Weird Isn't Bullish

Weird Isn't Bullish

Posted on May 19, 2020
The S&P 500 remains in a trading range. After declining -34% in 23 days, then rebounding +28% in the next 18 days, the market has since moved sideways. As the market has moved sideways, volatility has remained high. In the last 20 trading days, half of them have been outliers. There have also been several wide-ranging days where the market’s gap between the daily high and daily low has been substantial. So, while the end result may feel normal (through Friday, the market is down -0.37% in the last 20 days), it has had a high degree of volatility to get there.


Source: AIQ
Market Breadth
Canterbury has discussed the Advance/Decline Line (AD Line) in past updates. The AD Line measures market breadth, or the number of stocks participating in rallies or drawdowns (stocks rising or falling). A healthy market will see a “rising tide lifting all ships,” rather than just a few of the generals leading the way. Looking at today’s AD Line, which uses the stocks in the S&P 1500, while the S&P 500 matched its high from late April last Monday, the advance decline line shows that the recent short rally was driven by fewer stocks.


Source: AIQ

The S&P 500 only measures the market capitalization/performance of the 500 largest US companies. In fact, the index is largely represented by just a few stocks. Twenty-two percent of the performance of the S&P 500 comes from just the six largest stocks (Microsoft, Apple, Google, Johnson & Johnson, Amazon, Facebook). On average, these stocks are only -2.60% off of their price from February 19th (S&P 500 high). What about the other 494 companies that make up 78% of the index? On average, those stocks are -23% off of their February 19th price. In other words, much of the S&P 500’s performance is being exaggerated by just 6 stocks.

This can also be seen looking at the Russell 2000 and S&P Mid cap stocks. The Russell, which represents small cap stocks is -26% off of its February 19th price, and the Midcaps are off by -25%.

Bottom Line

No one can predict where the market will go from here with 100% certainty. However, we can look at the probabilities. If it is the middle of July and the weather is Sunny and 80 degrees, then there is a reasonable expectation that tomorrow will be similar. Volatility works the same way. The market has been volatile—expect it to remain volatile. High volatility is a bearish characteristic.

We see it on the news all the time. You often hear the phrase “if you miss the 10 biggest up days in the market, you’re dead—so buy & hold.” Often media pundits neglect to mention that the 10 biggest up days will occur in the same type of environment as the 10 biggest down days. At the time of this writing, the Dow is up 900 points. That is not a bullish characteristic. There is no reason to believe that markets will be able to sustain that type of move, and you could very likely see it occur in the opposite direction in this environment.

From a portfolio management perspective, the goal is to remain stable, and ultimately get to a new high in the shortest period of time. Markets saw a large decline followed by a large rally. Volatility remains high. Maintaining a stable portfolio during volatile periods can lead to a benefit in compounding returns as the market fluctuates between extremes.
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.