We Can Learn A Lot From 2013

We Can Learn A Lot From 2013

Posted on December 30, 2013

Canterbury Portfolio Thermostat Weekly Update – 12/30/2013

Market State 1 (5 trading days) – long-term Bullish; short-term Bullish - Market State 1 is the most predictable of the Portfolio Thermostat’s 12 Market States (environments). The expected risk is typically in the -2% to -4% range, measured from the previous market peak. The most recent S&P 500 peak was registered on Thursday at 1842.02.

Canterbury Volatility Index (CVI) = 50 (rational market environment) The CVI was down 2 points, reflecting a slight decline in volatility for the week (Bullish).

Market Comment:
We see that the European market has been picking up steam recently, with the S&P Europe 350 ETF (IEV) up 5.14% over the last 6 trading days and recording a new five-year high on 12/24.

The S&P 500 closed 1.27% up for the week and 1.97% for the month. It has had a stellar quarter and was up 10.08% through last Friday, a return that most investors would be happy with over a full year. However, the high return is only half of the picture. The other half concerns the amount of risk taken to achieve the return.

The Portfolio Thermostat’s highest volatility only registered a CVI of 61 during the fourth quarter and the maximum percentage peak-to-trough correction was a mere -1.75% between 11/29 and 12/12. Although it is not uncommon to experience a one-day correction of 1.75%, it is unusual to have such a low drawdown for a full quarter.

Much can be learned from a year like 2013. The largest S&P 500 peak-to-trough correction was only -5.75% (between 5/21 and 6/24), while all other declines for the year were less than -5%. Year to date, the S&P 500 is up 31.87% and the highest volatility reading was CVI 73. Note that a CVI reading below 75 is considered to be in a "safe zone.” Most major US stock indexes were limited to normal fluctuations or "market noise.”

Observation:
2013 has been a case study on why fixed percentage asset allocation based on investor risk tolerance and the practice of mindlessly diversifying among many asset classes primarily for a false sense of security and the aesthetics of adding more colored pieces to the pie chart are just plain wrong. There are times to hedge, times to get out of our equity positions, and times to just enjoy the ride. Unfortunately, stagnant diversification can neither accommodate all of these times nor have the ability to switch between them.

Bottom Line:
The US stock market may need a little time to digest its recent gains, which could result in a slow start for January, but there are no indications that the current Bullish stock market environment will be ending anytime soon.

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.