96% oversold (Bullish), on the close Wednesday, to 68% overbought (neutral to slightly Bearish) after just two days. If our short term supply and demand indicators could work their way back to turning positive, we would then see a return to Bullish - Market State 1. In that case, our Velocity of Volatility alert would be canceled and the Portfolio Thermostat would return back to a low risk environment.

Portfolio Transactions:
The Portfolio Thermostat’s universe of about 130 Exchange Traded Funds (ETFs) includes 9 major market Sectors. The Portfolio Thermostat will hold at least 3 of the top 5 ranked Sector ETFs during Bull - Market States (environments). A Sector holding will be sold when it falls out of the top 5 ranking and replaced by the highest ranked Sector ETF.

The Portfolio Thermostat:
The Portfolio Thermostat’s success is not determined by whether the market environment is Bullish, Bearish, volatile, stable or somewhere in between. The Thermostat’s long term success is dependent on the accuracy of its algorithms to identify a change in the market environment. Equally as important is its ability to make timely portfolio adjustments to match and benefit from the unique characteristics in the new market environment.

Breakthrough investment technologies have no value without revolutionary portfolio management strategies that can benefit from them. Fortunately we now have all the necessary tools, technologies and a portfolio strategy that makes it possible to benefit from any market environment - Bull or Bear.

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.