Three Questions on the Current Market

Three Questions on the Current Market

Posted on June 16, 2020
This week’s Canterbury Market Update will discuss three key points: What type of Market Environment is this, Why did the markets go down and then back up, and Where will the markets go from here.

Question #1: What type of Market Environment is this?
 Last Monday, the S&P 500 was -6% below its February all-time high.  If someone would have slept for 4 months, it would they would have guessed that little had happened. The reality was that the market dropped by -34% and rallied 45%, during that short period of time. Neither had happened, that fast, in the history of the markets.

Make no mistake about it, we are in a risky market environment. In fact, the current market is almost opposite of what we have experienced over the last ten years. After taking about a three-week breather, the market dropped nearly -6% last Thursday. The next day had a wide intraday trading range of 3.3%.  The market participants were obviously confused. Monday, at the time of this writing, the market again, experienced a wide trading range. It is important to understand that high volatility in NOT a bullish indicator, even if the move is to the upside.

On the other hand, a true bear market is not as much about the size or percentage of the decline as it is about the amount of time spent in an irrational/volatile state. As it stands now, we have to believe that the downside risk far outweighs the upside potential. Even if the market goes up from here, and establishes a new high, there is no reason to believe the market will not follow with a substantial decline. Canterbury’s Market State algorithms will provide a signal if, and when the markets have returned to a normal and safer environment.
 
Question #2: Why did the Market go down, and back up again?
Rational and efficient market environments behave within reason.  News events will tend to have very little impact and fluctuations should be limited to normal corrections within about a 10% range from the peak value.

The 34% decline through March saw record-breaking outlier days, ranging anywhere from -12% to +9%, most occurring back-to-back-to-back.  Investors were in a state of panic, and their emotions led to bad decision making and contributed to what turned out to be “fake pricing.” On March 23rd, the day of the market low, Canterbury released a video stating that emotional drawdowns are followed by equally emotional rallies, and that the rally would occur before the news was at its worst.  From that day on, the Markets began the emotional rally we saw through last Thursday. 

Once the markets had regained about 50-60% of the overall decline, the Portfolio Thermostat began its stabilization process, as part of its adaptive way of dealing with the emotional market. There was no predicting which way the market would head, but only that it would remain volatile and the risk was far greater than the upside. 

The last 3 weeks of the stock market’s rally was driven mostly by the lagging stocks.  We said in last week’s video update (found here: https://youtu.be/6Z8JSVACY5w ) that the market leadership had been dominated by airlines, cruise liners, casinos, and real estate.  The flood into these stocks was last-minute investors looking for an opportunity to participate in the already overdone rally.  Last Thursday’s -6% decline was driven by these same stocks. 

Question #3: Where will the Market go from here?
As has been stated in previous sections, the market is volatile and emotional.  Any minor news event has the ability to move the market in exaggerated fashion, up or down.  Whether the news is dealing with Coronavirus or the FED, the market has reacted in an overblown way to every snippet of news.  Over half of the trading days for the last 4 months have been outlier days (+/-1.50%), with many of those being extreme outliers that many investors may not see in a lifetime. 

Last Thursday, volatility got reintroduced into the market and reminded many investors that the market is playing a dangerous game. Markets do not like the unknown, and right now there are several major unknowns out there.  Again, as stated in the video last week and earlier in this post, even if the market does attempt to establish a new high, there is no reason to believe it will be able to hold it in this type of environment. 

The strategy here is to keep the portfolio stable regardless of the market’s volatile movements.  This is achieved by maintaining a high benefit of diversification.  As the market fluctuates, in both directions, the Portfolio Thermostat can adjust its allocations to lower or raise its benefit of diversification in order to achieve a “ratcheting” effect.  In other words, the goal is increase exposure as the market fluctuates downward and decrease exposure following kickback rallies.
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.

 
Canterbury Investment Management: Tom Hardin

More About Brandon Bischof

Brandon is directly responsible for managing the Canterbury Analytics Group (CAG). To date, Canterbury Analytics Group has played an important role in advancing portfolio management from a loose art form based on subjectivity and obsolete assumptions to an adaptive process with scientific rules and methods capable of providing evidence based results and statistically relevant value add results.


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.