What is Riskier? Stocks or Bonds

What is Riskier? Stocks or Bonds

Posted on August 05, 2013

Canterbury Portfolio Thermostat Weekly Update – 8/05/2013

Market State 1 (last 20 trading days) = Bullish/Rational - Market State 1 is the most predictable of the Portfolio Thermostat’s 12 Market States (environments). The risk, while in MS 1, is typically around -2% to -4% from the most recent market peak.

Canterbury Volatility Index (CVI) = 58:
The CVI was down 1 point for the week and down 15 points from the previous peak (73) on June 26th. Current market risk is low. Remember that the DJIA can be subject to a 200 to 275 point isolated one-day decline, particularly when complacency is high and volatility is low. Such a move, if it occurs, would not affect the current Bullish market environment.

Market Update:
So far this year we have seen the typical ebb and flow of a strong Bull stock market. The year began with the S&P 500 working its way higher, through mid May, without taking a breath. Stocks finally had a typical short-term consolidation of its gains, including a sharp four-day drop that scared many nervous "long-term investors” who get caught up in short-term market noise of the market. The US Stocks made another big run through mid July. I noted in the July 22nd Weekly Update that the US stock market had reached a 100% overbought condition (meaning that it moved too high, too fast) and a consolidation of the gains was likely over the next month or so.

The good news is that the S&P 500 just traded sideways for about three weeks and then broke to a new high. The short-term sideways period was enough to move the market from being 100% overbought to now 68% overbought (neutral) and that occurred after the S&P 500 broke to a new high.

Here is a breakdown for the month of July:

S&P 500 +5.09%
20+ Year Treasury Bonds -2.10%
70% S&P 500 and 30% Treas. Bonds +2.90%
50% S&P 500 and 50% Treas. Bonds +1.46%

Source Orion Advisors

Most professional and individuals consider stocks to be riskier than bonds. The truth is that risk is more connected with changes in volatility than the market class, such as bonds versus stocks. A common characteristic of almost all Bull markets is low or declining volatility. Bear markets are faster than Bulls and, as a result, they are marked by high or increasing volatility.

Let’s take a look at the S&P 500 ETF (symbol SPY) and the 20 year Treasury Bond Symbol (TLT). Most would be surprised to learn that TLT is currently more volatile than SPY. We know this to be true because our Canterbury Volatility Index (CVI) is at 81 on Treasury Bonds (TLT) and only at 58 on the S&P 500 (SPY).

The CVI has been consistently higher on Treasuries than on the S&P 500 all year. The volatility indicator on TLT has increased almost 60% since March. On the other hand, the S&P 500 volatility has decreased about 10% from where it started at the beginning of the year. Any guess as to which, stocks or bonds, are in a Bull or Bear market?

Bottom Line:
Mindlessly holding a fixed percentage asset allocation between stocks and bonds based on a subjective "risk tolerance score” has little to do with true risk management. There is a time to own bonds and a time to own something else. Risk management is all about maintaining true diversification within your portfolio. In other words, only hold securities with Bull market characteristics – meaning, buy securities with low or decreasing volatility and sell securities doing the opposite.

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.