The Shift in Sector Leadership Continues

The Shift in Sector Leadership Continues

Posted on June 19, 2017
Market Update 6/19/2017
 
Macro - Market State (Based on the S&P 500)
Market State 1: Bullish/Rational (18 trading days): Market State 1 – The S&P 500 is only 7 points below 2,440 high. New market highs generally occur while in Market State 1. From a risk perspective, Market State 1 will typically be subject to a -3% to -5% correction, from the most recent peak. Such corrections can occur at any time and would be considered “random market noise.”

Canterbury Volatility Index (CVI 34): Volatility continues to decline and is only 1 point higher than it was on May 15th at CVI 33. The last time volatility was this low was on January 7, 1994 at CVI 32.
 
Comment:
As discussed in previous updates, low volatility is a primary bull market characteristic. That said, one day large moves (outliers) tend to occur when volatility is at an extremely low level. For example, the previous low at CVI 33 (May 15th) was followed by a 44 point drop in the S&P 500 the next day (-373 Dow points). The previous low in volatility (April 21st) at CVI 35 was followed by a two-day advance of 40 points in the S&P 500 points (448 Dow points). In both cases, the markets shifted back to the same low volatility as before, as if nothing had happened.
 
Speaking of low volatility, my friend David Vomund at Vomund Investment Management told me that the S&P 500 has not had more than a -5% correction in 235 trading days and counting. This is the longest streak since 1996. Long periods with low volatility and small corrections are like squeezing down a spring. When the pressure is released, expect more single day moves in the 1.5% or larger range.
 
Change in Market Leadership
The Canterbury’s “Sector Volatility Weighted Relative Strength Rankings” have made a pretty dramatic shift in leadership during the second quarter:
 
                                                                                                                            
                                                         Start of 2nd Quarter         Current Rank
                                                           (3/31/2017)                     (6/19/2017)
1 - Health Care (XLV)                                 #8                            #1
2 - Utilities (XLU)                                        #5                             #2
3- Consumer Staples (XLP)                       #7                             #3
4 - Industrials (XLI)                                     #4                             #4
5 - Technology (XLK)                                 #1                             #5
6 - Discretionary (XLY)                              #2                             #6
7 - Basic Materials (XLB)                           #6                             #7 
8 - Financials (XLF)                                   #3                             #8
9 - Energy (XLE)                                        #9                             #9
 
The current market leadership is moving away from: Technology (was #1 now #5), Consumer Discretionary (was #2 now 6#) and Financials (was #3 now #8). The new leaders are more defensive: Health Care (was #8 now #1) Utilities (was #5 now #2) and Staples (was #7 now #3).
 
Bottom Line:
The above move in Canterbury’s Volatility Weighted Rankings to defensive Sectors, coupled with extreme low volatility, and the long period since the last correction of more than 5% would lead us to believe that a normal correction of -5% to -10% could be around the corner.
 
 
 
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.


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