Volatility Declining, But Remains High
Market State 4: (Transitional/Bullish): The S&P 500 is currently in Market State 4. Market State 4 is actually one of the rarer Market States. Since 1950, there have been a total of 668 changes in Market States, and only 20 of them have been to Market State 4 (3%). There has been 17,538 trading days since 1950. Of those, only 157 of them are days spent in Market State 4 (0.89%). Market State 4’s characteristics are as follows:
Volatility: Transitional (High, but decreasing)
Short-Term Supply & Demand: Negative
Volatility currently remains high but has fallen slightly to send the market into Market State 4. Short-Term indicators remain negative. Market State 4 is very rare, so it is difficult to make out any significant prediction as to where it goes from here. Keep in mind, the S&P 500 is now sitting at a point of resistance.
Canterbury Volatility Index (CVI)- CVI 79: Volatility remains high following a spike in volatility on August 5th. Volatility (CVI) has been as high as CVI 87, and since that point has only fallen 8 points. High/increasing volatility is a signal that outlier days (days beyond +/-1.50%) have a higher probability of occurring.
The Market (S&P 500) has rallied back to where it started off the month of August. At this point, we last saw a sharp spike in volatility, coupled with a drop in the market and transition to Market State 6. The stock market is currently overextended, with 91% of stocks giving unconfirmed AIQ sell signals. In addition to this, as we discussed last week, the Nasdaq continues to underperform the S&P 500 on a relative basis. We would expect that during these short rallies, that the Nasdaq would be outperforming. This is not the case.
We have also discussed that for most of this year, the Russell 2000 (small cap stocks) has been performing much weaker than the S&P 500 (large caps). Last week, the Russell 2000 had a sharp rally, with increasing relative strength compared to the S&P 500. Similar to the S&P 500, the Russell rallied back to where it began the month of August. This, however, was done on high volatility. High/increasing volatility (CVI) is a bearish market characteristic. Given high volatility (the Russell currently sits at CVI 102), we know that there will be sharp declines, but also some sharp rallies. Currently, the Russell, just like the S&P 500 is at a point of resistance.
The Canterbury Portfolio Thermostat does not aim to compete against any individual index or blended benchmark. We know that portfolio efficiency is a moving target, and all asset classes will go in and out of favor. The Portfolio Thermostat is an Adaptive Portfolio Strategy designed to navigate various markets and create an efficient portfolio for today’s environment- Bull or Bear.
Canterbury benchmarks its portfolio against key “internal” metrics, in order to measure portfolio efficiency. These metrics are Portfolio State, Portfolio Volatility, and Portfolio Benefit of Diversification. Together, these internal benchmarks create the Portfolio Efficiency Score.
Currently, the Portfolio Thermostat remains properly positioned to deal with the current market environment. The Portfolio Thermostat has a higher Benefit of Diversification due to the recent transitional environment. Although the market rallied last week, and volatility went from being negative to Transitional, volatility still does remain high. The Thermostat currently holds 3 inverse positions to help stabilize the portfolio, but also holds several of the best risk-adjusted sectors/industries that are currently bullish. The Thermostat has low volatility, which is a bullish characteristic.
The market did rally last week back to a point of resistance but is currently overbought on high volatility. 91% of stocks in AIQ (a technical analysis program) are giving unconfirmed sell signals. The Russell 2000 also rallied, showing its first sign of strength in a long time, but this was still on high volatility and is now at a point of resistance. The Nasdaq continues to show declining relative strength to the S&P 500.
The Portfolio Thermostat remains efficient with a Portfolio Efficiency Score of 90. It holds a combination of bullish, low risk securities, as well as some inverse positions to help stabilize the portfolio should the market continue to show volatile behavior.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.