This article was originally published on ETFTrends.com.
Last week, our team at Canterbury produced a July Market Update Video, which is reposted below. The video covers different ways to define volatility, and more importantly, how to manage volatility.
We would highly recommend watching the video. For the first part of the video, Canterbury discusses, in detail, three ways to evaluate and visualize the market’s volatility:
The Canterbury Volatility Index—We compare the low volatility of the markets last year, to the increased volatility that we have seen in 2022
The Market’s swings—In 2021, the S&P 500 only saw two pullbacks of barely -5%. In 2022, the index has had several declines and rallies that have occurred in very short amounts of time. So far this year, the S&P 500 has declines of -9%, -9%, -15%, and -12%, and rallies of +6%, +11%, +7%, and +7%. That is all in a timeframe of 6.5 months.
Outlier Days—This is a topic we write about often. In a normal year, or one with low volatility, the markets would expect to see 13 trading days that are beyond +/-1.50% (based on bell curve math). In 2021, the market saw 18 outlier days, or right around what was to be expected. In 2022, the S&P 500 has had 46 outlier days and is still only halfway through the calendar year.
In the second segment of the video, Canterbury goes into why it is important to limit your portfolio’s volatility, regardless of your perceived “risk tolerance,” and offers solutions to navigating a volatile market. Here is a brief summary of those points:
Downside Volatility outweighs upside volatility—The larger the decline, the larger the return required to get back to a point of breakeven. A -10% portfolio loss requires +11.11% to get back to breakeven. A -30% decline means you need +42% return to breakeven. A -50% drop can be devastating to your portfolio, requiring a +100% return just to breakeven.
Hypothetical Example of Limiting Volatility—we show a hypothetical example of limiting both a portfolio’s declines and rallies to just 33% of the market in 2022. Having more stable portfolio volatility and limited declines, results in requiring a much less percentage increase to breakeven and compound growth.
Adaptive Portfolio Management—We discuss our portfolio management methodology, the Canterbury Portfolio Thermostat, and how it has limited fluctuations so far in 2022 and been successful in adapting to this volatile bear market.
That is a quick summary/preview of the items discussed in Canterbury’s latest video. We would highly recommend watching it and reaching out to us with any questions.
Even with the recent rally, as things stand today, we are still in a bear market environment. The vast majority of equities are in a transitional or bear Market State, according to Canterbury’s indicators. Two positives for the markets are that the Nasdaq index has had some short-term relative strength as of late, and volatility is starting to decrease. When the Nasdaq, which is dominated by technology-related securities, is leading, markets tend to do better. The market is a little overbought as of right now and could see a pullback. We will be watching to see how the Nasdaq performs during any pullback that may come. If it can continue to outperform relative to the markets, that should be a positive indication.
Another positive for the short-term has been the general market trend. Since the low in mid-June, the Nasdaq has put in a series of higher lows and higher highs in the short-term. This is also reflected in the S&P 500, although that index could be right on overhead resistance, which may cause a pullback to occur.
As for sector rankings not much has changed. Health Care sectors and industries are currently at the top of our equity lists, followed by Consumer Staples and Utilities. Financials and Basic Materials are the worst ranked sectors.
For more news, information, and strategy, visit VettaFi.com.
POPULAR ARTICLES AND RESOURCES FROM ETFTRENDS.COM