What do Brexit and Ebola have in Common?

What do Brexit and Ebola have in Common?

Posted on July 05, 2016
Weekly Update
7/5/2016
 
Market State 6 (Transitional): Transitional environments are periods when both bullish and bearish market characteristics exist. “Transitional” and “Bearish” market environments can experience unconstrained risk of declines and periods of high volatility.
 
Canterbury Volatility Index (CVI 81): The volatility, as measured by the CVI, has increased by 28 points over the last seven trading days, with a volatility low of CVI 53 registered on June 22nd.  The June 13th Weekly Update warned that the combination of extreme low volatility, overhead resistance, and an overbought condition was creating a high-risk environment. The low volatility was, in other words, the quiet before the storm.
 
Market Comment:
It always amazes me to see the way major changes in market behavior are linked to one, so called, world-changing event or another. Could it be that the event merely lights the fuse of a market anomaly that was ready to explode anyway?
 
Take the 2014 Ebola scare as an example. As I remember it, two people in Dallas came down with Ebola and it was credited with a sharp market decline. In fact, many believed the world would never be the same.
 
Federal Officials on Ebola:
'It Could Change the Economy of the World'
September 25, 2014 | Bloomberg Markets
 
Wall Street tumbles on Ebola fears
October 1, 2014 | Reuters
 
Was Ebola the culprit or was it just the match? Was it responsible or did it merely tip the balance that was already set by a Transitional Market State and an extremely low CVI?
 
Excerpt from the Canterbury Weekly Update on 9/22/2014:
Keep in mind that extremely low volatility will sometimes bring the "one day outlier” we have discussed many times in the past. Markets are supposed to move. Slow markets mean complacency among investors. Complacency will sometimes end with a knee jerk reaction to an unexpected short term event. The important point to remember is that such moves are just part of the random market noise and will have little impact on the overall trend.
 
Excerpt from the Canterbury Weekly Update on 9/29/2014:
An extended period of extremely low volatility is similar to squeezing a spring between your thumb and forefinger. The tighter it is squeezed, the bigger the pop when it is let go. This is exactly what occurred last Thursday when the S&P 500 dropped -1.62% and the Dow declined 264 points or -1.54%. 
Below is a chart showing how the market was setting itself up for a pop in volatility during that time: 

Source: AIQ

Which brings us to today.
 
Why Brexit is Grim News for the World Economy
Expect a global chilling effect on investment
June 24, 2016 | The Economist
Was Brexit really a world-changing (and market-moving) event or just the fuse that set off a pop in volatility as a result of a combined Transitional Market State, overbought condition, and extremely low volatility?
 
Excerpt from the Canterbury Weekly Update on 6/20/2016:
Canterbury’s studies show that volatility is likely to experience certain times of extremes, with periods of very high volatility often followed by periods of very low volatility and vice versa…The S&P 500’s volatility is suboptimal at the CVI 55 or lower range. Our studies show that a pop in price, either up or down (usually down), tends to occur following a period of lower than normal volatility.”
 
Below is a chart showing how the market was again setting itself up for a flash of volatility:

Source: AIQ

Bottom Line:
The Canterbury Portfolio Thermostat handled the sharp two-day decline and three-day rebound by establishing asset allocation, diversification, and security selection that was able to maintain stability through an unstable market environment, allowing the portfolio to remain in a bullish Portfolio State 1. 




Canterbury Portfolio Thermostat State 1 (Bullish): The Portfolio State represents a low-risk portfolio based on the current market environment.
 
The Portfolio Thermostat “model” portfolio’s CVI = CVI 23 (Low Risk)

 
Canterbury Investment Management: Tom Hardin

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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.


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