Transitional Environments bring Leadership Rotations

Transitional Environments bring Leadership Rotations

Posted on November 19, 2018
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Market State 6- Transitional:  The stock market, as measured using the S&P 500, remains in a Transitional Market State 6.  Since turning to a transitional environment in the middle of October, the S&P 500 has experienced 10 outlier days (+/-1.50%).  Outlier days are more likely to occur during Transitional Market Environments.  Market State 6’s characteristics are as follows:

Long-Term: Positive
Volatility: High/increasing
Short-term supply & demand: negative
 
Canterbury Volatility Index (CVI) – CVI 85: Coincidentally, CVI remains at CVI 85 for a 4th straight week.  Throughout this last 4-week span, CVI has stayed at consistent level, neither increasing nor decreasing.  This higher level of CVI helps explain some of the outlier days we are experiencing.

Comment:

As has been discussed several times in the past, markets go through several different environments.  Transitional environments, like the one being experienced right now, often yield a change in market leadership.  All securities have periods where they are leading the market, and periods where they are lagging the market.  The current Transitional environment is a good example of leadership rotation.  The chart below shows the 9 S&P 500 sectors today, as well as the beginning of October (when the market was in a bull market state).  The Sectors are ranked by their Volatility-Adjusted Relative Strength, which is a proprietary risk-adjusted ranking system utilized by Canterbury.
 
October 1st, 2018   Today  
Sector VWRS Rank   Sector VWRS Rank Change
Healthcare 1   Staples 1 +6
Discretionary 2   Utilities 2 +4
Technology 3   Healthcare 3 -2
Energy 4   Discretionary 4 -2
Industrials 5   Financials 5 +4
Utilities 6   Technology 6 -3
Staples 7   Basic Materials 7 +1
Basic Materials 8   Industrials 8 -3
Financials 9   Energy 9 -5
 
Most notable from the chart above is the rise of Staples and Utilities, which each rose 6 spots and 4 spots respectively. The top 3 S&P sectors are now Staples, Utilities and Healthcare, which are typically thought of as being less risky sectors. It will be interesting to see where sector leaderships is when we shift out of the current environment into either a more bullish environment, or a bearish environment.

Observation:

The S&P 500 is currently in a short-term downtrend that started in mid-October.  From the chart below, we can see that the market is in the middle of a trading range that began earlier this year, before temporarily breaking out and falling back into it.  Currently at the middle of this range, we could either see a retest of old lows around the 2635-2640 (support) or a break of the most recent relative highs (2810).



Bottom Line
The Market does not know where it wants to be.  Sector leadership continues to rotate, and the market remains in a trading range.  The amount of recent large outliers is a characteristic of the current market environment.  The current correction still falls within a normal range for a Bull Market which is about 10-12%.

It is easy to become emotional during an emotional environment.  Investor decisions often become irrational.  That is why it is especially important to have an Adaptive Portfolio Strategy, like the Canterbury Portfolio Thermostat.  The Thermostat is designed to maintain portfolio efficiency through all different market environments- Bull or Bear.
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.