The Federal Government Shut Down but the US Stock Market Remains Stable

The Federal Government Shut Down but the US Stock Market Remains Stable

Posted on October 07, 2013

Current Market Environment:Market State 2 (last 5 trading days) - The US stock market continues to be long term Bullish but is experiencing a short term consolidation period. Market State 2 is typically representative of a normal correction in a Bull market. The typical risk is in the -4% to -8% ranges from the previous S&P 500 peak.

Canterbury Volatility Index (CVI) = 51. The CVI was up just 1 point last week. Volatility remains low (Bullish). A CVI below 75 reflects a low risk environment (Bullish). The Canterbury Portfolio Thermostat Model remains in Market State 1 - Long and Short Term Bullish. The Portfolio Thermostat’s CVI = 43. The Thermostat Model’s CVI declined 1 point last week reflecting low and decreasing volatility (Bullish). Low and flat or decreasing volatility are characteristics of a stable and efficiently diversified portfolio.

Market Comment:
The S&P 500 was basically flat last week closing at 1690.50 down 1.25 points. The market was 97% overbought (over extended) about two weeks ago. We have been looking for a short term correction that would digest part of the previous 6% gain that began in early September. The market has since corrected -2.03%, from the August 8th peak. It is surprising that such a small decline would cause our indicator to become 82% oversold (Bullish).

The chance of reaching the higher end of a Market State 2 correction is not likely. The CVI volatility is stable and market is currently in an oversold condition,

Observation:
Last week, the US government finally shut down. The shutdown had little effect on the equity markets. This is just one more, in a long list of bad domestic and international news events. If I were marooned on a deserted island, with nothing but my computer and the Portfolio Thermostat program, I would be convinced that the folks back home were experiencing utopia! I can’t remember a Bull market with more investor pessimism in my career. That said the Portfolio Thermostat has remained in Bullish Market States (environments) for over a year. Fortunately, the markets are driven by the law of supply and demand instead of events and experts’ opinions on the impact of those events.

Bottom Line:
We remain in a long term Bull Market with generally low and declining volatility. Based on where the Portfolio Thermostat’s indicators stand today, we can expect normal market noise. The Dow Jones Industrials may experience a few moves over 100 points as a result of the government posturing and theater. There may 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.

Portfolio Thermostat-Market States DescriptionMarket States are categorized by analyzing three primary inputs:

  1. Long-term indicators are used to identify the primary trend of the market or security.
  2. The proprietary Canterbury Volatility Index (CVI) and related volatility indicators evaluate the degree of rationality in the current market environment.
  3. Short-term supply and demand indicators determine which portfolio adjustments are to be made and indicate the strength of the current Market State.

The Portfolio Thermostat process identifies 12 individual Market States, which include:

  • 5 Bullish (rational) Market States
  • 4 Bearish (irrational) Market States
  • 3 Transitional Market States (tends to precede a change from Bullish to Bearish, indicating caution)
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.