The Market is in a Trading Range

The Market is in a Trading Range

Posted on September 03, 2019


Market State 6 (Transitional)- The S&P 500 is currently in Market State 6, a transitional market state that began 20 trading days ago (8/5/2019).  Small cap stocks, measured by the Russell 2000, are currently in Market State 12, a bearish Market State.

Transitional markets, especially ones that are more volatile, are unpredictable.  Some go right back to being bullish environments, while others do not.  Because of this, managing risk in a transitional market is crucial to investment success.

Other Markets:
 
Dow Jones Market State 6- Transitional
Nasdaq Market State 6- Transitional
Russell 2000 Market State 12- Bearish
EAFE Market State 6- Transitional
Emerging Markets Market State 12-Bearish
Dollar Market State 1- Bullish
Treasury Bonds Market State 1- Bullish
Gold Market State 1-Bullish
 
Canterbury Volatility Index (CVI)- CVI 85: Volatility remained relatively flat last week for the S&P 500.
 
Other Markets:
 
Dow Jones CVI 82 (flattening)
Nasdaq CVI 104 (flattening)
Russell 2000 CVI 101 (flattening)
EAFE CVI 66 (flattening)
Emerging Markets CVI 88 (flattening)
Dollar CVI 24 (flat)
Treasury Bonds CVI 69 (decreasing)
Gold CVI 72 (decreasing)
 
Comment
The market is in a trading range.  Since the volatility spike on August 5th, the S&P 500 has hovered between 2820 (short-term support) and 2940 (short-term resistance).  The S&P has touched the support and resistance levels roughly 3 times each, bouncing off each time.  Most recently, the S&P 500 hit the 2940 resistance level on Friday, before retracing slightly today (as I am writing this, it is midday Tuesday and the S&P is off -0.75%).  Small caps, on the other hand, have been much weaker, putting in lower highs and lower lows.
 


Source: AIQ
 
S&P 500 Stocks
Canterbury Portfolio Analytics Group ran Security States for each of the S&P 500 stocks.  The results were that 158 stocks were bullish (MS 1-5); 124 stocks were transitional (MS 6-8); and 218 were bearish (MS 9-12).  The chart below shows the percentage of stocks falling into each category in each sector:


Source: Canterbury Portfolio Analytics

From the chart above, you can see that very few sectors have a majority of bullish stocks- Utilities, Real Estate, and Consumer Staples are the only three.  As a side note, the healthcare sector is mostly being held back by the pharmaceuticals industry (ticker: XPH), while the Medical Devices industry (Ticker: IHI) has behaved much more bullish.  Energy, Financials, and Industrials have the highest percentage of bearish stocks.
 
Portfolio Thermostat
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. Below, you will find a description and reading of each metric.



The current Portfolio Efficiency Score of 95 indicates that the Portfolio Thermostat is currently efficient with low risk.  The market (S&P 500) is currently in a Transitional Market State.  Transitional Market states can do 1 of 2 things: go back to being bullish or go into a volatile bear market.  Because of this, it is important to maintain a low risk portfolio especially through transitional environments, because of the uncertainty they often bring. 

The Portfolio Thermostat has managed to stabilize throughout this Transitional environment.  It holds a combination of equities and alternatives that are currently creating a bullish portfolio.  Recently, the Thermostat has utilized some inverse positions to stabilize the portfolio and prevent large outlier days that we often see with high volatility.  A Benefit of Diversification of 55% indicates a more diversified portfolio.  Typically, in a bull market environment, this number would be somewhere between 25 and 35.  Since Transitional markets have potential to turn bearish, a raised Benefit of Diversification is efficient for this environment and creates a more stable portfolio. 

Bottom Line
Transitional Markets can be unpredictable.  The S&P is currently in a trading range, waiting to break out one way or another.  It could either rally through overhead resistance or break below support.  The Russell 2000 is performing much weaker, putting in lower highs and lower lows.  Many S&P sectors, with the exception of Utilities, Real Estate, and Staples, have a majority of stocks either Transitional or Bearish.

The Portfolio Thermostat has taken the appropriate steps to stabilize throughout this transitional environment.  The market could shake out and go back into a bull market, or it could transition into a bear market.  Regardless, risk management is crucial to investment success.  We want to maintain efficient characteristics through all market environments- Bull or bear.
Canterbury Investment Management: Tom Hardin

More About Tom Hardin

As Chief Investment Officer, Tom has more than 30 years of experience in the investment management industry and has a broad breadth of knowledge. He is known as an innovator, educator and has been revolutionary in the advancements of portfolio and risk management.

 
Canterbury Investment Management: Tom Hardin

More About Brandon Bischof

Brandon is directly responsible for managing the Canterbury Analytics Group (CAG). To date, Canterbury Analytics Group has played an important role in advancing portfolio management from a loose art form based on subjectivity and obsolete assumptions to an adaptive process with scientific rules and methods capable of providing evidence based results and statistically relevant value add results.


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.