Introduction
This was the third quarterly re-screening since the portfolio was started and I have to say it was one of the hardest so far. Firstly I had to fight typical behavioural biases as I was tempted to apply some valuation constraints and thereby take some profits in some of the big risers. However, since I have not done this up to now and the behavioural bias I'm trying to avoid is selling winners too soon, I resisted the temptation again this time, although perhaps I will apply them with a full re-screening at the annual stage. Any way the other reason I avoided this was that using the 80 threshold on the Scores also suggested a rather excessive 6 sales, 2 of which seemed reasonable, 2 which seemed 50 / 50 and 2 which didn't seem to make that much sense. Thus for this quarter I went with 75 as the cut off which meant the 2 sales that seemed reasonable to me went ahead which I'll discuss in the next section.

After the strong recovery in October, November proved to be a bit more lack lustre with a small positive total return for the FTSE All Share of 0.57%. The Mid 250 led the way again, as it often does, with a 1.9% total return while FTSE 100 delivered a more modest 0.33% as the miners fell again after a strong bounce in October and the likes of Standard Chartered and Rolls Royce fell heavily on the back of corporate developments. Finally the Small Cap indices fell and produced a -0.33% total return.

Final results today from Diploma (DPLM) which is  held by the Compound Income Scores portfolio. This one which was purchased at the inception of the portfolio in April this year and has been a disappointing performer as it has fallen by around 24% since then. This has come on the back of a fullish rating when it was purchased and some down grades to earnings from 38.83p to 37.24p since then. So we have had a 4% earnings down grade and a 20% de-rating which shows the importance of valuations and how changes can really make a difference to your investment returns.

Note to self, perhaps I should tighten / lower my value criteria for new entrants to a more average level of say 14 to 15x or less rather than using the maximum PE & minimum yield of 20x & 2% that I'm prepared to pay. Food for thought there, although quality income / growth candidates do tend to get recognized and rated accordingly. So may be I'll think about that at and perhaps review it at a future quarterly / annual review. Any way since Diploma's score has deteriorated on the back of the down grades to 80 and it has therefore been flirting with the sell zone in previous quarterly reviews, lets see if today's numbers make the grade.

 Indices
With September having come and gone I'm sure investors will be glad to see the back of it as nearly all UK indices fell on the month. FTSE 100 again led the way down with its heavy weightings in commodity related stocks and produced a -2.86% total return while the All Share produce -2.73%. This reflected modest outperformance by mid and small cap names, but most of those also produced negative returns, with only the FTSE Fledgling index producing a positive return on the month with a total return of +0.12%.

For the Quarter it was a similar pattern with FTSE leading the way down with a -6.13% total return down to the Fledgling Index being the best performer again but that was still a -1.65% total return.

Market Timing Indicators
When I last looked at these at the end of August there were mixed signals from these moving average based indicators, with large cap indices indicating sell / cash, while mid and small cap indices were still above their 10 month moving averages and therefore in buy / invested territory.

After September's fall across the board all the indicators have now turned negative to suggest sell / cash although the small cap and Mid cap indices are only 1.1% and 1.6% below their moving averages. So a rally in October could turn those positive again whereas another fall would obviously leave them more in bearish territory. In contrast the large cap indices seem to be firmly into a bear trend as they are 6.3% to 7.4% below their moving averages, so it will take a big rally in October to turn these around in the short term.

So these trend following indicators are now suggesting a cautious approach may be best for now as the trend in the market may have turned negative now. I say may as these have given a number of negative signals which have then been rapidly reversed as the market traded sideways, but the recent sell off has been more decisive and may therefore mark a turn. However as we have passed St Ledgers day and we are approaching a seasonally stronger period I guess time will tell.

Mechanical Compound Income Scores Portfolio
Regular readers will know that this is a portfolio that I set up back in April this year based on top decile stocks in the Compound Income Scores. The portfolio which is skewed towards mid and small cap / AIM stocks has benefited from this in previous months and September saw a continuation of this trend. As a result the portfolio delivered a positive total return of +1.78% compared to the -2.73% for the FTSE All Share mentioned earlier, representing another 4.51% of outperformance this month.

This reflect the markedly different make up of the portfolio compared to the index and leaves it with a total return of 
+8.24% since inception in April 2015, which compares with -8.05% from the All Share for outperformance of 16.28%.
Interestingly the annually re-balanced portfolio which has remained untouched since the start has produced +8.63% in the six months or so since inception reflecting the large commonality in stocks so far and slightly less in the way of frictional transaction costs.

However I'm not getting carried away with the success so far as, given the different make up of the portfolio, performance is likely to be volatile in both directions and it just so happens it has been in a positive direction so far. At least it is encouraging that the Scores have so far been able to identify attractive stocks even in a difficult market.

Talking of attractive stocks 14 of the 20 holdings were up this month despite the market falls and the big winners were Utilitywise (UTW) which bounced back by 24% from the previous months sell off. While the illiquid Maintel (MAI) rose by 13% from the bottom of its recent trading range to the top on the back of some decent results. Others that also benefited from good results were EMIS the healthcare software group (+11.3%) and IG Group (IGG) the spread betting / stock broking firm (+5.4%). While the big winners in the quarter were Alliance Pharma (APH), Finsbury Foods (FIF) and Rank (RANK)

On the downside Diploma (DPLM) -8.3% and A.G. Barr (BAG) -6.8% fell on the back of lack lustre updates in September. While Renishaw (RSW) -7.8% continued to drift off from an expensive rating post results earlier in the quarter. These names were also the biggest fallers over the quarter too.

Summary & Conclusion
So a tricky September has left markets and headline indices looking damaged with trends potentially broken to the downside for now with the often difficult month of October still to come. It will be interesting to see if investors regain some confidence and come back in for so bargains to produce a traditional year end rally or if the markets are sending an early warning sign of economic trouble on the horizon - China slow down, US rate rise etc.

However as ever it remains a market of stocks and it is always possible to find some attractive stocks and make some money, but like King Canute this may not be possible if the tide has really changed. Any way that's all I have time for now, good luck with your investing in these difficult times. I'll do the quarterly re-screen of the portfolio today as planned and report back later with the changes.

I saw an interesting article today (which I shared on Twitter earlier) in the Daily Telegraph in which Ambrose Evans-Pritchard wrote up a note from the Morgan Stanley strategist Graham Secker. I remember him from my time in the City and I rated him highly as he made some good call and does interesting research. The write up is about his technical indicator which measures market valuation and sentiment etc. and includes a chart of the indicator which is shown in the chart. You can click the image to read the article which I highly recommend, although it is worth noting this isn't a signal to rush out and buy today. But it does suggest some well chosen contrarian purchases down here while everyone else is losing their head might bring you some decent returns in the medium term.


We also had a trading update from Diploma (DPLM) today which is in the Mechanical Compound Income Scores portfolio and currently has a score of 82 which is lower than when it entered the portfolio. It is also therefore getting close to the sell threshold so this may well be one that is heading for the exit at the next quarterly review at the end of September.

This seems more likely now as the update, while positive in parts, did allude to some headwinds on underlying turnover and margin pressure. However some of this related to a relocation of operations in the seals business and lower margins on some new acquisitions. These (acquisitions) have been and continue to be part of their business model and quite often they then ramp up the margins so this may not be such a concern in the medium term.

However I suspect it may lead to some downgrades in the short term and therefore could hit the score some more too. Before any changes and with the shares off by 7% this morning this leaves them on a still fullish looking 18.5x this years currently forecast earnings with a 2.6% yield. So I wouldn't suggest buying this one just yet and indeed with the slowdown in growth to single digits the rating still looks a bit rich so you could perhaps even call it a sell?