You Can See A Lot By Just Looking -Yogi Berra

You Can See A Lot By Just Looking -Yogi Berra

Posted on September 21, 2015

Weekly Update

September 21, 2015

Market State 12-A (19 Days) Transitional/Bearish: MS 12-A will typically follow an emotional sell-off that triggers the Portfolio Thermostat’s bearish indicators, such as, an increase in velocity of volatility and a substantial break of the 200 day moving average.

 

Canterbury Volatility Index (CVI 108) Bearish: A volatility reading above CVI 90 is reflective of high investor emotion leading to imbalances between the forces of supply and demand. Last week the volatility declined just slightly (from CVI 112) as the market entered a “consolidation period.”

 

Overbought/Oversold indicator (94% OverBOUGHT) Bearish: The previous week’s reading was 79% OverSOLD Bullish/Neutral. This is a surprising bearish turn for this important short term indicator. A 95% plus reading is considered to be extreme. This has been an accurate early predictor of a change in the short term market direction. In this case, the indication would be for a market decline.

 

Market Comment:

Headline: U.S. Stocks Decline Amid Fed Rate Decision

Bloomberg

 

Based on the headline, most would have guessed that the Fed had just RAISED rates. Sorry, the majority would have been wrong again. Rates remained the same and the U. S. equity markets declined sharply.  How many times did we hear the media say that that the equity markets go DOWN if the Fed raised rates or would go UP if rates remained the same? The opposite was true again. High volatility adds to the market’s counter intuitive nature.

 

Here is a quote from the last Weekly Update:

Transitional market environments tend to overreact to the daily news and will often move in the opposite or counterintuitive direction from what one would expect.

 

Last Monday, the Dow closed at 16,371 and ended the week just 14 points higher at 16,385. The four days in between had a 724 point swing. The first move was up, and then, following Fed Chair Yellen’s announcement that rates would remain unchanged, the market went down.

Day                                  Dow Points
Tuesday                            +228.89
Wednesday                       +140.10
Thursday                             -65.21
Friday                               - 290.16

Observation:

Sharp declines are followed by sharp counter trend rallies that can retrace about 50% of the total decline from the peak. The retracement is typically followed by a consolidation period.

Source: AIQ

“You can see a lot by just looking.”

It looks like the market is forming a “Continuation Pattern.”

 

Continuation Pattern: A technical analysis pattern that suggests a trend is exhibiting a temporary diversion in behavior, and will eventually continue on its existing trend.

Source: Investopedia

The above chart of the S&P 500 shows the formation of a bearish continuation pattern. A pennant (ascending/descending) or rectangular “flag” pattern, is reflective of a period of consolidation. Most consolidation patterns typically breakout in the same direction as the primary trend.

 

The following are some pictures of “continuation patterns”.

Source: Google

 

Bottom Line:

The equity markets will continue to have random large up and down days.The Portfolio Thermostat has adjusted its Exchange Traded Fund (ETF) holdings to reflect the current “transitional” market environment. Our Canterbury Portfolio Thermostat model portfolio is currently in Bullish - Market State 2.

 

The Canterbury portfolio, should be able to maintain daily fluctuations to less than 1% to 1.5% ranges and total maximum drawdown declines, from the peak, value to the 8% to 10% ranges. Any outliers from these ranges should be rare and small.

 
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.