The Portfolio Thermostat Accurately Predicted the Current 16 Month Bull Market

The Portfolio Thermostat Accurately Predicted the Current 16 Month Bull Market

Posted on October 28, 2013

Canterbury Portfolio Thermostat - Weekly Update - 10/28/2013

Current Market Environment:
Market State 1: (last 10 trading days): Bullish/Rational - Market States 1 and 2 are reflective of an advancing stair-step price pattern of higher highs and higher lows. In other words, a steady advancing market or security will first establish a new cycle high in price, followed by a normal pullback (consolidation of gains), followed by another advance to a new high, then another pullback, a higher high, higher low and so on and so forth.

Canterbury Volatility Index (CVI) = 57 (rational market environment) The CVI was down 3 points for the week. Low or declining volatility are primary characteristics of a Bull market. Currently, we have both, a low and declining level volatility (Bullish). The probabilities for a meaningful short term decline remain low.

Market Comment:
The S&P 500 was up a little less than one percent last week. This was a real accomplishment for the market considering that, a week ago, our short term overbought/oversold indicator was 93% overbought (extended). Last Friday, the indicator finished at a lower level, 83% overbought, even though the market was slightly higher for the week. Currently, every major market average has registered a new high, with the exception being the Dow Jones Industrial Average. The S&P 500, Mid-Cap 400, and Russell 2000 all reached new highs last week. Small-cap stocks remain the strongest.

Canterbury Market State Case Study 7/19/1929 through 3/31/2011:
In 2011, Canterbury performed a study on the major US stock market index. The purpose of the study was to identify each Market State and the volatility reading (Canterbury Volatility Index) for every trading day beginning on July 19, 1929 through 3/31/2011 (20,516 trading days).

The Portfolio Thermostat’s algorithms can identify 12 individual Market States (meaning different market environments)

  • 5 Bullish - Market States (rational/low volatile)
  • 4 Bearish - Market States (emotional or irrational with high and increasing volatility)
  • 3 Transitional - Market States: Caution (may indicate a transition from Bullish to Bearish environment)

The Canterbury study showed that Market States 1 and 2 were by far the most common of the twelve environments. MS 1 and MS 2 account for 35.89% and 17.65% of the total trading days respectively (53.54% of total days).

Market State 1 is the most predictable of the Portfolio Thermostat’s 12 Market States (environments). Our study showed that MS 1 has typical risk in the -2% to -4% ranges from the previous market peak.

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, according to our study.

Observations:
Is the Study Statistically Valid?
There were many observations and conclusions made from our 2011 Market State study. The extensive amount of data examined from the 20,516 trading days is statistically significant.

Specifically, do Market States 1 and 2 reflect a Bull market and is the maximum expected market risk in the -4% to -8% ranges, reflected in the above results?

The current Bull market environment that began on 6/14/2012 was not part of the original study. As a result, the recent period has been a true test of the validity of the narrow set of expected outcomes.

Current 16 Month Bull Market Statistics:

  • The Portfolio Thermostat has been in a Bull Market State every day since June 14, 2012 (sixteen months).
  • Either Market State 1 or 2 was in place for every day except 39 days for the period.
  • During that time, beginning on June 14, 2012 and counting, the S&P 500 has had only 3 declines over -5% (maximum draw-downs). All declines were less than -8%.

*The term "draw-down” refers to the maximum percentage decline from the highest (market cycle) peak to the lowest trough or bottom. S

S&P 500’s maximum percentage declines from 6/14/2012 to date:

  • -7.7% (9/14/12 through 11/15/12
  • -6.7% (2/19/13 through 2/25/13)
  • -5.8% (5/21/13 through 6/24/13)

During that time, the S&P 500 has gone up +32.4%, not including dividends.

Conclusion:
A real world observation of the current Bull market’s predictions have proven to be amazingly accurate. In fact, the results far exceed the probabilities that could be attributed to luck.

Bottom Line:
Twenty first century portfolio management has evolved from a subjective art form to an objective science. Today, we have all the cutting edge technologies, investment tools and an innovative portfolio strategy that can help us benefit from any market - 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.