Volatility is Higher in Long Term Bonds Than the Stock Market

Volatility is Higher in Long Term Bonds Than the Stock Market

Posted on June 10, 2013

Canterbury Portfolio Thermostat Weekly Update-6/10/2013

Market State 2 = Bullish/Rational – The Portfolio Thermostat model shifted from Market State 1 to MS 2 on Wednesday 6/5/13. Market State 2 begins during a normal, short-term consolidation in a long-term Bull market.

The S&P 500 saw a short-term peak to trough consolidation of -3.6%. The peak was on 5/2/13 at 1660.16. The most recent low was 1608.90 last Wednesday. The typical risk while in Market State 1 is 2-4% from the peak. Market State 2 has risk in the 4% to 8% range from the 5/2 peak.

Canterbury Volatility Index (CVI) = 61: The CVI was up 3 points for the week (a slight increase in volatility). A CVI below 75 (in the S&P 500) is typical of a low risk/Bullish stock market. It is interesting to note that the 20 Year Treasury Bonds ETF has a 74 CVI. That means bonds currently have more risk than stocks.

The Dow was down 216 points Wednesday. It is normal to have a 200 to 275 point, one day "isolated” decline when the CVI is below 75. Such one day events tend to have little or no affect on the existing market environment.

Our overbought/oversold indicator reached a rare 100% oversold reading on Wednesday. It was not surprising to see the Dow and S&P 500 bounce back +1.92% and +2.14% respectively after reaching the most extreme oversold level.The market remains 92% oversold on the close last Friday. The short-term risk remains low. We may have seen a short term bottom on Wednesday.

Weekly Comment:
Last week’s big concern was Thursday’s employment number. The Portfolio Thermostat’s low CVI and oversold condition indicated that the number would either be positive or no big deal. Markets are much smarter than most people think. A negative surprise would have most likely been preceded by a sharp increase in our volatility indicator. One of the Portfolio Thermostat’s most important tenants is that changes in volatility are a leading indicator of future price.

Interest rates have spiked higher. It appears that, short term, the Fed’s tapering talk has been overhyped, overdone and premature. Investors who think they are "safe” in Treasury and Muni bonds are just getting a first taste of how bad a Bear market in bonds can get. Treasury bond funds are down 6% in the last month and down over 11% over the last year. The risk reward ratio on bonds is not so hot right now.

Bottom Line:
The truth is that the biggest risk we face is not maintaining a strong investment discipline as a result of our emotions. The minor -3.6% pullback caused a lot of anxiety for the financial press and many investors. We are long term investors. This is why it is so important to have confidence in the process and not focus on the short-term noise.

As it stands now, the risk remains low and we are in a Bull market. The U. S. market continues to outperform international stocks. The Financials and Discretionary sectors continue to be the best performers. That being said, there is broad based participation among most market sectors. Value stocks are slightly out-performing growth stocks. Portfolio Thermostat’s model has made some adjustments on ETF holdings over the last couple weeks to reflect a slight change in market leadership. The US equity markets should remain relatively stable and positive until the CVI (volatility) begins to increase.

The Portfolio Thermostat is designed to identify, and then categorize, the various market environments into 12 individual Market States. Market States 1 through 6 represent different market environments during a long term Bull market. Market States 7 through 12 are different stages of a long term Bear market. The PortfolioThermostat assigns a custom asset allocation created to benefit from the uniquecharacteristics of each Market State environment.

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.