At the moment, the average investor’s appetite for risk appears to be low. According to Canterbury’s risk-adjusted ratings, the top two sectors are utilities and energy (which combine for 7.7% of the S&P 500 market capitalization), while the bottom two sectors (out of 11) are information and communications technology (which combine for 34% of market capitalization). for the Standard & Poor’s 500 Index). In other words, sector leadership prefers smaller, “defensive” sectors.
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Speaking of defense, bonds were anything but defensive. The Twenty-Year Treasury Bond ETF (Ticker: TLT) has reached a new low for the year and its lowest since early 2014. This puts the ETF down 27% year-to-date. For the traditional conservative investor, bonds are supposed to be the risk-averse asset. When the stock market goes down, the hit to their portfolios should in theory be limited or offset by their holdings of bonds. This theory did not work in 2022.
Given the market plunged last week, it should come as no surprise that the market is in oversold territory in the short term. One point we have to make is that overbought/oversold indicators don’t tell us when The market will have a turning point and fluctuate up or down, and they don’t tell us how much commissions or drawdowns will be. An oversold market can always become oversold. During volatile markets, oversold or extreme overbought conditions can strike more often than they would in a normal market environment. These indicators are very uncertain and short-term, which means that it is best to work on them after there is some confirmation that the security or indicator wants to go up.
Here are two more short-term points. Currently, the weekly relative strength of the Nasdaq is flat. A positive sign for the market is that the Nasdaq is leading the market or the S&P 500. This will show that investors have an increased appetite for risk. That’s not the case now, but it’s better than the relative strength of the Nasdaq flat versus bearish. The other point is that there is a slight divergence in the advanced regression line, which measures the number of stocks rising versus falling. While the S&P 500 has set a relative low over the past few weeks, the AD streak dedicated to stocks just didn’t. This is just a small positive for the market, as the advanced regression line acts as a better indicator for identifying major tops and bottoms rather than short-term mid-cycle moves.
Long term and conclusion
This is a bear market and all indicators of the market condition in Canterbury have turned negative. These indicators are long-term trend, volatility, and short-term supply and demand. Bear markets often fluctuate in both directions, with big dips followed by big short-term highs. Markets have seen it multiple times this year. So the question becomes, “In the long run, what’s the plan?”
Here’s the positive: Every bear market is eventually followed by a new bull market. This does not mean that your investment plan should be just to buy and hold for the long term, hoping to be better on the other side. Bear markets can devastate investors and cost them years of complexity just to try to break even. This is exacerbated by the bond market slump, where bonds do little to offset portfolio risk.
The key to profiting from a bear market, rather than being penalized for it, is to mitigate portfolio volatility. We know that in the short term, the markets will fluctuate in both directions. Long-term success requires a series of short-term decisions. Adaptive portfolio management is about managing short-term volatility and positioning the portfolio to benefit from it in the long-term. The goal is to adapt the portfolio to manage all the ups and downs of the market. By reducing risk in a bear market, an adaptive portfolio can be more suitable for compounding in a bull market.
The Canterbury Portfolio Thermostat’s adaptive portfolio, Canterbury Portfolio Thermostat, has successfully adapted to this volatile market environment by limiting dips in normal volatility and participating in various short-term advances in the market. The portfolio maintains a high interest from diversification, as the securities held have less correlation with each other. This has limited the number of “out” days (trading days exceeding +/- 1.50%) to only 7 trading days (which is to be expected). For reference, the S&P 500 has had 58 choppy trading days.
As always, if you have any questions, feel free to call our office or send an email.
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