The Transitional/Bear Market Is Not Over

The Transitional/Bear Market Is Not Over

Posted on December 22, 2015

Weekly Update

12/21/2015

Market State 8A – (26 trading days) Transitional/Bear Market State: The Portfolio Thermostat has been in one of the “Transitional/Bearish” Market States for the last 83 trading days, beginning on August 20, 2015 when a shift occurred from Bullish - Market State 2 to Transitional - Market State 6.

Canterbury Volatility Index (CVI 86) – Bearish: Volatility, as measured by the CVI, has now increased 11.7% from the low on 12/2 at CVI 77.

Overbought/Oversold indicator (80% oversold) – Neutral/Bullish. An “oversold” (bullish) reading of 95% or higher is considered to be an extreme level.

Market Comment:

Recall these two quotes from the update two weeks ago:

The rare 2.05% gain in the S&P 500 on Friday, December 4th, is NOT a bull market characteristic. The following two Fridays have also had 2% moves but down, not up. The equity markets remain in a Transitional/Bearish Market State environment. Expect random “kickback” rallies but the risk remains high.

Observation:

The Portfolio Thermostat has only experienced two “Transitional/Bearish Market State” periods since the end of the infamous 2008/2009 stock market meltdown. The first Transitional/Bearish Market State environment was in 2011 and lasted 87 trading days. During that time, the Portfolio Thermostat’s indicators never shifted to a full-fledged “confirmed” Bear-Market State (Market States 9, 10, 11 and 12). The S&P 500’s highest peak during this first Transitional/Bearish period was registered on 4/29/11 at 1364. The lowest low was on 10/3/11 at 1099. This calculates into a maximum peak-to-trough decline of 19.4%.

The second and current “Transitional/Bearish Market State” environment began on August 20th of 2015. It has lasted for 84 trading days and counting. The current Transitional/Bear is just 3 days short of matching the 2011 Transitional/Bear period. So far, the highest peak-to-trough decline (drawdown) has been 12.4%. The current maximum decline is 7% less than 2011. That being said, the current “Transitional/Bear” has yet to show any meaningful indications of nearing an end. In other words, the current Transitional/Bear will last longer than the one in 2011 and will most likely have more downside to come.

The chart below shows the first break in the long-term upward trend since 2011. 

Source: AIQ

Source: AIQ

Bottom Line:

Despite the risk of the two post-2011 Transitional/Bearish periods above, the Portfolio has nevertheless consistently remained in one of the Bullish Market States

As a result, the Portfolio Thermostat’s ETF holdings continue to be positioned to produce a stable portfolio, regardless of what the markets have in store as we enter 2016.

 
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.

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.