The US Stock Market Remains in a Low Volatility Environment

The US Stock Market Remains in a Low Volatility Environment

Posted on October 21, 2013

Canterbury Portfolio Thermostat Weekly Update – 10/21/2013

Current Market Environment:
Market State 1: (last 5 trading days): Bullish/Rational - Market State 1 is the most predictable of the Portfolio Thermostat’s 12 Market States (environments). The risk, while in MS 1, is typically around -2% to -4% from the previous market peak. The S&P 500’s peak was registered on the close Friday at 1744.50.

Canterbury Volatility Index (CVI) = 60 (rational market environment) The CVI was up 1 point for the week. Our studies, beginning in 1970, show that there has been only one S&P 500 draw-down that exceeded a single digit percentage, while the volatility was below CVI 75. A "draw-down” is the percentage decline from the highest peak to the lowest trough.

Last Week’s Volatility Alert Cancelled:
The 322 point advance, on October 10th, triggered a volatility alert in our proprietary Velocity of Volatility indicator. The Portfolio Thermostat gives a volatility alert when a "spike” in the market’s price far exceeds the norm and the Portfolio Thermostat is in Market State 2, meaning in a corrective phase, which was the case two Thursday’s ago.

The largest spikes, on "advancing” days, usually occur during volatile Bear markets as the market rebounds from a big correction. It is rare to see a large spike up in a long term Bull. Increasing volatility means that correlations among securities owned are getting higher, along with investor emotions. Increasing volatility can be an indication of higher future risk.

The "volatility alert” expires when the Thermostat goes back to Market State 1 which occurred on the close last Monday. The volatility alert had no impact on our holdings. No buys or sells were issued.

Market Comment:
The S&P 500 was up 2.42% last week closing on its high. It is up 5.38% from the market’s low, registered 8 trading days ago. Our short term overbought oversold indicator is currently 93% overbought (extended).

It would be healthy for the market to consolidate some of its short term gains and get this indicator back to a more neutral reading. That said we remain in a low risk Bull Market environment. The market has had a nice run over the last few days.

Bottom Line:
Any viable investment strategy must be based on science and eschew subjectivity. The markets are driven by one thing and one thing only, the Law of Supply and Demand. Any viable portfolio management strategy must be based on quantifiable rules. These rules should measure various aspects of how supply and demand is currently affecting market classes, securities and the portfolio as a whole.

Bull and Bear stock market environments are not just different, they are opposite. It does not make sense to hold the same asset allocations and securities through both market environments. An effective portfolio management model must have the ability to make adjustments based on the changing market environments. Maintaining "true diversification” requires a dynamic process designed to only hold securities with low correlation in order to maintain consistency and manage risk through all market environments – Bull or Bear.

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.