What Do Weather and Markets Have in Common?

Currently, our indicators point to a Market State 9, which is a bearish Market State. While volatility has declined off of its peak for the past two months, it does remain high. A rally like we just saw in the S&P 500 is not uncommon during bear markets. Both rallies and declines during Bear Markets are fast and emotional. The big question everyone is asking, but no one has a certain answer for, is “where will the market go from here?”

Our expectation is that the market will remain in choppy waters. The good news is that the recent rising tide of the markets lifted all ships, in that there was broad participation across most stocks. This was not a rally fueled by just a few larger names. The S&P 1500 stocks-only Advance-Decline Line, which measures market participation, almost reached a new peak. That is a good sign.

Bear Markets, by nature, are full of uncertainty. Everyone is watching what the Fed will do and what its next move will be to combat inflation. That uncertainty will most likely lead to market fluctuation, but markets won’t likely decline to the previous lows, at least at this time. They will, most likely, stay volatile. So far in 2022, there have been 50 “outlier” trading-days. Canterbury defines an outlier day as +/-1.50%. In a normal year of low market volatility, you would expect to have about 13 outlier days. This was the case in 2021 (18 outliers), but we have obviously far surpassed that expectation in 2022.

Markets are a lot like the weather. If it has been a cold 30 degrees outside over the last few weeks, then one would expect that the next few days would likely be a similar temperature. If markets have been volatile for the last 8 months, then they are likely to continue to be volatile. So, what would give us an indication that the environment is beginning to change? In the example of weather, we would begin to see temperatures to start rising to 35, 40, to 45 degrees. In the case of markets, we would begin to see volatility begin to decrease. As temperatures begin to change, your thermostat would begin to adjust the amount of hot air produced to maintain a consistent indoor temperature. As your portfolio’s volatility begins to decrease, the combination of securities would need to adapt to the change and

adjust to match the new environment. Right now, it is still cold outside, but it is not as cold as it was a couple months ago.

Successful portfolio management requires a diligent, adaptive process. Volatile Bear markets have shown that portfolio management is not about buying and holding a fixed allocation of asset classes. A “Buy and hold” strategy, by definition, cannot adapt to changing environments. Hoping that markets will always be efficient, and that volatility and bear markets are things of the past is not an effective strategy.

To build a portfolio, Canterbury monitors an extensive universe of Exchange Traded Funds (ETFs) and looks to identify not only securities that have good technical characteristics, but also ones that improve the portfolio’s diversification and correlations. Through actively adapting the portfolio on a real time basis, the aim is to maintain an efficient portfolio even when the broad markets look bleak.

Canterbury’s adaptive portfolio, the Canterbury Portfolio Thermostat, has had rational, low volatility for all of 2022 while remaining invested in the markets. To achieve this involves holding both market equity positions, as well as alternative asset classes and securities that can benefit from a volatile stock or bond market. As the markets’ shifts through various stages, the portfolio will adapt its holdings to the new environment. Our goal is to compound a portfolio through limiting declines and managing volatility and diversification.

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