The Shifts Between Bullish Market States 1 and 2 Continue

The Shifts Between Bullish Market States 1 and 2 Continue

Posted on March 17, 2014

Canterbury Portfolio Thermostat – Weekly Update 03/17/2014

Market State 2 (2 trading days) - Long-term: Bullish; Short-term: Neutral/Bearish. The previous Market State 1 was in place for only 7 trading days.

The S&P 500 corrected almost -2% last week. Last week’s (March 10th) - Weekly Update provided a logical explanation for the short term market condition: "Upgrading from Market State 2 to Market State 1 can burn up a lot of short term buying power. As a result, it is common to see a short term correction, following the upgrade; this will allow the market to digest the previous gains.” "A normal short term Bull market correction is likely.”

Overbought/Oversold Indicator:
The March 10th overbought/oversold indicator closed at 93% overbought (short term Bearish). A reading over 95% is considered to be an "extreme level.” Last Friday’s reading finished at 81% oversold (short term neutral-major improvement). Last week went a long way toward digesting February’s big gains.

The overbought/oversold indicator is less important, to the Portfolio Thermostat’s algorithms, when the medium term market is in a strong up-trend, which it isn’t. The current environment is more reflective of a trading range. As a result, we can’t get really excited about the improvement in this indicator until we see more of an extreme low in the mid 90s oversold range.

Canterbury Volatility Index is at CVI = 57: The market’s volatility declined 1 point last week. Great News: the CVI did not show an increase in volatility following the S&P 500 -1.96% decline. Low volatility is a primary characteristic of a healthy Bull market. A volatility reading below CVI 75 is considered to be a low risk environment.

Market Comment:
We remain in a long term Bull Market. The U.S. equity markets continue to look healthy based on the current Portfolio Thermostat readings. Please keep in mind that a 4% correction, from the previous peak, is normal and can come at any time and with no warning. The S&P 500 is currently about -2% down from the last peak. A 5% to 8% correction is less likely in the current environment but would still be considered normal market noise.

Bottom Line:
All traded markets fluctuate. Fluctuation is part of the price for liquidity. It is important to not confuse market noise with something more ominous.

Our Portfolio Thermostat will adjust its holdings to match the changing market environments. It will issue individual Sell signals when a security holding no longer meets the qualifications to help maintain stable portfolio volatility. The Portfolio Thermostat will then identify the best ETF replacement from our universe of about 130 (ETFs). The primary objective of the Portfolio Thermostat is to optimize the portfolio to produce the highest return with the lowest risk. Today, we have all the tools and innovative securities to manage and benefit from any market environment – Bull or Bear.

Overview of the Portfolio Thermostat Market States:

  • Long-term indicators are used to identify the primary trend of the market or security.
  • The proprietary Canterbury Volatility Index (CVI) and related volatility indicators evaluate the degree of rationality in the current market environment.
  • 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 (which tend to precede a shift from Bullish to Bearish, indicating caution)

Each of the 12 Market States is assigned a percentage allocation of the 2 Groups

  • Group 1 – Global Equities
  • Group 2 – Bonds & Alternatives
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.