The S&P has Registered 15 New Record Highs over the Last 25 Days

The S&P has Registered 15 New Record Highs over the Last 25 Days

Posted on December 02, 2013

Canterbury Portfolio Thermostat - Weekly Update-12/02/2013

Current Market Environment - Market State 1 (last 34 trading days): Market State 1 represents a bullish/rational environment. It is the most predictable of the Portfolio Thermostat’s 12 Market States. The risk, while in MS 1, is typically around -2% to -4% from the previous market peak.

Canterbury Volatility Index (CVI) = 50 (reflects a rational market environment) The CVI was down 3 points from the previous week (decrease in volatility). Volatility has declined 12% over the last 14 days. As a point of reference, a CVI reading below 75 is considered to be a "safe zone.”

The Portfolio Thermostat has not seen volatility this low (CVI 50) since 6/06/07. The difference between then and now is that the CVI was rising in the second quarter of 2007. To date the CVI has been declining (Bullish). Our short term overbought/oversold indicator is currently 52% overbought (Neutral) improving from 62% overbought the previous week.

Market Comment:
The S&P 500 barely eked out an advancing week. Friday closed at 1805.81 just 1 point up from the previous Friday. That was enough to keep the S&P 500’s weekly win streak alive at 8 advancing weeks in a row. Since 1980, there have only been 3 times when the market has risen 9 weeks in a row. We would see the fourth time, on December 6th, with one additional higher weekly close. If the market can pull off a record tying week this Friday, then one more up week would set a new world’s record: Ten up weeks in a row!

But wait! Does the S&P 500’s incredible run of advancing weeks in a row mean that we could be experiencing a bubble? Is the market doomed to have a substantial correction?

We all know that the market will eventually experience, at least, a normal correction simply because markets fluctuate; both up and down. That said I am not convinced that the eventual market correction will be connected to the record weekly winning streak.

Luck has played a big role in the S&P 500’s current string of 8 advancing weeks. Last week could have been just as likely been down 1 point, as opposed to up 1 point, which would have caused the string to be broken. The last 2 weeks are only up 0.42%. The last 5 weeks have a total gain 2.79%. The S&P 500 has gained 6.28% during the 8 week advance which is strong but not parabolic or an unreasonable increase.

All that said there are additional talking points in addition to the 8 consecutive advancing weeks. Did you know that the S&P 500 has closed at a new all time high on 15 of the last 25 days? Interestingly enough, from the date of the first new high through the fifteenth, registered last Thursday, the S&P 500 is only up 2.26%. In other words, each new high was set based on a very small increase in value. A great deal of financial press and fanfare accompanied each of the new highs. The hype has led investors to believe that the US stock market has advanced more than it has and is therefore a potential bubble.

The recent market advance has been rational and orderly which is what we would expect to see during a healthy Bull market environment. According to the American Association of Individual Investors (AAII), last week’s poll of independent investors recorded an increase in optimism (Bulls) but it still shows that over 50% of investors are currently either Bearish or neutral. There is no excessive investor optimism which is typical of a market top or bubble.

Index Update:   November Quarter to Date Year to Date
S&P 500: CVI = 50 +3.05% 7.78% 29.12%
US Treasury Bonds: CVI = 62 -2.66% -1.29% -14.03%

Observation:

  • Treasury bonds have a higher CVI (volatility risk) than the S&P 500.
  • Treasuries have had a higher volatility risk for the entire year versus the S&P 500.
  • The S&P 500 has experienced a substantial advance: (+29.12%)
  • Treasury bonds have experienced a substantial decline: (-14.03%)

Conservative to Moderate asset allocations:

  November Quarter to Date Year to Date
50% S&P 500/50% US Bonds 0.18% 3.20% 6.94%·
60% S&P 500/40% US Bonds 0.75% 4.11% 11.12% ·
70% S&P 500/30% US Bonds 1.33% 5.02% 15.45%

Observation:

  • The most conservative asset allocation (50/50) had the highest volatility and lowest return.
  • The moderate allocation (70/30) had the lowest volatility and highest return.
  • Any allocation to bonds would have increased risk and reduced return.
  • All market classes (stocks, bonds and others) experience variable and ever-changing environments. Environments range from Bullish to Bearish and low volatility to high volatility.
  • The practice of establishing a "fixed percentage asset allocation,” among variable markets and securities is not an effective method to manage risk and return.
  • Therefore, the popular method of establishing a "fixed percentage asset allocation,” based on subjective "investor risk tolerance,” in a variable market environment is FLAT WRONG.

The Goal of 21st Century Portfolio Strategy:

  • A Portfolio Strategist’s primary goal is to produce geometric compounded returns over time. For example, $100 doubles to $200, then to $400, then $800, $1,600, etc). Substantial portfolio declines kill the benefits of compounding.
  • Avoiding substantial declines requires a scientific process to maintain portfolio stability, similar to the process a thermostat would use to maintain stable indoor temperature during variable weather environments.
  • The purpose of the Canterbury Portfolio Thermostat is to manage and maintain portfolio stability during variable markets by making timely adjustments to own securities that match each market environment.
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.