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The Market is Attempting to Rebuild, Brick by Brick

Markets are counterintuitive and will do whatever it takes to confuse the masses. Last year was the definition of a bear market. This year, 2023, began in a bear market. Will it end the year in the same state?


To begin the month of January, things are certainly starting to look “up” for the broad markets. The S&P 500 has continued its short-term rally that began in late December. Volatility (as defined by the Canterbury Volatility Index, “CVI”) has fallen significantly off its highs. The market index has also broken above its 200-day moving average, and above a contentious trend line drawn from the index’s previous peaks. Additionally, it has put in a recent higher low point. In other words, the market is starting to look more "transitional" than "bearish". The big question that remains right now, is will it be able to hold this position? Or, is this the calm before the bear market swipes its paw again?


Source: Canterbury Investment Management. Chart of S&P 500 created using Optuma Technical Analysis Software.


A bear market was globally felt in 2022. Now, the S&P 500 has seen some positive developments here recently, and the positivity has been felt globally. At Canterbury, we follow over 200 ETFs (exchange traded funds) daily. These ETFs include global equities, bonds, alternatives, and inverse securities. Right now, we are beginning to see a lot more securities turn “green” or start to show signs of positive, lower risk characteristics.

What is surprising is that according to Canterbury’s risk adjusted rankings, the leadership has largely shifted towards the international markets.


Out of the top 50 risk-adjusted ranked ETFs in our universe, most of them are either alternatives like Uranium, or individual countries and geographic regions like Mexico, Euro Stoxx, and South Korea. In fact, only one S&P 500 sector is in the top 50 (energy) and one of higher ranked industries may surprise you.


There has been a lot of negative press about housing recently. Mortgage rates rose sharply last year and “new single-family houses sold” recently fell to their lowest level since 2018 (according to expert economist Bob Barone of Universal Value Advisors). While the fundamentals of home buying are not looking great, US Home Construction stocks are turning positive.


The chart below shows an ETF composed of stocks in the home construction industry. The lower half of the chart shows its “Money Flow Index.” Money Flow measures how much “buying power” or “selling power” there is in a particular stock or fund. Rising Money Flow would indicate that there is more conviction to the buy side, or that the volume is higher on up days, while declining Money Flow shows that there are more shares traded during down days.

Source: Canterbury Investment Management. Chart created using ITB and Optuma Technical Analysis Software

Here are 3 points on the chart above:

1. Back in late 2021, while the US Home Construction fund was rising, its Money Flow was falling, showing a negative divergence (i.e. there was less conviction to the upward move).

2. Throughout the fall of 2022, the ETF was declining in price, while Money Flow remained flat. This is a positive divergence. There was less conviction to the downward move.

3. Now, the Home Construction ETF has “gapped” up through its 200-day moving average on rising Money Flow


Bottom Line

Markets are counterintuitive and do what most would least expect them to do. The S&P 500 is showing signs of improvement and beginning to act more "transitional" as opposed to "bearish." Many market segments are beginning to break above key moving averages and trend lines.


Looking the state of global equities, it is surprising to see so many international names pop up on our lists, considering many are saying that international economies are worse off than the US economy right now. In the same fashion, it is surprising that Home Construction ETFs are strong relative to the broad market, given the apparent low demand for housing. Regardless of economic news and numbers, markets are reality.


The Portfolio Thermostat continues to adapt its holdings to adjust with the markets. Recently, it has taken some positions in some of the better ranked industries, regions, and alternatives, while maintaining some inverse positions for risk management. The goal is to maintain low and consistent volatility as we continue to navigate changing market conditions.

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