Why Does the Financial News Insist that Volatility is High?

Why Does the Financial News Insist that Volatility is High?

Posted on June 17, 2013

Canterbury Portfolio Thermostat Weekly Update-6/16/2013

Market State 2 (Last 8 trading days) = Bullish/Rational – MS 2 begins during a normal, short-term consolidation during a long-term Bull market.

Canterbury Volatility Index (CVI) = 63: The CVI was up 2 points for the week. A CVI below 75 (in the S&P 500) is typical of a low risk/Bullish stock market.

Our overbought/oversold indicator is currently at an extreme 99% oversold level. It is typical to see the stock market rally shortly after reaching a 95% or higher oversold level.

Weekly Comment:
The financial press continues to report on the US stock market’s "increasing volatility.”


NEW YORK (CNN Money) 6/14/13
Volatility and fear are back with a vengeance on Wall Street.
A key metric for measuring market volatility -- the Chicago Board Options Exchange's Volatility Index (VIX) -- has been on a tear. During the past six weeks, it's spiked nearly 42%.

Many experts believe that the popular VIX (CBOE Volatility Index) is a good measure of changing market volatility and can be a useful indicator of future price. This assumption could not be further from the truth.

The VIX is often referred to as the "investor fear gauge." Fear and volatility are not the same thing. High investor fear is more associated with market bottoms than tops (Bullish). On the other hand, increasing market volatility is characteristic of declining or Bear markets.

The VIX is based on put and call option premiums which increase when intraday market noise gets louder and investors get nervous. Market noise has been a primary contributor to many bad short term investment decisions.

Our Canterbury Volatility Index (CVI) is a true measurement of short term, day to day, volatility in markets and securities. Many studies, including our own, have shown that changes in volatility can be an effective leading indicator of future price. Intraday market noise, as measured by the VIX, has no meaningful predictive value.

The year 2013 began with the CVI at 71. Last week closed at CVI 63. Volatility has not been increasing this year. In fact it has remained stable and has declined during the first half of 2013. Low volatility is a characteristic of a Bull market. Therefore, it is no surprise that most U.S. stock indexes are trading close to their highs for the year.

The same cannot be said about Treasury bonds or emerging markets. The 20 year Treasury bond (ETF) is down about -10% and the emerging markets are down a little more than -9% over last three weeks.

The Bottom Line:
We remain in one of the Bullish Market States (Market State 2). Financials, Health Care, Discretionary and Industrial sectors are at the top of the Portfolio Thermostat’s Security States rankings. This leadership is reflective of a Bull Market. The low stock market volatility indicates a low risk environment. Expect a continued positive and stable market environment, unless the CVI experiences a significant increase.

The Canterbury Portfolio Thermostat Model:
The Portfolio Thermostat model is a dynamic rules-based process designed to stabilize portfolio volatility by adjusting to the changing nature of markets. It actively manages asset allocation and diversification to most benefit from each market environment’s unique characteristics. The Portfolio Thermostat helps maintain acceptable portfolio fluctuations and avoid "substantial declines.” Substantial declines destroy the likelihood of generating compounded returns, which is the primary objective of all rational investors. The inspiration for the Portfolio Thermostat arose from the need to manage portfolio volatility and generate compounded returns throughout all market environments.

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.