The Stock Market Is Looking Like a Runner in the Starting Blocks

The Stock Market Is Looking Like a Runner in the Starting Blocks

Posted on June 30, 2014

Canterbury Portfolio Thermostat - Weekly Update – 06/30/14

Market State 1 (16 trading days) - Long term: Bullish; Short term: Bullish

Canterbury Volatility Index is at CVI = 43: The CVI (volatility) declined 1 point for the week. The S&P 500’s volatility, along with most other global equity markets, is near record low levels.

Overbought/Oversold Indicator:
Our overbought/oversold indicator continues to improve. The market is now 74% oversold (short term Neutral/ Bullish) versus last week’s reading at 52% oversold. Last week the S&P 500 was down less than 2 points. The fact that the indicator improved by 22 points during a flat market is a Bullish sign. An extreme oversold condition occurs when the reading is 95% or higher.

Observation:
We could see a little more of a short term sell-off or sideways movement to reach a 95% oversold condition but this is not a primary requirement to see a new leg up in the major equity markets.

Supply and Demand:
The pricing of all liquid securities is driven by the irrefutable law of supply and demand. Supply and demand is driven by the buying and selling activities of investors. The investors’ are buying and selling based on what they believe to be true, regarding the future, and how strongly they believe what they think they know.

In other words, markets are dynamic creatures that directly reflect the changing nature of investors’ beliefs and behavior. Therefore, the financial markets, like investors, can be both: rational or irrational; both: efficient or inefficient; both: stable or volatile and many places between.

Low and/or decreasing volatility represents rational investor behavior and is a primary characteristic of a Bull market environment. On the other hand, Bear markets and Bubbles are the result of the actions of confused and emotional investors. High investor emotion causes erratic and volatile price behavior. Volatile swings in price are a primary characteristic of a Bear market. There is no such thing as a rational Bear market or an irrational Bull. We can see high emotion during a Bubble, but we all know what eventually happens to Bubbles...

Market Comment:
As of today, the market resembles a runner in the starting blocks. The starter just needs to pull the trigger. In the meantime it is possible for the Thermostat’s indicators to deteriorate, but not likely. The probabilities favor a new leg up and if that does not happen our indicators suggest that the downside from here should be limited.

Bottom Line: As of today, almost all our primary indicators are positive and risk is low. Almost all of the Portfolio Thermostat’s indicators are positive or Bullish on most major equity markets. Just reread the past two weekly updates for a list of some of the primary Bullish Portfolio Thermostat indicators.

Portfolio Thermostat: The Portfolio Thermostat model currently holds 14 Exchange Traded Funds. The optimum number of holdings in Market State 1 is 12 to 14 ETFs. Owning more than 14 would limit the impact of owning the strongest ETFs in our universe. Owning fewer than 12 ETFs would limit the broad diversity connected with Market State 1.

The number of ETFs owned in a portfolio is determined by the current Market State (6 Market States are Bullish, 2 are Transitional and 4 are Bearish). Our studies show that one the most important components is maintaining an optimum portfolio, with the highest return and lowest risk, is directly connected to the number of holdings and the allocations between Global Equity ETFs and Alternative ETFs. Over diversifying by holding more positions than the Portfolio Thermostat’s optimized model will impact the ability to quickly adjust to changing environments.

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.