Market State 1 (Bullish): The S&P 500 continues its nice rally. Most new market highs occur while in Market State 1. As we wrote about in last week’s update, the Nasdaq continues to show strength over the S&P 500, which is a positive sign for the market. Also continuing its streak, small caps continue to underperform the general market. While that is not ideal, this has yet to stop large cap stocks from showing strength.
Canterbury Volatility Index (CVI)- CVI 57: Rising markets are ideally accompanied by declining volatility, which is exactly what we are seeing right now. Volatility, as measured by the Canterbury Volatility Index, has been declining since early October, while the market has been rallying off a relative low point. Short-term volatility, a 10-day CVI, is at an extreme low level. It did rise slightly on Friday’s move, but not enough to bring short-term volatility out of extreme low territory. Extreme low volatility is like the squeezing down of a spring: you are more likely to see volatility spikes. On the flip side, there is no telling how long volatility will stay at extreme lows before spiking.
Comment
International equities have shown a lot of weakness over the last year and a half. In fact, in terms of Volatility-Weighted-Relative-Strength, Canterbury’s proprietary risk-adjusted-ranking system, the EAFE (Europe, Australia, and Far East) had been ranked behind the S&P 500 since May of last year. Recently, however, the EAFE has showed strength through this recent rally, breaking out above a resistance level.
Source: AIQ
Portfolio Efficiency
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.
The Canterbury Portfolio Thermostat remains efficient for the current market environment. Portfolio Efficiency is a moving target. As markets go through different extremes- from a low volatility bull market to a high volatility bear market, an adaptive portfolio strategy, like the Canterbury Portfolio Thermostat, will make the necessary adjustments to navigate the changing markets and maintain efficiency.
Bottom Line
The US stock market continues to rally on declining volatility. Many international countries are now beginning to show some strength for the first time in a long time. Risk in the markets is declining. The Russell 2000, which represents small cap stocks continues to lag, but the Nasdaq is outperforming. The Nasdaq’s outperformance, coupled with an increase in international strength are both positive signs for the overall market.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.