Worst New Year Opening for Stocks Ever // January 19, 2016

Worst New Year Opening for Stocks Ever // January 19, 2016

Posted on January 19, 2016

Weekly Update

1/19/2016

Market State 12A - Transitional/Bear: The Portfolio Thermostat has been in one of the “Transitional/Bearish” Market States for the last 92 trading days, beginning on August 20, 2015 when the Portfolio Thermostat shifted to Transitional - Market State 6. The next day, August 21, 2015, the market environment moved to Transitional/Bearish Market State 12A.

Canterbury Volatility Index (CVI 98) – Bearish: Volatility, as measured by the CVI, increased by 10 points last week. High and increasing volatility is a primary characteristic of a bear market environment. A CVI of 75 or lower is representative of an “efficiently” traded market. Nonetheless, market volatility up to the CVI 90 range is still an indication that the benefit of diversification is showing meaningful risk reduction. A sharp increase in volatility, however, can trigger an alert from our Velocity of Volatility indicator. In such an event, the Portfolio Thermostat’s volatility rating will turn Negative (bearish), even if the volatility score is below CVI 75.

Overbought/Oversold indicator (96% oversold): Short-Term Bullish. This indicator has caused a lot of confusion among our readers. Therefore, I’m changing the way it is displayed on this and future Weekly Updates.

The Overbought/Oversold indicator can be a good early indication of a “short-term” change in market direction. This indicator is typically only good for calling a move that lasts for a few days or weeks. Extreme readings of 95 or higher, either overbought (bearish) or oversold (bullish), could justify an adjustment in the portfolio’s ETF holdings.

Market Update:

The most frequently asked question for 2016 so far: How much are you down year to date?

Year to date has certainly felt like a long time, but it has only been a total of 10 trading days.

The last 10 days account for the worst start for the major U.S. equity markets in history!

S&P 500: -8.0%
Dow Jones Industrials: -8.3%
NASDAQ 100: -9.8%
Russell 2000: -11.3%
EAFE (large cap Intl.) -9.3%
MSCI Emerging Markets -10.7%
Source: Bar Charts and Morgan Stanley Capital Markets

The Canterbury Portfolio Thermostat model is basically unchanged year to date, as well as from the most recent market peak on November 3, 2015. Adjustments were made in the portfolio’s ETF holdings during the 4th quarter to reflect the shift from a bullish Market State to a Transitional/Bearish Market State, which occurred on August 21, 2015. The risk of the recent market downturn year to date and the risk from the November 2nd high has been managed within the Portfolio Thermostat’s range of expectations.


A Recap

A couple months ago, many believed that the October rally meant the bull market was back on track (see chart 1, point 1 below). The advance came off the September 28th low of 1881.77, which represented a 12.1% increase. The S&P 500’s October advance had been the largest monthly gain seen in the past four years. In reality though, this had merely been a typical kick-back rally that could be expected after the sharp decline experienced at the end of August (see point 1 below).

Chart 1

Source: AIQ Systems


Sharp declines are typically followed by large kick-back rallies, like that of October, which are typically soon offset by an emotional sell-off. The October rally did not exhibit the characteristics that are typical of a stainable advance. The probabilities of retesting the old lows and establishing a new lower low is substantially more likely than the opposite (retesting the old S&P 500 high at 2131 on May 21st and establishing a new high, which would be highly unlikely based on the current Market environment).

The paragraph above might sound familiar because it was taken to what we wrote in our Weekly Updates from October 26 and November 2, 2015. The fizzled and now the S&P 500 is retesting its lows.

Today:

Currently, most equity markets are in a short-term oversold condition (short-term bullish) and the S&P 500 is right on its first level of support (see chart 3, point 2). Expect another short-term “bear market rally.” It is unlikely that a typical “oversold” rally will get very far and it is low probability that the next rally will be any different. In anticipation of a short-term rally, the Canterbury portfolio sold 2 of its 5 inverse ETFs last week for profits.

The October rally occurred at an early stage of the Transitional/Bear environment. Today, the bearish Market State environment is well established. Over 50% of U. S. stocks have already experienced a bear market decline of 20% or more. Any advance should quickly run into waves of overhead supply from sellers looking to sell into a rebound.

Bottom line:

The Portfolio Thermostat is first and foremost a comprehensive portfolio management system. Portfolio management is about managing risk and maintaining a stable and efficient portfolio through all market environments – bull or bear.

Portfolio optimization, through variable market environments, requires making tactical adjustments. Our Canterbury portfolio has been successful at maintaining stability as a result of holding “inverse” ETFs as a risk management tool and a source of appreciation during the downturn. The correct combination of inverse ETFs, long and alternative ETFs, can reduce risk and even profit from bear markets.


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.


Disclaimer: 
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.